Company Voluntary Arrangement (CVA), is one of the notable business rescue procedures introduced by the Companies and Allied Matters Act 2020 (CAMA 2020). The CVA in CAMA 2020 is modelled after the CVA in the United Kingdom (UK) Insolvency Act 1986. About fifteen months after CAMA 2020 became law, Nigeria has had its first-ever CVA. This discourse critically assesses the groundbreaking and on-going CVA of Tourist Company of Nigeria Plc (TCN).
Relevant Facts
TCN is engaged in the business of hospitality, and owns the popular Federal Palace Hotel in Lagos, Nigeria. The directors of TCN, in their CVA proposal dated 30th August, 2021, claimed that TCN is facing cash-flow challenges induced by the Covid-19 pandemic. The proposal stated that TCN’s revenue had plummeted from NGN7.7billion in 2019 to NGN1.3billion in 2020. TCN’s 2020 audited financials shows that its cumulative outstanding obligation to creditors, is over NGN27billion. TCN’s directors thus, proposed a restructuring of its loans by waiving accrual and payment of interests from 1st March, 2020 to an agreed future date.
In their report dated 15th September, 2021, the nominees appointed by the directors opined that the proposal was viable and fair to creditors and the company. The nominees also opined that the proposed arrangement had reasonable prospect of being approved by creditors, and being implementable.
Nominees’ Report to Court
Section 435(2) of CAMA 2020 provides the procedure for nominees to “submit a report” on the arrangement to court. A nominee is required to submit his report within 28 days after he is notified by directors, or a longer period as permitted by Court. The nominee’s report is meant to state his opinions as to: (i) whether meetings of members and creditors should be summoned to consider the proposal, and (ii) the date, time and place of the meetings. Further, Section 436(1) provides that where the nominee has “reported” to Court, the nominee shall “unless the Court orders otherwise”, summon the meetings of creditors and members.
In TCN’s case, the nominees filed ex-parte originating summons with Suit No: FHC/L/CS/1250/2021, in which they asked the court to determine (i) whether the company’s directors were statutorily empowered to make a proposal to creditors, and (ii) whether separate meetings of creditors and members should be convened. On determination of the “questions”, the nominees asked for the following reliefs: (i) a declaration that the directors of the company were statutorily empowered to make the proposal to creditors, (ii) an order sanctioning the appointment of the nominees, and (iii) an order summoning separate meetings of creditors and directors on a specified date.
Accordingly, in TCN’s case, the nominees did not only submit a report to court as envisaged under CAMA 2020, but also applied to Court to determine questions whose answers were plainly obvious. Secondly, the nominees did not only state their opinion (in the report) as to whether the meetings should be summoned and the date, time and place of the meetings; the nominees also “applied” to court to make orders on these issues. This approach is erroneous. Section 435(1) of CAMA 2020 requires a report to be submitted to court. It does not require an application to court to summon meetings. TCN’s counsel erroneously used the procedure for schemes of arrangement under Chapter 27 of CAMA 2020, where meetings are convened by order of court and an applicant must issue an originating summons with an affidavit. In contrast, a hallmark of CVAs is minimal court involvement. This point is highlighted in Sir Kenneth Cork Committee’s Report which originated CVAs in the UK. The part of the Report proposing CVAs is titled “Voluntary Arrangements without an Order of the Court”.
Accordingly, rule 2.9(3) of the UK Insolvency Rules 2016 only requires a court, upon submission of a nominee’s report, to “endorse the nominee’s report and the copy of it with the date of filing and deliver the copy to the nominee”. In an exposition on CVAs, Ashurst, a leading global law firm, described the role of courts in this regard as “purely administrative”. Similarly, Felicity Toube QC, a leading UK insolvency silk, explained the procedure in the UK thus: “the nominees report has to be filed as part of the CVA becoming effective, but if there is no challenge to anything, the court probably does not look at it at all.” Further, in their treatise on insolvency law, Professors Andrew Keay and Peter Walton stated thus: “… although a report is made to the court, this is largely a matter of record only. The court does not become judicially involved in the CVA unless a problem arises.”
In any event, a perusal of the provisions on CVA will reveal that CAMA 2020 is very explicit where an application to court is required e.g. sections 435(4), 438(3), 440(1), 442(3) and 442(4).
Absence of Procedural Rules
CVAs are rules-driven. In the UK, the Insolvency Rules 2016 (UK Rules) has extensive provisions regulating several aspects of CVAs. For instance, the UK Rules embody provisions regulating notice of meetings, contents of notice of meetings, chairing of meetings, chairman’s discretion, quorum, voting rights, adjournments, combining creditors’ and members’ meetings etc. As regards approval of the proposal, the UK Rules require the support of at least 50% of members (with the value of votes determined by the number of votes conferred on members by the company’s articles). It also requires the support of at least 75% of creditors (in terms of the value of the debt).
CAMA 2020 is silent on the above procedural matters. It is expected that these procedural guidelines would be addressed by the anticipated insolvency rules. Instructively, Section 437(5) of CAMA 2020 says that, subject to the provisions of CAMA 2020, members and creditors’ meetings shall be conducted in accordance with the rules. TCN nominees may face a herculean task navigating through the CVA process without guidance from procedural rules. In appropriate circumstances, they may consider applying relevant provisions of the UK Rules. In extreme cases, they may seek direction from the Court to insulate them from any liabilities.
No Statutory Moratorium
CVAs under CAMA 2020 are not accompanied by any moratorium on enforcement actions. Consequently, creditors may unilaterally pursue claims or enforcement actions whilst the CVA is ongoing. Under the UK regime, CVAs of certain small companies may be accompanied by a 28-day statutory moratorium. This provision has been omitted in CAMA 2020.
Nominees would have to prospect for ways of placating creditors to give nominees the opportunity to prepare and present proposals to the general creditors. Nominees may negotiate standstill on enforcement actions with creditors with significant claims. This would ensure that the process is not torpedoed by these creditors. Commendably, TCN’s proposal has a standstill agreement on contemplated and existing legal proceedings in relation to loans in the proposal.
Alternatively, a company undergoing CVA may be put in administration to enable the statutory moratorium come into effect. This option may increase the cost and complexity of the process. Further, it may be unattractive presently, due to the absence of procedural insolvency rules.
Challenging CVAs
A standstill agreement will not affect the right of a creditor to challenge the CVA on the grounds specified in Section 440 of CAMA 2020. A creditor may challenge an approved arrangement on the ground of unfair prejudice: Section 440(1)(a). In this regard, the creditor may allege that he/she was, without justification, treated less favourably than other similarly situated creditors (horizontal prejudice). Alternatively, a creditor may allege that he/she is in a worse position that he/she would have been in a liquidation or administration (vertical prejudice). A creditor may also challenge an approved CVA on the basis of material irregularity: Section 440(1)(b).
Binding Effect of Approved Arrangement
Once approved by the meetings of creditors and members, an arrangement becomes binding on any creditor that was entitled to vote at the meeting as if he was party to the arrangement. This is irrespective of whether or not the creditor voted at the meeting, attended the meeting or received notice of the meeting. In the old UK regime, creditors who were not given notice of the meeting were not bound by approved arrangements. Although this appeared reasonably “fair”, it often resulted in exclusion of large claims which undermined the potency of the arrangements.
Immunity for Secured and Preferential Creditors
In TCN’s case, the nominees stated that the arrangement would not “touch” secured creditors. This is consistent with Section 437 of CAMA 2020. CVAs do not affect the rights of secured and preferential creditors. Accordingly, at the meetings, creditors or members are not permitted to make proposals or modifications to proposals which affect the rights of secured creditors without their consent. Creditors and members are not also permitted to make proposals which alter the payment priority of preferential creditors without their consent.
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An implication of the above is that secured creditors may enforce their security whilst CVAs are ongoing. Such secured creditors may appoint receivers or call in administrators, which could disrupt the CVA. Similarly, preferential creditors may enforce their claims whilst the CVA is ongoing. Such preferential creditors may torpedo the CVA by filing winding-up petitions against the company.
Advantages of CVAs
Significant advantages of CVAs, have been highlighted in a previous discourse. First, CVAs do not disrupt a company’s operations. Directors and management remain in charge of the company’s affairs. In TCN’s case, the directors have stated that the CVA would be supervised by licensed insolvency practitioners, whilst directors and management will remain in office. Second, CVAs are more private with no requirement for advertisement or notifications. Third, CVAs are flexible; parties may structure arrangements to suit the debtor’s peculiar circumstance. Fourth, CVAs are less expensive compared to administration or liquidation. Fifth, unsecured creditors are better positioned to be paid their debts in CVAs. Sixth, an arrangement approved by the meetings of creditors and members, is binding on both consenting and non-consenting unsecured creditors.
Conclusion
Notwithstanding any perceived flaw(s), the stakeholders behind TCN’s CVA deserve commendation for steering TCN into/through uncharted waters of CVA. This will potentially open the floodgates for more CVAs by cash-flow insolvent but viable businesses. Finally, it is hoped that TCN’s CVA would serve as a wake-up call for regulators to speedily produce the requisite insolvency rules, which would drive CVAs and other formal insolvency procedures in CAMA 2020.
Read the original article on This Day.
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