COMPANY VOLUNTARY ARRANGEMENT UNDER CAMA 2020: A VIABLE OPTION FOR CORPORATE SUSTAINABILITY?

INTRODUCTION

For a very long time, the story of every company in financial distress followed the same script; the company fell behind on its financial obligations, its creditors lost their patience, a receiver manager is appointed, or a winding up petition is filed and the curtain is drawn on the company. Essentially, the financial struggles of a company was the beginning of the end. For three decades under the repealed Companies and Allied Matters Act 1990, Nigerian insolvency law operated on this single assumption.

Then came the Companies and Allied Matters Act (CAMA) 2020 (hereinafter referred to as “the Act”), which introduced a number of formal rescue mechanisms[1], one of which is the Company Voluntary Arrangements (hereinafter referred to as “CVA”)[2]. The CVA is centered on a simple thought; Instead of marching every financially ailing company straight to the graveyard, why not let it sit down with its creditors, negotiate realistic repayment terms and trade its way back to health? A financially distressed company, after all, is like a patient with a bad cough. Some coughs are the first sign of something terminal. Most are not. Yet, under the old regime, the response to both could too easily lead to the same prescription: liquidation.

The purpose of a CVA is to provide a way for a financially distressed company to avoid liquidation and continue operating, whilst also ensuring that its creditors receive a portion of the money owed to them. We must emphasize that this article is not concerned with whether CVA is, on paper, a good idea. It clearly is. We find that the harder and more useful question is whether it can actually work here, in a jurisdiction where our court process moves at a slow pace, where creditors have very short patience and where “rescue culture” can sometimes be a phrase alien to many creditors and even some insolvency practitioners.

It is against this backdrop that this article seeks to examine the central question: Is CVA a viable instrument of corporate sustainability or will it become just another provision of the Act, sound in theory, promising in design but quietly gathering dust in the statute books, while creditors and insolvency practitioners keep reaching, out of habit, for the liquidation solution?

WHAT IS COMPANY VOLUNTARY ARRANGEMENTS (CVA)?

Simply put, CVA is a rescue mechanism, whereby the directors of a company propose to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs.[3] CVA is a form of business rescue arrangement which allows a company in financial difficulties to propose to its creditors and enter into an agreement with them regarding the repayment of all or a part of its debts over an agreed period of time. [4]

As is oftentimes mentioned, CVA is a “debtor in possession”[5] procedure where the debtor is left in control of its affairs while it continues its business as a going concern under the supervision of a nominee.

The draftsmen are of the view that retaining the debtor in possession and control of its affairs is a useful feature of the CVA framework and may facilitate the smooth implementation of the arrangement. This is because the existing management possesses valuable knowledge of the company’s operations, business model, assets, liabilities, customers and of course, the circumstances that contributed to its financial distress. Such knowledge may place the management in a better position to identify the underlying cause of the company’s difficulties and take the necessary steps to restore the business to financial health. The CVA is thus intended to provide the company with an easy method of rescue achieved by simply entering into a binding agreement with its creditors.

STEP BY STEP GUIDE ON THE CVA PROCESS

1.    CVA proposal

The CVA process begins with the preparation of a proposal. Under the Act, the company’s directors are responsible for preparing the proposal, unless the company is already in administration or liquidation, in which case the proposal may be prepared by the administrator or liquidator. The proposal sets out how the company intends to deal with its debts, whether by paying them in full, paying a proportion of them or restructuring the payment timetable. The proposal must also nominate a licensed insolvency practitioner[6] to act as the “nominee”.

The proposal is not merely a statement of the company’s intention to restructure its debts. It must provide creditors with sufficient information to assess both the company’s circumstances and the merits of the proposed arrangement. In particular, the CVA proposal is required to contain: (a) “identification details for the company[7]; (b) explain why the proposer thinks a CVA is desirable [8]; (c) explain why the creditors are expected to agree to a CVA[9]; and (d) be authenticated and dated by the proposer.”[10]

The proposal should also set out details of the company’s assets[11], together with the nature and amount of its liabilities[12] . These requirements are important because creditors cannot be expected to approve a restructuring plan on the basis of optimism alone. They must be given enough information to determine whether the proposed arrangement offers a better prospect of recovery than the alternatives available to them.

2.    The Nominee’s Report

Within 28 days of receiving the proposal, the nominee is required to submit a “report” to the Court addressing the viability of the proposal and  for meetings of the company’s creditors and members should be convened to consider it.[13]

3.    Meetings of Creditors and Members

Following the nominee’s report, he shall, “unless the Court orders otherwise”, summon meetings of the creditors and members.[14] The purpose of these meetings is straightforward: to give those whose interests are affected by the proposal an opportunity to consider and vote on it. The meetings may approve the proposed voluntary arrangement either as presented or with alterations.

4.    Approval

Approval of a proposal or a modification to a proposed CVA, requires “three-quarters or more (in value)”[15] of those entitled to vote at the meeting to vote in favour of it i.e. creditors representing not less than 75% of the value of the debt represented at the meeting must support the proposal.

In our considered view, this threshold is deliberately high as it ensures that CVA does not become an instrument by which a company quietly outvotes its most exposed creditors but remains a genuine consensus among those who stand to lose the most if the company fails.

We are then left to wonder, what happens where the creditors and members do not see eye to eye? In the event that the decision taken by the creditors’ meeting differs from that taken by the company meeting, a member of the company may make an application to court [16] “not later than 28 days after the decision was taken by the creditors meeting”[17] or “at a later day, where the decision of the company meeting was taken on a later day”.[18]When the court receives such application, the court may order the decision of the company meeting to have effect instead of the decision of the creditors’ meeting[19] or make such other order as it deems fit.[20]

Once approved or the court makes a decision as the case may be, the arrangement binds every creditor entitled to vote at the meeting, whether or not that creditor actually attended, voted, or even knew the meeting was taking place.[21] To our mind, that single provision is, in many ways, the CVA’s entire benefit and its entire risk compressed into one sentence. It gives the arrangement the force it needs to actually bind a fractious band of creditors together. It also means a sleepy, absent or apathetic creditor can wake up bound to a bargain it never had the chance to properly evaluate, which is precisely why the Act also provides that “persons entitled to vote at either the creditor’s or members meeting”, or “persons who would have been entitled, in accordance with the rules, to vote at the creditors’ meeting if they had had notice of it” or even the nominee himself and if the company is already being wound up or in administration, the administrator or liquidator[22] may apply to court to challenge the arrangement on the ground of unfair prejudice or material irregularity, and where the challenge succeeds, the court may revoke or suspend the decision, or order fresh meetings altogether.[23]

Notwithstanding the foregoing, we must also mention that a CVA cannot be proposed to affect the right of a “secured creditor” to enforce his security, except with his consent.[24] It is also not possible to approve a proposal that either affects the priority of payment[25] or constitutes a reduction in portion of the amount to be paid to a preferential creditor in comparison to another preferential debt without the consent of the preferential creditor.[26]

IMPLEMENTATION OF THE CVA

Once the arrangement is approved and running, the nominee’s role ordinarily transitions into that of a “supervisor”, although the Act permits another person to be appointed to perform that function[27], whose task is to ensure the company actually does what it promised. Should the company falter, the supervisor is not a bystander. He or she is among the persons empowered to petition the court for the company’s winding-up, so that a failed CVA does not simply exist in limbo but is resolved with the same finality the arrangement was designed to avoid.[28]

ADVANTAGES OF CVA

The draftsmen are of a firm view that CVA is significantly advantageous for an economy like Nigeria’s, where small and medium enterprises form the overwhelming bulk of its registered companies and where a single missed payment, a delayed government contract or even one bad exchange-rate quarter can veer an otherwise viable business into technical insolvency. A rescue first culture does not merely save individual companies. It preserves jobs, protects supply chains from the domino effect of one debtor’s collapse taking down three or four others and signals to investors, foreign and domestic alike, that Nigerian commercial law no longer treats financial distress as a moral failing deserving of the ultimate corporate capital punishment i.e. liquidation. Having said that, some other advantages include:

1.    Continuity of Management and Business Operations: The company remains under the control of its existing directors and management, allowing it to continue its ordinary business operations while implementing the CVA. This is significant because financial distress does not necessarily mean that the underlying business is commercially unviable. By preserving the company’s ability to trade, generate revenue and maintain relationships with customers and suppliers, the CVA gives the business an opportunity to generate the cash required to meet its restructured obligations and return to financial health.

2.    CVAs are private, and there is no requirement for customers or the public to be notified of the process.

3.    CVAs are flexible and allow debtors to propose diverse arrangements to creditors depending on the debtor’s financial position.

4.    CVAs are not complicated or expensive, compared to other formal insolvency procedures.[29]

CHALLENGES AND/OR DISADVANTAGES OF CVA

Here is where our enthusiasm must yield to candour. A statutory provision, however, elegantly drafted, is only as viable as the ecosystem asked to operate it and frankly, Nigeria’s CVA regime, which is now six years old, still bears the slightly unfinished look of a house whose foundation is excellent, but whose wiring has not yet been fully tested.

Four challenges and/or disadvantages immediately stand out. The first is awareness. directors of financially distressed companies, creditors and a good number of practitioners, still reach reflexively for liquidation as the only tool in the box, simply because it is the tool they are used to. A rescue mechanism nobody thinks to use is, for all intents and purposes, no rescue mechanism at all.

The second is the absence of a “moratorium”[30]. Unlike administration, which triggers an interim moratorium halting lawsuits and enforcement action the moment an administrator is appointed[31] and unlike the scheme of arrangement[32], for which the Act introduced its own statutory moratorium, the CVA carries no automatic moratorium at all.  A company negotiating a CVA can, in theory, be sued into oblivion by an impatient creditor while the ink on its rescue proposal is still dry.

The third is that ironically, unsecured creditors are bound by the terms of the “voluntary proposal” notwithstanding that they opposed the same or had not received notice of the meeting.[33] and finally, the directors of the financially distressed company are allowed to remain and manage the affairs of the company and there is no investigation into the conduct that may have contributed to the company’s distress.

RECOMMENDATION AND CONCLUSION

We believe the necessary recommendation is quite glaring. Under the UK regime, a moratorium is available for companies which allows for an automatic “20 business days” moratorium to come into force as soon as the documents containing the proposal for a company voluntary arrangement are filed in court.[34] During this period, creditors are generally restrained from taking or continuing certain enforcement actions against the company, thereby giving the company a valuable window within which to negotiate and implement a rescue arrangement without the immediate threat of creditor action.

We recommend that Nigeria incorporates a similar statutory moratorium into its CVA regime under the Act. Such a moratorium would provide a company seeking to restructure with the necessary breathing space to negotiate with its creditors and finalise its proposal, without the risk that an individual creditor may undermine the restructuring by commencing or continuing enforcement proceedings.

Is CVA a viable option for corporate sustainability? For us, the honest answer is that it is viable in the way a bridge is viable before the first traffic has crossed it. The engineering is sound. The design borrows sensibly from jurisdictions like the UK, where the model has been tested for decades. What remains is the “traffic” itself i.e. the directors willing to propose it, the creditors willing to trust it, the practitioners willing to suggest it and of course, the courts willing to nurture it through its early and inevitably imperfect years.

Please note that the foregoing does not in any way constitute legal advice. Kindly contact the key personnel for any legal advice on the subject matter