AN APPRECIATION OF INSOLVENCY IN THE NIGERIAN CONSTRUCTION X REAL ESTATE INDUSTRY: A BRIEF DISCOURSE ON CAUSATION X PANACEA

1.         Corporate Affairs Commission of Nigeria

2.         Securities and Exchange Commission of Nigeria

3.         Federal Ministry of Works and Housing

4.         Federal Roads Maintenance Agency

5.         Council of Registered Builders of Nigeria

6.         Real Estate Developers Association of Nigeria (REDAN)

7.         Nigerian Institution of Estate Surveyors and Valuers (NIESV)

Insolvency in the Industry in Nigeria:

Insolvency is the inability of a corporate body to pay its debt obligations as they become due. Insolvency typically arises where the corporate body’s current liabilities exceeds, its current assets, that is, it is in a negative net current assets position. In such threatened insolvency situations, that is, failing all curative actions, the company or its creditors are known to, acting individually or collectively, opt for any of the formal insolvency resolution options, including[1]: company voluntary arrangements, administration, receivership and receivership management, arrangements and compromise, netting, and winding up/liquidation.

However, and just before the solutions is the need to restate some known, yet often silent, factors behind such business tragedies. It need be said that these factors are not exclusive to the Industry. These causative factors are broadly:

1.         Financial or Capitalisation Factors: At the heart of the Industry is financing. Adopting an unsuitable financing mix to a construction or real estate project may be its greatest albatross. Often, patient capital, of the non-recourse breed, is suitable for large scale projects in the Industry. The dearth of a risk capital orientation in the Nigerian financial services sector has also seen to unworkable financial mismatches being applied to projects with their inevitable end being the insolvency of financially obligated stakeholders. Further, being an industry with heavy import reliance, the Industry has been significantly impacted by the Naira’s flotation and escalating cost of foreign exchange.

2.         Regulatory or Institutional Factors: These include all factors related to the legal and regulatory landscape of the Industry. These are not limited to the foremost example of the slow and bureaucratic challenges with land registration and property-related regulations. The high cost of regulation coupled with overlapping roles of different regulatory bodies are known to lead to delays and confusion during project approvals, construction and delivery. From the ministries of land at States and the Federal level to the physical and urban planning offices of the States, the inordinate delays often faced in these processes are insensitive to the time value of money and tenor-based financial obligations.

3.         Operational Factors: Real estate and construction projects often suffer from budget overruns due to poor project management and a lack of transparent financial reporting systems. Additionally, the lack of effective contract management practices with contractors and subcontractors usually leads to legal disputes and delays, which further strains cash flow. These factors, largely point to technical and administrative competence on the part of Industry professionals, and of course, have often led to the insolvency of their relevant going concerns.

Preventing x Resolving Insolvencies in the Industry:

Having identified common causes for insolvencies in the Industry, we present also, some preventive measures to be adopted on both project and corporate bases, such as:

1.         Good Creditor, Vendors and Personnel Relationships Management

2.         Project Feasibility Studies and Due Diligence

3.         Comprehensive Financial Stress Testing

4.         Feasible Contracting, including avoiding Fixed Term Contracts and opting for Variations

5.         Good Contract Management

6.         Financial Risk Management including good Budgeting and Insurances

7.         Progressive Project Management

8.         Good Corporate Governance

However, and in the event of threatened insolvency, a business in the Industry should focus on such curative strategies as:

1.         Creditor(s) relationships management by being open and frank on the threatened insolvency event. Such open and frank communications help build trust and facilitates better and more holistic resolutions.

2.         Business and or project re-organization. This includes by:

2.1            reducing recurrent expenses through elimination of non-essential recurrent expense heads including non-core personnel; and

2.2            improving liquidity through non-core assets sale or the separate professional management of core revenue-generating assets: The options here include the sale and lease-back of revenue-generating assets to allow for increased cashflow from those assets. Third-party asset managers can be employed for this purpose.

3.         Joint Venture Partnerships: Collaborations on newly negotiated partnership/equitization terms (with deferred payment dates) with other companies, especially critical vendors/suppliers, to deliver on projects. Naturally, this will affect the business’ returns on the project, but then it would have saved it from hemorrhaging cash with instant payments.

4.         Debt Restructuring: Re-negotiate payment timelines, interest rates and possibly additional debt-injection with creditors. Examples here include mortgage renegotiations in the case of real estate projects.

5.         Engaging the services of an Insolvency Practitioner to facilitate any or all of strategies in (1) to (4).

In a real insolvency situation, all focus must be on resolving the situation. Denying the situation is not only crassly emotional but outright unprofessional and smacks of either ignorance or complicity, best spelt as, fraud. Resolving insolvencies requires, the:

1.         investigative financial skillset of determining the real cause of the insolvency event so as to deal decisively with it;

2.         experience of unmasking the principal actors behind the insolvency event and denying them of corporate powers that could further engender the situation;

3.         professional knowledge of identifying and prioritizing creditors and other stakeholders in accordance with extant laws; and

4.         professional knowledge and experience of employing the best business rescue or creditor(s) protections available under extant laws, which include but are not limited to, in the order of their disruptiveness:

4.1            Company Voluntary Arrangements

4.2            Arrangement and Compromise

4.3            Administration

4.4            Netting

4.5            Receivership

4.6            Appointment of a Receiver Manager

4.7            Winding-up

The Court-ordered protections in the options in 4.1 to 4.3 have seen organisations literally rise from near-death, and as such, their wider adoption is readily encouraged given their business rescue focus.

Ultimately, the success or otherwise of these strategies depend largely on the collaborative efforts of the relevant stakeholders such as the leadership of the of the business/project, its executives and or management, creditors, vendors, engaged relevant professionals especially insolvency practitioners, regulators including CAC and insolvency practice regulatory bodies, and the Courts. While preventive measures will largely be within the remit of the business’ leadership to masterfully adopt, the management of threatened and real insolvencies requires a combination of the efforts of the leadership of the business and at least an experienced    insolvency practitioner to strategically navigate.

Conclusion:

Successfully dealing with insolvencies is mostly timebound, hence a quick diagnosis will be a function of the prognosis, especially where the correct strategies are adopted masterfully. The role of good advice as well as the active actions of an experienced insolvency practitioner cannot be overemphasized in these circumstances.    

About AO2LAW:

At AO2LAW, we maintain a foremost Insolvency Practice in advisory, representation, and management capacities. Situated within our Commercial and Criminal Law Practice Group, our Firm brings to bear our expertise in core Commercial Law to assist businesses best navigate their preventive or anticipated, threatened and real insolvency situations.  

For further information on the foregoing (none of which is a legal advice) or related matters, please generally contact us at cclp@ao2law.com, or specifically contact the author