Insolvency and Employee Rights in Nigeria: What You Must Know

The corporate landscape in Nigeria is dynamic, characterized by periods of rapid growth and, inevitably, economic downturns. In this fluctuating environment, businesses can find themselves in financial distress, leading to insolvency. While the focus during such times often shifts to creditors and asset recovery, a critical, yet often overlooked, aspect is the impact on employees. What happens to their jobs, their outstanding wages, their severance, and their future when the company they work for faces the prospect of winding up or restructuring?

This comprehensive guide delves deep into the intricate relationship between insolvency and employee rights in Nigeria. We will explore the legal framework, the different types of insolvency procedures, the specific entitlements of employees, and the practical steps they can take to protect their interests. Our aim is to provide a clear, understandable, and insightful resource, ensuring no blind spots are left uncovered.

Understanding Insolvency: A Foundation

Before we dive into employee rights, it’s crucial to grasp what insolvency truly means in the Nigerian context. Often, the terms “insolvency,” “bankruptcy,” and “liquidation” are used interchangeably, but they have distinct legal meanings.

What is Insolvency?

Insolvency, at its core, is a state where an individual or a company is unable to pay its debts as and when they fall due (cash-flow insolvency) or when its liabilities exceed its assets (balance sheet insolvency). In Nigeria, the Companies and Allied Matters Act (CAMA) 2020 is the principal legislation governing corporate insolvency. While CAMA doesn’t explicitly define “insolvency,” it outlines the circumstances under which a company will be deemed unable to pay its debts.

Distinguishing Key Terms:

Insolvency: A financial state of inability to meet financial obligations. It’s a condition.
Bankruptcy: This term primarily applies to individuals and partnerships, not corporate bodies, in Nigeria. The Bankruptcy Act 1990 governs personal bankruptcy.
Liquidation (Winding Up): This is a legal process by which a company is brought to an end. Its assets are sold off, debts are settled, and any remaining balance is distributed to shareholders. It is a consequence of insolvency, but not all insolvent companies necessarily undergo immediate liquidation.

Types of Corporate Insolvency Procedures in Nigeria:

CAMA 2020 introduced significant reforms to Nigeria’s corporate insolvency regime, aiming to promote corporate rescue rather than immediate liquidation. The main procedures include:

Receivership: This occurs when a receiver or manager is appointed, usually by a secured creditor (like a bank), to take control of a company’s assets to recover a debt. The company itself may still exist as a legal entity, but its operations or specific assets are managed by the receiver.
Administration: This is a rescue mechanism aimed at rehabilitating a financially distressed company. An administrator is appointed to manage the company’s affairs, with the objective of rescuing the company as a going concern, achieving a better result for creditors than in a liquidation, or realizing assets to make a distribution to secured or preferential creditors.
Company Voluntary Arrangement (CVA): This is a flexible arrangement that allows a company in financial difficulty to reach a binding agreement with its creditors regarding the repayment of its debts. It’s a debtor-in-possession procedure, meaning the company’s directors usually remain in control, but under the supervision of a “nominee” (an insolvency practitioner).
Arrangements and Compromises: Similar to CVAs, these are agreements between a company and its creditors or members to restructure debts or affairs. They often require court sanction.
Liquidation (Winding Up): This is the ultimate cessation of a company’s operations. It can be:
- Voluntary Winding Up: Initiated by the company’s members or creditors.
- Compulsory Winding Up (by Court Order): Initiated by a creditor, the company itself, or other eligible parties, typically due to the company’s inability to pay its debts.
- Winding Up Subject to Court Supervision: Where a voluntary winding up proceeds under the oversight of the court.

Each of these procedures has different implications for employees, which we will explore in detail.

The Legal Framework for Employee Rights in Nigeria

Employee rights in Nigeria are primarily enshrined in various laws, even in the face of corporate distress. Understanding these legal pillars is paramount for both employers and employees.

Key Legislation:

The Labour Act, 2004 (and subsequent amendments): This is the cornerstone of employment law in Nigeria. It governs the basic terms and conditions of employment, including wages, hours of work, leave, and termination. While it provides a general framework, its provisions on insolvency are somewhat limited.
Companies and Allied Matters Act (CAMA) 2020: CAMA is the primary legislation for corporate insolvency. Crucially, it contains provisions that address the priority of payments during winding up, which directly impacts employee claims.
Preferential Claims in Bankruptcy Act 1995: This Act specifically deals with preferential payments in bankruptcy and applies by analogy to corporate insolvency, particularly concerning the priority of workers’ claims. It was enacted to give effect to the International Labour Conference Convention 173 concerning the Protection of Workers’ Claims in the event of the Insolvency of their Employer.¹
Employees’ Compensation Act 2010: This Act provides for the payment of compensation to employees for injuries, diseases, or death arising out of or in the course of their employment. While not directly about insolvency, it’s relevant as outstanding contributions to the Employees’ Compensation Fund (ECF) might become an issue during insolvency.
Pension Reform Act 2014: This Act governs the contributory pension scheme in Nigeria. Unpaid pension contributions can be a significant claim for employees during insolvency.
National Industrial Court of Nigeria (NICN) Act 2006: The NICN has exclusive jurisdiction over all labour and industrial relations matters, including disputes arising from insolvency affecting employees. This means that any claims employees have against an insolvent company will typically be heard at the NICN.

International Labour Standards:

Nigeria is a signatory to various International Labour Organization (ILO) Conventions, some of which touch upon the protection of workers’ claims in the event of employer insolvency. While not directly enforceable as domestic law without domestication, they serve as guiding principles and can influence judicial interpretations, especially at the NICN, which often considers international best practices in labour relations.

Employee Rights During Insolvency Procedures

The rights of employees vary depending on the specific insolvency procedure a company undergoes. Let’s break down the implications for each:

1. Receivership

When a receiver is appointed, the primary goal is often to realize the secured creditor’s debt. The receiver generally does not step into the shoes of the company’s directors in the same way an administrator or liquidator would, especially concerning the continuation of the company’s business as a whole.

Impact on Employment Contracts: The appointment of a receiver usually does not automatically terminate employment contracts. However, the receiver may choose to continue employing staff if it’s necessary for the realization of the assets or for the going concern sale of the business. If the receiver continues to employ the staff, they are generally considered to be adopting the contracts of employment.
Termination by Receiver: If the receiver decides to terminate employment, employees are entitled to their contractual and statutory termination benefits, including:
- Notice Period/Payment in lieu of notice: As stipulated in their employment contracts or the Labour Act.
- Accrued Salaries and Wages: For work already done.
- Accrued Leave Allowances: For untaken leave.
- Severance Pay: If applicable under the contract, company policy, or collective bargaining agreement.
- Unpaid Pension Contributions: The company’s outstanding contributions to the employee’s pension fund.
Priority of Claims: Employee claims for wages, salaries, and severance pay incurred after the receiver’s appointment generally rank as expenses of the receivership and are paid in priority to the secured creditor’s debt, but this is a complex area and often depends on the specifics of the appointment and the receiver’s actions. Claims incurred before the appointment fall into the general pool of unsecured creditors, though certain claims receive preferential treatment (as discussed later).

2. Administration and Company Voluntary Arrangement (CVA)

These procedures are geared towards corporate rescue and rehabilitation, aiming to avoid liquidation. This often means a greater focus on preserving jobs.

Impact on Employment Contracts:
- Administration: An administrator is deemed to be an agent of the company and has broad powers to manage the company’s business. If the administrator continues to employ staff for more than 14 days after their appointment, the employment contracts are generally considered to be “adopted.” This means that the administrator is personally liable for wages and salaries incurred after the adoption, ranking as an expense of the administration, which has high priority. For wages and salaries accrued before the adoption, employees remain unsecured creditors, though with preferential status for certain claims.
- Company Voluntary Arrangement (CVA): In a CVA, the company’s directors remain in control, and the intention is often to continue trading. Therefore, employment contracts are generally not terminated by the CVA itself. Any changes to employment terms or redundancies would need to be handled according to regular labour law provisions, with employees potentially having claims for wrongful termination or redundancy if proper procedures are not followed.
Redundancy during Restructuring: If the administration or CVA involves downsizing or restructuring, redundancies may occur. Employers (or the administrator) must adhere to the provisions of the Labour Act regarding redundancy, which typically requires:
- Consultation with employees or their representatives (e.g., trade unions).
- Consideration of ability, experience, and reliability in selecting employees for redundancy.
- Payment of redundancy benefits (severance pay) as agreed in contracts, collective agreements, or as may be deemed reasonable by the NICN.
Employee Participation: While not explicitly mandated for individual employees, trade unions may be involved in discussions about the company’s future during these rescue processes, especially if collective bargaining agreements are in place.

3. Liquidation (Winding Up)

Liquidation means the end of the company. All employment contracts are automatically terminated upon the commencement of winding up.

Automatic Termination: This is a crucial point. When a company enters liquidation, employment relationships cease immediately.
Employee Claims: Upon termination, employees become creditors of the company for any outstanding entitlements. These typically include:
- Unpaid salaries and wages up to the date of liquidation.
- Accrued leave allowances.
- Payment in lieu of notice (if not worked).
- Severance pay (if applicable).
- Unpaid pension contributions.
- Any other outstanding benefits, such as unremitted taxes (PAYE).
Proof of Debt: Employees must formally prove their debts to the liquidator. This involves submitting a statement of claim detailing all monies owed to them.
Priority of Claims in Liquidation: This is where the Preferential Claims in Bankruptcy Act and CAMA 2020 become highly relevant. In a liquidation scenario, after secured creditors (up to the value of their security) and the costs of liquidation have been paid, certain debts are given “preferential” status. Employee claims often fall into this category.
- What are Preferential Employee Claims?
  Under the Preferential Claims in Bankruptcy Act, and by extension applied to corporate insolvency, the following employee claims are given priority over other unsecured debts:
  - All amounts due by way of wages or salary (whether or not earned wholly or in part by way of commission) accruing to any employee within the period of three months before the date of the receiving order² (or the winding-up order).
  - All amounts due in respect of leave accruing to any employee within the period of two years before the date of the receiving³ order/winding-up order.
  - All amounts due in respect of any paid absence (not being leave) accruing to any employee within the period of three months before the date of the receiving order/winding-up⁴ order.
  - Recruitment expenses or other amounts reimbursable under any contract of employment.
  - An amount equal to three months’ wages or salary, by way of severance pay, to each employee.
  - All amounts due in respect of workers’ compensation under any written law relating to workers’ compensation accrued before the date of the receiving order/winding-up⁵ order.
  - Any tax, duty, or rate payable by the bankrupt in respect of any period prior to the date of the receiving order/winding-up order (this includes PAYE deducted from employee salaries but not remitted).
- Ranking of Preferential Debts:
  - Firstly, wages, salaries, leave, paid absence, recruitment expenses, severance pay, and workers’ compensation.
  - Secondly, certain taxes and duties.
  - Debts having the same priority rank equally and are paid in full if the assets are sufficient; otherwise, they abate in equal proportions.
- Unsecured Debts: Any employee claims exceeding the preferential limits, or claims that do not fall under the preferential categories, are treated as ordinary unsecured debts, ranking pari passu (equally) with other general creditors. This means they are paid only after all preferential debts have been settled, and if there are insufficient funds, they share proportionally.

Challenges and Pitfalls for Employees

Navigating insolvency as an employee can be a daunting experience, fraught with emotional and financial challenges. Several pitfalls can arise:

Lack of Information: Companies in distress often become secretive, leaving employees in the dark about their future. This uncertainty can lead to anxiety and impact decision-making.
Delayed or Unpaid Entitlements: Even with preferential claims, the insolvency process can be lengthy, and funds may be insufficient to cover all employee entitlements. Employees might face significant delays or receive only a fraction of what they are owed.
Complex Legal Procedures: The insolvency process is highly legalistic. Employees, particularly those without union representation, may find it difficult to understand the procedures for proving their claims and asserting their rights.
No Notice/Wrongful Termination: While some insolvencies may allow for proper termination procedures, some employers might cease operations abruptly, leaving employees without notice or any immediate payment of outstanding benefits. This could constitute wrongful termination, but pursuing such claims against an insolvent company can be challenging.
Loss of Employment and Future Prospects: The most immediate and significant impact is job loss. This can lead to financial hardship, difficulty in finding new employment, and a sense of instability.
Unremitted Pension Contributions and Taxes: Employees might discover that their pension contributions or PAYE taxes, which were deducted from their salaries, were never remitted by the employer to the relevant authorities. This can create long-term problems for their retirement savings and tax compliance.
Emotional and Psychological Impact: Beyond the financial strain, the loss of a job due to company insolvency can take a significant toll on an employee’s mental and emotional well-being.

What You Must Do: Practical Steps for Employees

If you find yourself working for a company facing insolvency, proactive measures are crucial.

1. Stay Informed and Document Everything:

Gather Information: Try to get as much information as possible about the company’s financial situation. While management might be tight-lipped, look out for official notices, communications from creditors, or news reports.
Document Employment Details:
- Employment Contract: Keep a copy of your contract, which details your salary, benefits, notice period, and termination clauses.
- Pay Slips: Retain all your pay slips. These are crucial for proving your outstanding wages and benefits.
- Correspondence: Keep records of any communication with your employer regarding your employment, salaries, or company issues.
- Pension Statements: Obtain statements from your Pension Fund Administrator (PFA) to verify that your pension contributions have been remitted.
- Tax Records: Keep records of your tax deductions (PAYE).
- Leave Records: Document your accrued but untaken leave days.
Track Outstanding Payments: Maintain a detailed record of all monies owed to you, including salaries, allowances, and any other benefits.

2. Understand the Type of Insolvency Proceeding:

Identify the Insolvency Practitioner: Find out if a receiver, administrator, or liquidator has been appointed. Their contact details will be important.
Understand Their Role: Research the specific powers and duties of the appointed insolvency practitioner, as this will dictate how they interact with employees and process claims.

3. Assert Your Claims:

Contact the Insolvency Practitioner: Once appointed, the receiver, administrator, or liquidator is legally obligated to deal with the company’s affairs, including creditor claims. Contact them immediately to inform them of your outstanding entitlements.
Submit a Proof of Debt Form: The insolvency practitioner will typically provide a “Proof of Debt” form. Complete this accurately and thoroughly, attaching all supporting documentation (pay slips, contract, etc.). This is the formal way to register your claim.
Be Specific: Clearly itemize all monies owed to you:
- Basic salary for specific months.
- Overtime pay.
- Allowances (housing, transport, leave, etc.).
- Unremitted pension contributions (both employee and employer portions).
- Unremitted PAYE.
- Severance pay (calculated according to your contract or applicable law).
- Payment in lieu of notice.
Keep Copies: Always keep copies of all documents you submit to the insolvency practitioner.

4. Seek Legal Advice:

Don’t Go It Alone: Navigating insolvency law is complex. It is highly advisable to consult with a legal practitioner specializing in labour and insolvency law. They can:
- Explain your rights in detail.
- Help you accurately calculate your entitlements.
- Assist in preparing and submitting your proof of debt.
- Represent you in negotiations with the insolvency practitioner.
- Advise on potential legal action at the National Industrial Court if your rights are violated.
Consider Group Action: If many employees are affected, consider pooling resources to engage a lawyer as a group. This can reduce individual costs and strengthen your collective bargaining power.

5. Engage with Trade Unions (If Applicable):

Union Representation: If you are a member of a trade union, immediately inform your union representatives. Trade unions play a vital role in protecting members’ interests during corporate distress. They can:
- Engage in collective bargaining with the company or insolvency practitioner.
- Provide legal support and advice to members.
- Negotiate redundancy packages and other entitlements.
- Represent members in court if necessary.

6. Explore Redundancy Options and Re-training:

Understand Redundancy Terms: If redundancy is inevitable, ensure you understand the terms of your redundancy package, including severance pay calculations.
Look for New Opportunities: While dealing with the current situation, start looking for new job opportunities. Take advantage of any career counseling or re-training programs offered by the company, government, or NGOs.

7. Pensions and Tax Remittances:

Confirm Remittance: Contact your Pension Fund Administrator (PFA) and the relevant tax authority (e.g., State Internal Revenue Service for PAYE) to confirm that all deductions from your salary have been remitted by your employer.
Report Non-Remittance: If there are unremitted funds, immediately report this to your PFA and the tax authority. They have mechanisms to pursue the company or the insolvency practitioner for these outstanding amounts. Unremitted pension contributions are a serious offense under the Pension Reform Act.

The Role of Regulatory Bodies and Courts

Corporate Affairs Commission (CAC): The CAC is the primary regulator of companies in Nigeria. All insolvency proceedings are required to be notified to the CAC after necessary court approvals. The CAC maintains a register of companies, including those undergoing insolvency.

National Industrial Court of Nigeria (NICN): As mentioned, the NICN has exclusive jurisdiction over labour and employment matters. Employees who feel their rights have been violated during an insolvency process can approach the NICN for redress. The NICN is increasingly leaning towards international best practices in labour relations, which often emphasize fair treatment and protection of employee rights, even in cases of company distress.

Federal High Court: The Federal High Court has exclusive jurisdiction over corporate insolvency matters, including winding-up petitions, administration, and company voluntary arrangements. While the NICN handles the labour aspects, the Federal High Court oversees the overall insolvency process. This means there can be an interplay between the two courts, and understanding which court has jurisdiction over what aspect of a claim is crucial.

Preventative Measures for Employees and Employers

While insolvency can sometimes be unavoidable, certain measures can help mitigate its impact on employees.

For Employees:

Regularly Check Pension Statements: Don’t wait until things go wrong. Regularly verify that your pension contributions are being remitted to your PFA.
Keep Good Records: Maintain personal files of all employment-related documents.
Understand Your Contract: Read and understand your employment contract, especially clauses relating to termination, redundancy, and benefits.
Join a Union: If eligible, consider joining a trade union. They provide a collective voice and often have legal resources.

For Employers:

Proactive Financial Management: Implement robust financial management practices to identify and address financial distress early.
Transparency with Employees: While difficult, being as transparent as possible with employees about financial challenges can help manage expectations and morale, and potentially facilitate smoother transitions if insolvency becomes unavoidable.
Adherence to Labour Laws: Even in distress, employers must strictly adhere to labour laws regarding payment of wages, benefits, and termination procedures. Non-compliance can lead to further legal complications.
Timely Remittance of Statutory Deductions: Promptly remit pension contributions and taxes deducted from employee salaries. This is a legal obligation and protects employees’ future.
Explore Corporate Rescue Mechanisms Early: If facing financial difficulties, explore corporate rescue options like CVA or administration early, rather than waiting until liquidation is the only option. This can potentially save jobs and ensure a better outcome for all stakeholders.

The Human Element: Beyond the Law

It’s important to acknowledge that insolvency is not just a legal or financial event; it has a profound human impact. Employees often invest years of their lives and emotional energy into their workplaces. Losing a job due to company failure can be devastating, leading to:

Loss of Identity and Purpose: For many, work is a significant part of their identity.
Stress and Health Issues: Financial strain and uncertainty can lead to severe stress, anxiety, and related health problems.
Family Impact: Job loss directly impacts families, affecting their financial stability, children’s education, and overall well-being.
Reputational Concerns: Employees may worry about the impact of working for a failed company on their future employment prospects.

Therefore, while the legal framework provides a safety net, empathy and support for affected employees are crucial during such times. This might include:

Clear Communication: Even if the news is bad, clear and timely communication from the company or insolvency practitioner can help employees prepare.
Support Services: Where possible, offering outplacement services, career counseling, or mental health support can make a significant difference.
Fair Treatment: Upholding principles of fairness and dignity in the process, even when difficult decisions are being made, is paramount.

Concluding Thoughts: Navigating the Storm

Insolvency in Nigeria is a complex and evolving area of law, with recent reforms aiming to strike a better balance between creditor rights and corporate rescue. For employees, understanding their rights within this framework is not just a matter of legal knowledge, but a practical necessity for protecting their livelihoods and future.

While the law provides a shield, the proactive steps an employee takes – documenting everything, seeking timely legal advice, and engaging with relevant bodies – can significantly influence the outcome of their claims. Similarly, for employers, adhering to legal obligations and exploring rescue mechanisms early can mitigate the devastating impact of insolvency on their workforce.

The journey through corporate insolvency can be a turbulent one, but armed with knowledge and the right support, employees can navigate the storm with greater confidence, ensuring that their valuable contributions are recognized and their entitlements, to the extent possible, are secured.

Have you or someone you know experienced the impact of company insolvency in Nigeria? What challenges did you face, and what advice would you offer to others in a similar situation? Share your thoughts and experiences in the comments section below.

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