WHAT CREDITORS SHOULD KNOW ABOUT THE COMPANIES AND ALLIED MATTERS ACT (CAMA 2020)

The business landscape in Nigeria is dynamic, constantly evolving with legislative reforms designed to foster a more robust and predictable environment. Among these, the Companies and Allied Matters Act 2020 (CAMA 2020) stands as a monumental piece of legislation, repealing and replacing its 1990 predecessor. While much has been written about CAMA 2020’s impact on company formation, corporate governance, and ease of doing business, its profound implications for creditors often remain underexplored.

For businesses and individuals who extend credit – be it financial institutions, suppliers, service providers, or even private lenders – understanding CAMA 2020 is not merely an academic exercise; it is a critical necessity for protecting interests, mitigating risks, and maximizing recovery in challenging times. This comprehensive guide will delve deep into the core provisions of CAMA 2020 as they pertain to creditors, offering insights, practical advice, and a clear roadmap to navigating the complexities of corporate debt and insolvency in Nigeria.

A New Dawn for Creditors: The Philosophy Behind CAMA 2020

Before diving into the specifics, it’s essential to grasp the underlying philosophy of CAMA 2020 regarding corporate distress. The old CAMA was largely liquidation-focused, meaning that when a company faced financial difficulties, the primary recourse was often to wind it up. This frequently resulted in the destruction of viable businesses and suboptimal returns for creditors.

CAMA 2020 introduces a paradigm shift towards business rescue and rehabilitation. The Act prioritizes mechanisms that allow distressed but potentially viable companies to restructure their debts and operations, aiming to return them to profitability rather than immediate dissolution. For creditors, this means a dual perspective: while it offers new avenues for potential recovery from a resuscitated company, it also introduces complexities in enforcing immediate claims, particularly for unsecured creditors.

Who is a Creditor Under CAMA 2020?

At its simplest, a creditor is any person or entity to whom a company owes a debt or obligation. This broad definition encompasses:

• Secured Creditors: Those whose debts are backed by specific collateral (e.g., a mortgage, charge, or debenture over company assets). Their claims are typically prioritized in insolvency.
• Unsecured Creditors: Those whose debts are not backed by specific collateral (e.g., trade creditors, suppliers, employees for unpaid wages, general lenders without security). Their claims are usually paid after secured and preferential creditors.
• Preferential Creditors: Certain unsecured creditors are granted priority by law for specific types of debts (e.g., taxes, wages, and salaries for employees up to certain limits).

Understanding your position as a secured, unsecured, or preferential creditor is paramount, as CAMA 2020 treats each category differently, particularly during insolvency proceedings.

The Bedrock of Protection: Creation and Perfection of Security

For secured creditors, CAMA 2020 reinforces the importance of properly creating and perfecting security interests. A security interest is only as good as its enforceability.

• Registration of Charges: The Act emphasizes the requirement for companies to register charges (like mortgages and debentures) with the Corporate Affairs Commission (CAC) within 90 days of their creation. Failure to register a charge renders it void against a liquidator, administrator, or any creditor of the company. This means an unregistered charge, even if valid between the company and the creditor, offers no protection in an insolvency scenario.
  • Interactive Tip: As a secured creditor, when was the last time you verified that your charge was properly registered at the CAC? Do you have proof of filing and registration? This small step can make all the difference between recovery and loss.
• Priority of Charges: Generally, the priority of registered charges is determined by the date of registration, not the date of creation. This underlines the “first in time, first in right” principle, making prompt registration critical for secured creditors to protect their ranking.
• Floating Charges: CAMA 2020 maintains the concept of floating charges, which are charges over a class of assets that change over time (e.g., stock-in-trade). These charges “crystallize” (become fixed) upon certain events, such as the commencement of winding up or the appointment of a receiver. Secured creditors holding floating charges need to be aware of the events that trigger crystallization to protect their interests.

When a Company Can’t Pay: Understanding Insolvency and Debt Recovery

CAMA 2020 provides a clearer statutory test for determining when a company is deemed “unable to pay its debts.” A company is considered unable to pay its debts if:

• A creditor, to whom the company is indebted in a sum exceeding N200,000 (Two Hundred Thousand Naira) then due, has served a written demand at the company’s registered or head office, and the company has, for three weeks thereafter, neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor.
• Execution or other process issued on a judgment, decree, or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part.
• It is proved to the satisfaction of the court that the company is unable to pay its debts.

This N200,000 threshold provides a clear trigger for creditors to initiate winding-up proceedings if their demands are ignored.

Beyond Liquidation: New Business Rescue Mechanisms

The most significant shift for creditors under CAMA 2020 is the introduction of formal business rescue mechanisms. These are designed to provide a lifeline to distressed companies, but they also significantly impact creditors’ immediate rights and recovery strategies.

1. Company Voluntary Arrangement (CVA)

• What it is: A CVA is a flexible arrangement between a company and its creditors (or a class of creditors) to reschedule debts or propose a composition of debts. It aims to allow the company to continue trading and ultimately repay its creditors, often with reduced amounts or extended terms, rather than facing immediate liquidation.
• How it Works (for Creditors):
  • Proposal: The company’s directors (or administrator/liquidator if already in formal insolvency) propose the CVA, outlining the financial position, the proposed repayment plan, and the appointment of an insolvency practitioner as a “nominee” to supervise the process.
  • Creditors’ Meeting: A crucial meeting of creditors is summoned to consider the proposal. Creditors vote on whether to approve the CVA, with or without modifications.
  • Binding Effect: If approved by a majority in value (75%) of creditors present and voting, and also approved by the company’s members, the CVA becomes binding on all unsecured creditors, regardless of whether they voted for it or not.
  • Secured Creditors: This is a critical distinction: a CVA cannot interfere with the rights of secured creditors without their express consent. This provides significant protection for those with properly perfected security interests.
• Creditor’s Perspective – Opportunities and Challenges:
  • Opportunity: For unsecured creditors, a CVA offers a chance to recover a portion of their debt, which might be higher than what they would get in a liquidation scenario, especially if the company’s business can be salvaged. It can be a more collaborative and less adversarial process than winding up.
  • Challenge: The binding nature on non-consenting unsecured creditors means you might be forced into an arrangement you didn’t agree with. Also, secured creditors retaining their rights means they can still enforce their security, potentially depleting assets available to unsecured creditors.
• Interactive Question: Imagine a company owes you N5 million for goods supplied (unsecured). They propose a CVA to pay 50% of the debt over two years. What factors would you consider before voting to approve or reject this proposal? Think about the company’s prospects, the alternative of liquidation, and your immediate cash flow needs.
• What to Do:
  • Participate Actively: Attend creditors’ meetings, review the proposal thoroughly, and ask questions.
  • Seek Legal Advice: Understand the implications of the CVA on your specific claim.
  • Assess Viability: Critically evaluate whether the company’s proposed CVA is realistic and whether the company truly has a chance of recovery.
  • Challenge if Prejudiced: If you believe the CVA unfairly prejudices your interests, CAMA 2020 allows an application to the court within 28 days to challenge the arrangement.

2. Administration

• What it is: Administration involves the appointment of an insolvency practitioner (an “administrator”) to manage the company’s business, affairs, and property with the primary objective of rescuing the company as a going concern. If that’s not reasonably practicable, the aim shifts to achieving a better result for the company’s creditors as a whole than would be achieved on winding up, or realizing property to make a distribution to secured or preferential creditors.
• How it Works (for Creditors):
  • Appointment: An administrator can be appointed by the company, its directors, one or more creditors, or a designated officer of the Federal High Court.
  • Moratorium: Crucially, upon the appointment of an administrator, a moratorium comes into effect. This means no steps can be taken to enforce any security over the company’s property, and no legal action can be commenced or continued against the company without the court’s permission. This protection allows the administrator to stabilize the company without immediate creditor pressure.
  • Administrator’s Duties: The administrator has a duty to act in the interest of all creditors, not just the appointing creditor. They will investigate the company’s affairs, propose a strategy (administration proposal), and seek creditors’ approval.
• Creditor’s Perspective – Opportunities and Challenges:
  • Opportunity: Administration offers a structured process for potentially salvaging a distressed company, which could lead to better overall returns for creditors compared to liquidation. The moratorium provides a breathing space that can be beneficial for a company’s recovery.
  • Challenge: The moratorium means creditors cannot immediately enforce their claims. This can be frustrating for creditors seeking prompt repayment. The administrator’s focus might initially be on rescue, which may not align with an individual creditor’s desire for immediate payout.
• What to Do:
  • Engage with the Administrator: Understand the administration proposal and provide your input.
  • Monitor Progress: Keep track of the administrator’s actions and the company’s financial performance.
  • Seek Court Leave: If you have a compelling reason to enforce your security or take legal action despite the moratorium, you can apply to the court for leave.

3. Schemes of Arrangement and Compromise

• What it is: A scheme of arrangement or compromise is a court-sanctioned agreement between a company and its creditors (or members), or a class of them. It’s a versatile tool for corporate restructuring, mergers, acquisitions, and debt reconstruction.
• How it Works (for Creditors):
  • Court Involvement: The process involves significant court oversight. The court orders meetings of creditors (or classes of creditors) to vote on the proposed scheme.
  • Approval Threshold: The scheme must be approved by a majority in number representing at least three-fourths (75%) in value of the creditors (or class of creditors) present and voting. Once sanctioned by the court, it becomes binding on all creditors within that class.
  • Moratorium: CAMA 2020 introduces a six-month moratorium on winding-up petitions or enforcement actions by creditors once a scheme of arrangement process has commenced. This is a significant provision, similar to the administration moratorium, providing breathing space.
  • Secured Creditors and Moratorium: Importantly, a secured creditor can apply to the court to discharge this six-month moratorium if certain conditions are met, such as the company failing to comply with the terms of the arrangement or if the secured creditor can demonstrate that their security is in jeopardy. This provides an escape route for secured creditors.
• Creditor’s Perspective – Opportunities and Challenges:
  • Opportunity: Schemes of arrangement can facilitate large-scale corporate restructurings that might lead to a more stable and financially healthy debtor, ultimately improving long-term recovery prospects for creditors. The moratorium can allow for a more orderly restructuring process.
  • Challenge: The court-driven process can be lengthy and expensive. The binding nature on all creditors within a class, even those who dissent, can be a disadvantage. The moratorium, while beneficial for the company, delays immediate enforcement for creditors.
• What to Do:
  • Understand Your Class: Schemes often categorize creditors into different classes based on their rights. Understand which class you fall into and how the scheme affects that class.
  • Vote Strategically: Your vote can be crucial in determining the outcome of the scheme.
  • Monitor Court Proceedings: Keep abreast of all court hearings and orders related to the scheme.

Winding Up (Liquidation): The Final Recourse

Despite the emphasis on business rescue, winding up (liquidation) remains a critical process under CAMA 2020. This is the formal process of bringing a company’s existence to an end, realizing its assets, paying off its debts, and distributing any surplus to shareholders.

CAMA 2020 streamlines and clarifies winding-up procedures, which can be:

• Voluntary Winding Up: Initiated by the company’s members or creditors.
  • Members’ Voluntary Winding Up: Occurs when the company is solvent and able to pay its debts in full. The directors make a declaration of solvency. Creditors are paid, and any surplus is distributed to members.
  • Creditors’ Voluntary Winding Up: Occurs when the company is insolvent. The company proposes a resolution to wind up, and a meeting of creditors is also called. The creditors nominate a liquidator, and their wishes generally prevail over the members’. Creditors have a strong voice here and can even appoint a committee of inspection to oversee the liquidation.
• Winding Up by the Court (Compulsory Winding Up): Initiated by a petition to the Federal High Court. A common ground for a creditor to petition for compulsory winding up is that the company is unable to pay its debts (as per the N200,000 demand test discussed earlier).
  • The Role of the Liquidator: In all forms of winding up, a liquidator is appointed. The liquidator’s primary duty is to realize the company’s assets, discharge its liabilities according to legal priorities, and distribute any surplus. They act for the benefit of all creditors, not just the appointing party.
  • Priority of Payments in Winding Up: Understanding the order of payment is crucial for creditors:
    1. Costs and expenses of liquidation.
    2. Preferential creditors (e.g., certain taxes, employee wages and salaries).
    3. Secured creditors (to the extent of their security). Any shortfall for secured creditors makes them unsecured creditors for the remainder.
    4. Unsecured creditors (pari passu – equally, proportionally).
    5. Shareholders (if any surplus remains).
• Creditor’s Perspective – Opportunities and Challenges:
  • Opportunity: For creditors, particularly unsecured ones in an insolvent company, winding up by the court or a creditors’ voluntary winding up can be the most effective way to recover some portion of their debt, especially if business rescue is not feasible. The process is transparent, and the liquidator is accountable to the court and creditors.
  • Challenge: Liquidation often results in creditors receiving only a fraction of what they are owed, or nothing at all, especially if the company has limited assets and many secured or preferential creditors. The process can also be time-consuming.
• What to Do:
  • File Your Proof of Debt: Ensure you formally file your claim with the liquidator. This is essential to be recognized as a creditor.
  • Attend Creditors’ Meetings: Participate in meetings to receive updates, vote on resolutions, and ask questions of the liquidator.
  • Consider a Committee of Inspection: If you are an unsecured creditor in a creditors’ voluntary winding up, joining the committee of inspection gives you more oversight of the liquidation process.

Enhanced Protection for Secured Creditors: A Closer Look

CAMA 2020 offers several provisions that specifically bolster the position of secured creditors:

• Clarity in Winding Up: The Act provides clearer rules regarding the rights of secured creditors during winding up, reducing ambiguities that led to conflicts under the old regime. Secured creditors generally have the right to enforce their security independently of the winding-up process, unless a court order or moratorium prevents it.
• Protection Against Moratoriums: As discussed, while CVAs and Schemes of Arrangement introduce moratoriums, secured creditors’ rights are not automatically suspended without their consent in CVAs. In Schemes of Arrangement, there’s a mechanism for secured creditors to apply to the court to lift the moratorium under certain conditions. This is a significant safeguard.
• Netting Provisions: CAMA 2020 explicitly recognizes the enforceability of netting agreements in insolvency. Netting allows two parties to offset their obligations to each other, reducing the total amount owed. This is particularly relevant for financial institutions and can significantly mitigate credit risk.

The Corporate Affairs Commission (CAC) and Its Role for Creditors

The CAC is the primary regulatory body for companies in Nigeria and plays a crucial role for creditors throughout the lifecycle of a company, particularly during distress:

• Registration of Charges: The CAC is the registry for all charges created by companies. Creditors must ensure their charges are properly registered here. The online portal introduced by CAMA 2020 has made this process more efficient.
• Company Information: Creditors can conduct searches at the CAC to ascertain a company’s financial standing, registered charges, and statutory filings. This due diligence is crucial before extending credit.
• Filing of Insolvency Documents: All key documents related to insolvency proceedings (e.g., CVA proposals, administration orders, winding-up resolutions, appointment of liquidators/administrators) must be filed with the CAC. These filings provide public notice and transparency.
• Regulatory Oversight: The CAC has powers to investigate company affairs, ensuring compliance with CAMA 2020. While not directly involved in debt recovery for individual creditors, its oversight role contributes to a more transparent and accountable corporate environment.
• Interactive Tip: Before extending significant credit to a new client, have you considered conducting a comprehensive search at the CAC? What information would you specifically look for to assess their creditworthiness and potential existing liabilities?

Challenges and Considerations for Creditors under CAMA 2020

While CAMA 2020 brings many positive reforms, creditors should be aware of potential challenges:

• Emphasis on Business Rescue: While beneficial for the economy, the shift towards rescue mechanisms (CVA, Administration, Scheme of Arrangement) can delay immediate debt recovery for creditors, particularly unsecured ones. Creditors need to adjust their expectations and strategies accordingly.
• Judicial Delays: Despite efforts to streamline processes, the Nigerian judicial system can still be slow, leading to prolonged litigation in debt recovery and insolvency cases.
• Information Asymmetry: Creditors may not always have full access to a company’s financial information, making it difficult to assess the true viability of rescue proposals or the potential for recovery in liquidation.
• Complexity of New Procedures: The new insolvency provisions, while offering options, are complex. Navigating them effectively requires specialized legal and financial advice.
• Fraudulent Practices: CAMA 2020 includes provisions against fraudulent trading and fraudulent preferences, but creditors still face the risk of debtors attempting to hide assets or unfairly favor certain creditors. Vigilance and swift legal action are key.

Strategies for Creditors in the CAMA 2020 Era

To effectively navigate the landscape shaped by CAMA 2020, creditors should adopt proactive strategies:

1. Robust Due Diligence:
   • Before extending credit: Conduct thorough background checks on prospective debtors, including CAC searches for registered charges, financial statements, and directorship information.
   • Monitor Existing Debtors: Regularly review public filings and news about your debtors to identify early signs of financial distress.
2. Strong Documentation:
   • Ensure all loan agreements, supply contracts, and other credit arrangements are clear, comprehensive, and legally enforceable.
   • For secured credit, ensure your security documents are impeccably drafted and properly perfected at the CAC.
3. Proactive Debt Management:
   • Develop clear internal policies for overdue debts, including timely reminders, demand letters, and escalation procedures.
   • Consider alternative dispute resolution (ADR) mechanisms like mediation and arbitration before resorting to litigation, as they can offer faster and less costly resolutions.
4. Strategic Engagement in Insolvency:
   • Know Your Rights: Understand your specific rights as a secured, unsecured, or preferential creditor in each insolvency scenario (CVA, Administration, Winding Up).
   • Active Participation: Don’t be a passive observer. Attend creditors’ meetings, ask informed questions, and vote on proposals. Your collective voice can influence outcomes.
   • Timely Action: If a company shows signs of distress, act promptly. Delay can significantly diminish your chances of recovery. If you meet the N200,000 threshold and the company defaults, consider issuing a statutory demand as a precursor to winding-up proceedings.
5. Seek Expert Advice:
   • Given the complexities of CAMA 2020, engaging experienced legal counsel and insolvency practitioners is highly advisable. They can provide tailored advice, represent your interests in proceedings, and help you navigate the intricacies of debt recovery and corporate restructuring.

Case Study Snippet (Illustrative, Not Real): The ‘Sunrise Electronics’ Saga

Let’s imagine ‘Sunrise Electronics Ltd.’, a mid-sized distributor, faces financial woes. They owe ‘Component Solutions Plc.’ (an unsecured trade creditor) N10 million for parts and ‘Apex Bank’ (a secured creditor) N50 million, secured by a debenture over their assets.

• Old CAMA Scenario: Sunrise struggles, and Component Solutions initiates winding-up proceedings. Apex Bank, thanks to its debenture, appoints a receiver-manager. The receiver-manager prioritizes Apex Bank’s debt. Other assets are liquidated, often at distressed prices, leaving Component Solutions with little to no recovery after Apex Bank and preferential creditors are paid.
• CAMA 2020 Scenario:
  • Option 1 (CVA): Sunrise proposes a CVA to pay unsecured creditors 30% of their debt over 3 years. Component Solutions, after reviewing the proposal and realizing liquidation would yield 10%, votes for the CVA, even though they’d prefer 100%. Other unsecured creditors (some voting against, some for) eventually approve the CVA by the required majority. Apex Bank, being a secured creditor, is unaffected unless they explicitly consent. If Sunrise adheres to the CVA, Component Solutions recovers 30% without further litigation. If they default, Component Solutions can revert to traditional debt recovery.
  • Option 2 (Administration): Sunrise or Apex Bank initiates administration. An administrator is appointed. A moratorium kicks in, preventing Component Solutions from suing immediately. The administrator tries to rescue Sunrise. If successful, Component Solutions might get a better recovery from the revived company. If not, the administrator will liquidate assets, hopefully achieving a better outcome than a hasty winding-up. Apex Bank’s security is still paramount but its enforcement is paused during the moratorium.
  • Option 3 (Compulsory Winding Up): Component Solutions issues a statutory demand for N10 million. Sunrise fails to pay within three weeks. Component Solutions petitions for winding up by the court. A liquidator is appointed. Apex Bank enforces its security first. Then preferential creditors are paid. Whatever remains is distributed proportionally to unsecured creditors like Component Solutions.

This simplified example highlights how CAMA 2020 offers more structured options that, while sometimes delaying immediate gratification, can lead to a more organized and potentially higher recovery for creditors in the long run, particularly by promoting business rescue over outright liquidation.

The Road Ahead: Continuous Adaptation

CAMA 2020 is not static; its application will continue to be refined through judicial interpretation and practical implementation. Creditors must remain agile, staying informed about legal precedents and best practices. The emphasis on digitization within CAMA 2020 (e.g., electronic filings with CAC) also presents opportunities for creditors to leverage technology for better due diligence and monitoring.

Conclusion: Empowering Creditors in a Modernized Corporate Landscape

The Companies and Allied Matters Act 2020 represents a significant leap forward in Nigeria’s corporate legal framework. For creditors, it ushers in an era characterized by clearer rules, enhanced protections for secured interests, and a strategic shift towards business rescue.

While the new insolvency mechanisms – Company Voluntary Arrangements, Administration, and Schemes of Arrangement – offer potential for better long-term recovery and reduced value destruction, they also demand a more nuanced and strategic approach from creditors. Understanding the nuances of secured versus unsecured claims, actively participating in insolvency proceedings, conducting meticulous due diligence, and seeking expert guidance are no longer optional extras but fundamental requirements for safeguarding financial interests.

CAMA 2020 challenges creditors to move beyond a purely adversarial stance and to consider the broader economic context of corporate distress. By embracing the spirit of rehabilitation and strategically navigating the Act’s provisions, creditors can not only protect their investments but also contribute to a more resilient and dynamic Nigerian business environment.

What are your thoughts?

• As a creditor, which aspect of CAMA 2020 do you find most impactful on your business operations?
• Have you had any experiences (positive or negative) with the new insolvency provisions? Share your insights!
• What further information or resources would be most helpful for you in navigating CAMA 2020 as a creditor?

Let’s continue this conversation and collectively empower ourselves in the evolving Nigerian corporate landscape.