Corporate Insolvency in Nigerian Corporate Law

Corporate Insolvency in Nigerian Corporate Law

Corporate insolvency simply means a situation where a company’s assets are not sufficient to pay the company’s debts and liabilities. There are two types of corporate insolvency:

1. Cash Flow insolvency

This is where a company is not able to pay its debts when they become due.

2. Balance-sheet Insolvency

On the other hand, this is when the liabilities of a company is more than its assets.

When a company is insolvent, there are steps that can be taken to resolve the problem and to make the company liquid/solvent again without going into liquidation. These steps or procedures which are taken to rescue the company from insolvency and eventual winding up are provided for in the Companies and Allied Matters Act, 2020. They are:

  • Company Voluntary Arrangement (CVA)
  • Administration
  • Receivership

Company Voluntary Arrangement (CVA)

As provided for in S 434 to 442 of the Companies and Allied Matters Act, Company Voluntary Arrangement (CVA) is one of the procedures of rescuing a company that is insolvent. Although it has been in existence in other climes, it was introduced in Nigeria by Companies and Allied Matters Act, 2020. It is a business rescue arrangement which allows a company in financial difficulties to propose to its creditors to enter into an agreement with them regarding the repayment of all, or a part, of its debts over an agreed period of time. Put differently, it is an alternative arrangement available to companies facing financial di ficulties, to conveniently structure the repayment of debts to their creditors. In other words, it is an agreement between a company and its creditors, by which the company compromises its debts or agrees an arrangement for their discharge.

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For a Company Voluntary Arrangement to be effective, it must be approved by majority of the creditors. Once it is agreed upon by the majority of the creditors of the company, it becomes binding on all the creditors of the company except, those with security over the company's assets.

Differences between Company Voluntary Arrangement (CVA) and Arrangement & Compromise

Company Voluntary Arrangement is different from Arrangement and Compromise. The differences are as follow:

i. Company Voluntary Arrangement is contractual in nature and requires the approval of the creditors and members of the company to take effect while Arrangement and Compromise requires court order to convene the meeting where the resolution to approve the scheme of Arrangement and Compromise will be passed as well as sanction the scheme of Arrangement and Compromise. In other words, the court is more involved in Arrangement or Compromise than in Company Voluntary Arrangement.

ii. In Arrangement and Compromise, CAMA provides for a statutory 6 month moratorium while there is no    such provision in CAMA in respect of Company Voluntary Arrangement.

The implication of moratorium is that during this 6 month period, no winding up petition or enforcement action by any creditor shall be entertained against the company. This period of moratorium gives a company some breathing space to attempts to f ind a solution for, or trade out of, its financial difficulties. During this period of moratorium, apart from creditors precluded from taking any action against the

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