THE NIGERIAN INSOLVENCY LAW AND THE RIGHTS OF CREDITORS AND ACCOUNT HOLDERS OF INTERMEDIATED...

THE NIGERIAN INSOLVENCY LAW AND THE RIGHTS OF CREDITORS AND ACCOUNT HOLDERS OF INTERMEDIATED SECURITIES (VIS-À-VIS THE

INSOLVENT INTERMEDIARY)

Being a paper presented by

Chief Anthony Idigbe SAN at

SEC Seminar on Convention on Intermediated Securities Transcorp Hilton Hotel Abuja on 7th

May 2009

PUNUKA Attorneys & Solicitors

OUTLINE OVERVIEW PART I: SECURED CREDIT AND GENERAL

INSOLVENCY FRAMEWORK PART II: THE SPECIAL PROTECTION

AFFORDED ACCOUNT HOLDERS PART III:THE UNIDROIT APPROACH - A

SUMMATION OF BEST INTERNATIONAL PRACTICE ON THE ISSUE

CONCLUSION


OVERVIEW

THE NIGERIAN PARADIGM SHIFT :

Securities as Chose in action and need for evidence. From Direct Holding of Securities to Indirect Holding System.

Commercial ImperativePUNUKA Attorneys & Solicitors


OVERVIEW CONTD:

WHO IS AN INTERMEDIARY?

A Capital Market Operator…

Custodian Companies

Stockbroking firm

Depositories

Unit trust schemes

Portfolio investment companies ,etc

Intermediaries present insolvency risk to the investor who holds securities through them

OVERVIEW CONTD.

ECONOMICAL & TECHNOLOGICAL FACTORS?

IT revolution and impact on business transactions time & cost saving, Simplicity of formalities an electronic and speed of the light platform for deals

Remarkable growth of the Nigerian Capital Market and dealings in public company securities traded on the Stock Exchange. NSE capitalisation was =N=1.96 trillion in 2004 to =N=12.6 trillion in March 2008

A more globally integrated Nigerian economy

Nigeria – an attractive environment for FDI PUNUKA Attorneys & Solicitors

OVERVIEW CONTD

LEGAL FACTORS

Legislative initiatives and reforms tailored to ensure certainty of transactions and address risks associated with economical development.

Cross-over from Traditional Company Law to Securities Law in 1999 (CAMA and abolition of Part enactment of ISA 1999 now ISA 2007).

Cross-over from Securities Law to the Law of Intermediated Securities (ISA 2007; SEC Rules; the Unidroit Convention influence)

Nature abhors vacuum so commercial imperative have overriden traditional direct holding requirements as intermediaries have provided services to capital owners who want to access market


PART I

SECURED CREDIT AND THE GENERAL NIGERIAN INSOLVENCY

FRAMEWORK


What is Secured Credit?

A transaction by which enforceable rights in property is given to a lender or capital provider as collateral to satisfaction of repayment obligation in event of default

An unavoidable feature in any modern day economy (UK Cork Committee, 1982 on the importance of a secured credit regime). Enables deployment of fund from surplus to deficit users of capital

An assurance or undertaking to guarantee repayment over and above the mere promise to repay inherent in all credit transactions

The underpinning of all company law transactions or relationship (Debt/Equity Capital): investors secured against the assets of the company.


What is Insolvency?

Firstly and generally, the flip side of the coin: the framework that creates the necessary confidence and soundness in a secured credit system: management of systemic risk

An inadequate definition under the Nigerian general insolvency law (S650 CAMA)

A working definition; the inability of a debtor company to meet up with its commercial obligations/commitments

Insolvency and Restructuring (Mergers & Acquisition): the relationship

Balance Sheet Insolvency


THE CONNECTING FACTOR?

An efficient and clear insolvency regime is needed for the purpose of credit risk management through the enforcement of securities.

Priority and ranking issues with respect to classes of investors only arises in the context of insolvency.


THE NIGERIAN CORPORATE INSOLVENCY FRAMEWORK: THE GENERAL LAW OR THE

DIRECT HOLDING SYSTEM

CAMA: THE SUBSTANTIVE LAW (Cap C20 LFN 2004)

PART XIV – RECEIVERSHIP PART XV – WINDING-UP PART XVI – ARRANGEMENTS & COMPROMISES

Note that Nigerian Corporate Insolvency Regime does not make provision for Administration.

Restructuring, Mergers & Acquisition under ISA 1999 (now 2007): an additional aspect of corporate insolvency? (S122 (6) (d) ISA 2007).

COMPANIES WINDING-UP RULES 2001: THE ADJECTIVAL LAW

These two statutes capture essentially Nigerian corporate insolvency framework


REDISTRIBUTION OF ASSETS UNDER THE NORMAL LAW IN THE EVENT OF INSOLVENCY OF

CORPORATE BODY

A Direct Holding or Certificated Securities System. see Ss 79, 91, 151, 152 on definition of membership to company. A host of other similar provisions in CAMA for debenture holders S169 etc.

Protection of investors in the company tied to possession of certificated securities (in its absence, equitable protection available but fraught with attendant frailties -recourse to litigation invariably) and registration of name of holder in the company’s records (legal recognition & protection )


REDISTRIBUTION OF ASSETS UNDER THE NORMAL LAW IN THE EVENT OF INSOLVENCY OF

THE CORPORATE BODY-Contd.

SALIENT STATUTORY PROVISIONS CREATING THE ORDER OF REDISTRIBUTION- CAMA S. 393 (1), (cost of receivership factored in

realization of security for secured creditors ) S484 (liquidation expenses under winding up

procedure, the highest priority), S494 (the general rule on priority of interests) and S495 (An exception : the concept of fraudulent

preference). S506 (An alternative not tested by litigation:

fraudulent or reckless trading. Comp. with provision in UK Insolvency ActPUNUKA Attorneys & Solicitors

THE COMPETING INTERESTS OF VARIOUS STAKEHOLDERS: PRIORITY RULE IN THE DIRECT HOLDING SYSTEM

INSOLVENCY ADMINISTRATORS AND

SECU

RED C

REDITORS-FIRST M

OVER ADVANTAGE

INSTITUTIONAL C

REDITORS (PENCOM ,

FIRS,

SIRS ETC), & LABOUR CLAIMS

ORDINARY TRADE CREDITORS

DIFFERENT CLASSES OF SHAREHOLDERS


THE PROBLEM OF THE PRIORITY RULES CREATED UNDER THE NORMAL LAW FOR CAPITAL MARKET INVESTORS

S495 applicable ONLY in context of winding up proceeding. S494 fails to take cognizance of –

the peculiar nature of capital market and interests of investors investing indirectly with the issuer on an electronic/virtual or uncertificated environment (CSCS)

The interest of investors in the intangible assets (securities) of the intermediary acquired on behalf of/and with the funds of the account holders/investors.

Insufficient recognition of the concept of Trusteeship. Intermediated securities can be said to be sort of alien/incompatible with system created under the Normal Law with respect to ownership of shares and other securities and proof of title (S86 CAMA)


SECTION 86 CAMA

No notice of any trust, express, implied or constructive shall be entered on the

register of members or be receivable by the Commission.


THE PROBLEM OF THE PRIORITY RULES CREATED UNDER THE NORMAL LAW FOR CAPITAL MARKET INVESTORS

Outcome of Normal Law where the debtor company is not asset-rich?

By failing to recognize investor’s beneficial ownership of securities indirectly held by the capital market intermediaries, the Certificated system created under the Normal Law allows the absurd situation where investors are positioned at the bottom of the pyramid of priority as mere trade creditors.

Defeats imperative of special protection of capital market leading to the repeal of Part XVII of CAMA by S263 (1) (d) of the then ISA 1999 as regards dealings in public companies securities

Special nature of capital market and SEC ignored. Integrity of capital market and protection of investors undermined. Hazardous resort to statutory exceptions to S86 of CAMA and to equity rules (Equity looks

at what ought to be done as done) to provide basic protection to this special breed of investors.

S55 ISA 2007 on electronic means of issuing and transferring securities in direct conflict with CAMA’s several Ss 79, 86, 91, 151, 152 etc which requires registration of securities and thrives on the evidentiary system of share certificate


HOW DID NIGERIA DEAL WITH CHALLENGE OF GIVING SPECIAL & PREFERENTIAL TREATMENT TO INVESTORS/ACCOUNT HOLDERS IN CERTAIN SECTORS OF THE NIGERIAN ECONOMY

The Nigerian Legislator considered the- Special nature of banking industry and need for protection of

depositors Special nature of capital market transactions and need for

protection(dealings in a dematerialized environment).

The Mischief sought to be cured with respect to loopholes under the normal law and inadequate protection of account holders interests led to creation of special (insolvency) laws in these industries (pending a general insolvency framework reform) which derogate expressly from the normal Law–

NDIC Act 2006 and BOFIA 1991 as amended for banking. ISA 2007 for Capital Market & SEC Regulations on Intermediaries


PART II

THE SPECIAL PROTECTION AFFORDED TO ACCOUNT HOLDERS IN THE EVENT OF INSOLVENCY OF

INTERMEDIARIES (CMOs)


SPECIAL TREATMENT OF ACCOUNT HOLDERS UNDER SPECIAL LAWS

BANKING INSOLVENCY:

NDIC ACT 2006 AND BOFIA

Prevention of the bank’s Insolvency Failing same, special preferential

treatment afforded to account holders in the event of insolvency

S9 BOFIA on Minimum Paid up Share capital,

Ss. 13 BOFIA on minimum holding of cash reserves

Ss 16 & 21 NDIC Act 2006 on insurance of banking deposits with the NDIC

Ss. 7,31 to 35 BOFIA stating CBN take-over powers as well as NDIC take –over powers. Also ss 27 to 32, 37,38 and 40 to 43 NDIC Act subject to S54 BOFIA

CMOs INSOLVENCY: ISA 2007 AND SEC RULES ON INTERMEDIARIES

Prevention of the Intermediary’s Insolvency R26B (1) (v), 27 (1) (vii) 27 (2) (a) (c)

etc on stringent capitalization requirements so as to procure sufficient assets to serve as safety net distributable to sundry investors (fidelity bond value of 25% of paid up capital.

Rules 26, 27 and 207 of SEC’s regulations on registration and regulations of custodians and other intermediaries

Ss 197/198 on Investors Protection Fund

Ss. 48 to 51 ISA 2007 on SEC’s take over powers to prevent or manage going concern in difficulty


SPECIAL TREATMENT OF ACCOUNT HOLDERS UNDER SPECIAL LAWS

BANKING INSOLVENCY:

NDIC ACT 2006 AND BOFIA

Special preferential treatment afforded to account holders in the event of insolvency of bank-

Ss. 20 and 21 NDIC Act 2006 S54 BOFIA to the effect that

assets of failed bank to be made available for payment of account holders over and above all other liabilities of the bank.

S55(2) on conflict resolution between BOFIA and CAMA (BOFIA prevails over the Normal Law rule)

CMOs INSOLVENCY: ISA 2007 AND SEC RULES ON INTERMEDIARIES

Special preferential treatment afforded to account holders in the event of insolvency

Ss. 39 to 43 ISA 2007 on segregation of accounts by CMOs

Ss 197/198 on Investors Protection Fund

Rules 26, 27 and 207 of SEC’s regulations on registration and regulations of custodians and other intermediaries

S42 states that money in intermediary’s trust account is not available for the payment of the intermediary's debt. See also R207A(8) and R207B (18) on segregation of accounts by market participants.


CRITICAL ANALYSIS OF THE PROVISIONS OF THE SPECIAL CAPITAL MARKET LAW

IS CONFLICT WITH GENERAL LAW CLEARLY RESOLVED ON THE ISSUE OF PROIRITY AND SPECIAL PROTECTION OF INVESTORS?

Rules of interpretation: the specific prevails over the general. See case of Major & Co V Schroeder

S42 ISA juxtaposed to S494 CAMA not specific but in direct conflict with normal law (without a clear conflict resolution mechanism)

Ss. 54/55 BOFIA on the other hand is a very clear statute that clearly derogates to the Normal Law and the rule in S494.


THE REALITY DECANON V. ROYAL EXCHANGE

Here, stockbroker is claiming beneficial ownership of shares bought for account holder simply because they were bought in name of stockbroker

OTEDOLA / AP V. DANGOTE/ANNENIH/NOVA SECURITIES Can account holder claim benefit but deny liability

for other actions of intermediary on his behalf?


WILL THE CONVENTION CHANGE ANYTHING?

Article 7- Will not affect municipal procedural and substantive law of insolvency.

Article 21- Seeks to lay guiding principles and establish right of account holder against insolvency administrators and secured creditors

Preserves power of insolvency administrator to challenge transactions: A strong tool against the objective of priority of protection of investor.


MAKING THE CONVENTION EFFECTIVE

Like Bank account holders give priorityEnact new laws like

Uncertificated Securities Act Electronic Business Act Insolvency Act Strenghten the regulator SEC

Amend CAMA


THOUGHTS ON ROLE AND RESPONSIBILITIES OF JUDICIARY IN THE

FACE OF GLOBAL MELTDOWN

Ubi jus ibi remedium: The judiciary has to provide effective and adequate remedies in commercial disputes, especially in the area of debt enforcement and insolvency in this current global situation. The attitude of courts would be crucial in building investors confidence in the Nigerian economy and enforcement of law.

It follows therefore that the judiciary as a whole must be able to – Achieve the swift and efficient administration of justice and adjudication of commercial

disputes as is expected for commercial litigation: time particularly of essence Understand the dynamics of insolvency laws very well: need for further training and

specialization of judges in addition to conventional education. Provide different and collaborative avenues for remedies: the issue special jurisdiction

and exclusive jurisdictions, domestic remedies, collaboration with statutory regulators Promote reconciliation in commercial dispute taking advantage of its rules: in line with

inherent nature of insolvency laws based on compromise, settlement between debtor and sundry creditors.

Give more effective justice: pursue the fraudulent directors of insolvent companies and making their assets available for distribution to companies creditors. See S506 CAMA


CONCLUSION Uncoordinated two (2) track

development of traditional direct holding of securities and indirect holding of securities

Section 55 of ISA 2007 and Rule 98 of SEC Rules on Electronic Offer and Transfer of Shares now blaze the trail

A more comprehensive local approach now needed


THANK YOU

Chief Anthony Idigbe SANPUNUKA Attorneys & Solicitors

International Law CentreNo. 45 Adjarho Street,

Off Admiralty Way (Opposite White Dove)Lekki, Lagos

TEL: 2704789, 2704791FAX: 234 (0) 1 2704790

WEBSITE :www.punuka.comPUNUKA Attorneys & Solicitors

THE NIGERIAN INSOLVENCY LAW AND THE RIGHTS OF CREDITORS AND ACCOUNT HOLDERS OF INTERMEDIATED...

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