• Thursday, April 18, 2024
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Navigating Hurdles of Insolvency: What an insolvent company must do

Navigating Hurdles of Insolvency: What an insolvent company must do

Introduction:

Amidst the economic and fiscal brutality this country is currently subjected to, with its ancillary cousins of inflation, high cost of living, scarcity, or paucity of funds/lack of purchasing power, etc., businesses and business owners are not immune from these harsh economic realities. Then the question is, how can struggling businesses navigate the hurdles posed by this economic and fiscal reality?

In 2019, a matter was initiated by an appointed Insolvency Practitioner over a property and business of a company, being an offshoot of an insolvency proceeding. What happened in this case was that a company which was indebted to a bank approached and obtained a restraining order against this bank to prevent the bank from demanding or recouping the company’s indebtedness. For 10 years, she was successful until a twist of fate in the late 2019 when this bank appointed a Receiver/Manager who took over the company’s business and literally sold it off to satisfy the exposure of the bank. It was obvious the company was struggling but the owners also could not navigate the big hurdle of Insolvency.

This led me to ruminate on this question: how can an insolvent company navigate the hurdles of Insolvency especially in these trying times?

What We Now Know As “Insolvency”

The above story leads me to discuss what insolvency is about. It must be noted that the importance of this discussion, especially in this current unpredictable economy with an unprecedented biting reality on businesses, can never be overemphasized. According to Black’s Law Dictionary, 8th Edition at page 811, “Insolvency” is “{1} the condition of being unable to pay debts as they fall due or in the usual course of business. {2} the inability to pay debts as they mature.

In the case of AFROTEC TECHNICAL SERVICES (NIG) LTD v. MIA & SONS LTD & ANOR (2000) LPELR-219(SC), the Supreme Court had the opportunity to provide the meaning of the word “Insolvency”. However, this was done from the lens of an old law, Section 62{3} of the Sales of Goods Act, 1893. In the following words, His Lordship, Abubakar Bashir Wali, JSC, of the Apex Court defined insolvency thus:

“A person is deemed to be insolvent within the meaning of this Act who his either ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due, whether he has committed an act of bankruptcy or not.”

However, it is worthy of mention that the words: ‘person’, and ‘debtor’, as numerously supplied in the above excerpt shall be restricted {for the purpose of this discuss} to an artificial person and not natural person. An artificial person is one who came to be by the intervention and instrumentation of law, that is, Statutes, Agency{ies} of government such as Company House in United Kingdom, Corporate Affairs Commission {CAC} in Nigeria, etc., while in the case of a natural person, his existence is dependent on the activities of a man and a woman.

In a nutshell, an “Insolvent” state is a state where a company is unable to pay its debts as and when they are due. How then can you determine whether your company or organization is already trading or bargaining in the market of “Insolvency”? There are three major measuring lines to determine how deep your company or organization’s business is, in the market of Insolvency. Where your company has fallen short of one of these, your company is “Insolvent”; and they as follows:

  • The company is unable to meet its payment obligations.
  • The company is not expected to meet payment obligations when they become due.
  • The amount of existing liabilities exceeds the amount of the total assets of the enterprise.

The controlling phrase in insolvency is centered on the company’s inability to pay its debts. Section 572 of Companies and Allied and Matters Act (CAMA) 2020 defines this in the following paraphrased words:

A company is deemed to be unable to pay its debts if—

  • a company cannot pay a debt exceeding the sum of N200,000.00 when due and after the creditor has officially demanded for same.
  • a company cannot pay a judgment sum against it in favour of the creditor.
  • the court, after critical examination of the company, is satisfied that the company is unable to pay its debts.

At this point, take a brief dive into your company’s cash flow and balance sheet vis-à-vis the above measuring lines, the answer you get tells you whether your company is insolvent or not. Where your cash flow and balance sheet have betrayed your company and labelled you to be insolvent, your business is indeed insolvent.

What are the Options Open to such a Company?

Foremost, we need to understand that insolvency is a financial condition, and not a legal declaration, therefore there might still be a glimmer of hope. Consider the following steps as appropriate when your company is perceived to be edging towards insolvency:

  1. Find an insolvency practitioner for professional advice on the company’s position.
  2. Seek an urgent board meeting, where the financial health of the company is discussed and analyzed with the intention of proffering solutions for the company.
  3. Meet with the creditors and inform them of the company’s financial situation, if legally advised to do so, and share your already approved plans for solving it. Negotiate with creditors to see if liquidation can be avoided: seek cancellation of debts, where necessary; seek extension of deadlines for payments, where applicable; seek an agreement to make payments in instalments, where possible; finally, seek to include a partner who can make a private contribution to the company, or refinance the existing loans, or seek new lines of credit to improve liquidity. This can be through bank loans, asset financing, or attracting new investment.
  4. If you think your company can still carry on business while managing its insolvent stage, then do the following: enter an informal agreement with your creditors; or enter into a company voluntary arrangement; or put the company into administration.

These will offer some respite from creditor action and enable: a) the company to continue to operate for a short period, b) some properties belonging to the company to be sold to satisfy obligations to the creditor, and c) sell the entire company as a going concern.

  1. Thoroughly consider the company’s other options, such as restructuring or liquidation.
  2. Ensure that all actions taken are in the best interests of the creditors.
  3. Keep accurate records of all transactions and decisions from the point of suspected insolvency.

These are the ways your company can begin to rethink its current state to ensure it survives. One other thing that you must do is to cut emotional ties with your insolvent company. I know many business owners would say “I built this business from scratch with my sweat and efforts; therefore, I will not lose the company or the control of it”. It is better to lose your company than to lose your life.

What Options are available to the Creditors?

Most often than not, the reaction of a creditor against an insolvent business is without mercy. The creditor wants to ensure that his money is substantially recouped from the insolvent business. This may lead to such other things as Creditor’s petition for winding-up {under Section 573(1)a; Section 535 – 641 of CAMA 2020}, or an appointment of a receiver/manager {as the case may be, under Section 553 – 555 of CAMA 2020}, which ultimately may lead to liquidation of the insolvent business.

Liquidation is the process of winding up a Limited Liability Company or other incorporated Association.

Liquidation, however, is the legal process of bringing a limited company to an end. This stops the business from further trading or employing staff. Following the completion of a liquidation process, the business will be formally dissolved. This means it will be removed from the official Corporate Affairs Commission {CAC} register. This is known as being “struck off”, that is, the business will cease to legally exist.

Where business owners are not pragmatic or proactive enough, this may be the end of any insolvent business. Creditors would then be forced to go to any length to recover their investment.

If you should check your business thoroughly and carefully, and have realized that your business is already on the border of being insolvent, why don’t you take steps now and salvage what may be left of it? At least your emotional and psychological self!

Consider insolvency as a shield and not a sword to ruin your business. Don’t be like the company I mentioned earlier in this discussion. It had every opportunity to save itself but went to court, and for over a decade, the company tried to buy time until it became a forgotten adventure, for the business was no more.

Ajibola Ajiboye Esq. {Insolvency Practitioner}

Managing Partner,

Insolvency Practice and Corporate Service Group

Fadeson Legal Practice

[email protected]

www.fadesonlp.com