• Friday, June 21, 2024
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Single member companies and the restriction to convert

Written resolutions in Nigeria: Companies and allied matters act 2020 is too quiet

Nigeria is generally regarded as one of the key business destinations in Africa. However, Nigeria was ranked 131 out of 191 countries on the 2022 World Bank global index for the Ease of Doing Business. Before 2020, the country’s business and corporate ecosystem had been regulated by a 3-decade old law – the Companies and Allied Matters Act, 1990 (CAMA 1990) – which scarcely captured contemporary commercial realities, often occasioning regulatory bottlenecks and compliance costs for both local and foreign businesses in Nigeria.

Following years of legislative deliberations, the Companies and Allied Matters Act, 2020 (CAMA 2020) was eventually enacted and it effectively repealed CAMA 1990. This law no doubt ushered in various innovative provisions; one of such was the “Single-member Company” structure. Under CAMA 1990, every company was required to have at least two members from incorporation up until when the company ceases to be a going concern. However, CAMA 2020, specifically in section 18(2), now allows one person to form and incorporate a private company, i.e., a single-member company. While this is laudable, a further study of CAMA 2020 suggests that a multiple-member company (incorporated before or after the commencement of CAMA 2020) cannot change to a single-member company single.

Firstly, section 18(2) states that one person may “form and incorporate” a private company. While section 18(2) itself does not proscribe conversion from a multiple-member structure to a single-member structure, section 571(c) stipulates that one of the circumstances whereby a company may be wound up by the court is where “the number of members is reduced below two in the case of companies with more than one shareholder”. Moreover, there is no provision outlining a process for the conversion or reregistration of a multiple-member company to a single-member company. A combined reading of sections 18(2) and 571(c) of CAMA 2020 suggests that conversion from a multiple-member structure to a single-member structure is not permitted, as such is a ground for winding up – and this, in the writer’s view, is quite problematic.

One of the objectives for the passage of CAMA 2020 was to ease doing business in Nigeria, and denying multiple-member companies the right to convert to a single-member company structure falls short of that objective. It is worthy of note that section 408(c) of CAMA 1990 also provided for the reduction of members to one as a ground for winding up, however, such provision was relevant then given that under the old law, companies were ordinarily required to be incorporated with at least two members. The retention of this ground for winding up in CAMA 2020 and the inclusion of the phrase “…in the case of companies with more than one shareholder” suggest that the intendment of the drafters was to preclude multiple-member companies from converting to a single-member structure. This is however not in line with international best practices, especially within jurisdictions that recognise single-member company structures.

The Companies Act 2006 of the United Kingdom, one of the statutes after which CAMA 2020 was modelled, recognises and permits instances where one person may form a company (Sections 7(1)) or where the number of members in a limited company (private or public) may fall to one (Section 123(2)). In South Africa, section 13(1) of the Business Corporation Act 2008 (as amended) permits single-member companies and in practice, by agreement, other members in a multiple-member company may transfer their shares to a single shareholder. Elsewhere, the European Union in its Directive 2009/102/EC provides that a company may have a single member upon formation or where all its shares come to be held, by a single person. Under the Companies Act 2016 of Malaysia, companies may have a single member structure and section 466(d) stipulates that circumstances in which a company may be wound up by court is where the company comes to have no member.

Read also: CAMA 2020 – drawing the curtain on unused shares of a company

For better context, many small and medium-scale businesses incorporated before CAMA 2020 were envisioned by lone wolf promoters who were “forced” into working with someone else – simply to meet the regulatory threshold. In many cases, such forced relationships have left companies in precarious positions, including situations where misunderstandings between members become severe, to the detriment of the company. Preventing such companies from converting to a single-member structure isn’t the most ideal approach – even worse, prescribing such conversion as a ground for winding up is rather burdensome. Even the Supreme Court has urged, in Air Via Ltd v Oriental Airlines Ltd (2004) LPELR-272(SC), that “care and utmost caution must be exercised by the institution of justice in proceedings involving the termination of the life of a company.”

Instead of imposing winding up for a structure which serves to promote business needs, it is recommended that section 571(c) of CAMA 2020 be expunged or amended to reduce the threshold to “below one member” as obtainable in other jurisdictions.

Fabusiwa is a legal practitioner who writes and advises on corporate law, regulatory compliance and fintechs. [email protected].