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Derivatives: Enforceability of Close out Netting in Nigeria

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By: Olayemi Anyanechi, Managing Partner at Sefton Fross

The Companies and Allied Matters Act (CAMA 2020) is a game changer for derivative transactions in Nigeria. It introduces innovative provisions that will impact financial collateral arrangements typically used by parties involved in derivative trading. This article will examine the novel provisions introduced by CAMA 2020 as it relates to financial collateral arrangements.

An examination of financial collateral arrangements under the CAMA 2020

Until recently, the enforceability of derivative transactions in Nigeria had lingering questions. This was mainly due to the uncertainty over enforcement of the close out netting provisions. To mitigate this, counterparties were typically advised to pursue the Automatic Early Termination route.

Netting is a reconciliation and payment mechanism which involves the aggregation and conversion of mutual payment obligations into a single claim, so that the party owing the greater aggregate amount makes a net payment to the party owing the lesser aggregate amount. Forms of netting include contractual/settlement, insolvency and close-out netting.

Netting under extant Nigerian laws

Prior to CAMA 2020, Nigerian laws supported contractual netting and insolvency netting.
Insolvency netting is a mandatory right of set-off that arises when a company goes into liquidation. It is automatic and applies at the date on which the liquidation commences

Insolvency netting is recognised under the provisions on mutual credit and set-off in section 33 of the Bankruptcy Act 1 and implied by reference in the previous CAMA 2. Section 33 of the Bankruptcy Act provides that where there has been mutual credits, mutual debts or other mutual dealings between a debtor and any other person claiming to prove a debt in the debtor’s liquidation, an account of what is due from one party to the other in respect of such mutual dealing and the sum due shall be set off against any sum due from the other party and the balance of the account and no more shall be claimed or paid on either side respectively. Thus, it required the claim and cross claims to be between the same parties in the same right.

Contractual or settlement netting is the netting of reciprocal deliveries or payments which are due on the same date. It provides for mutual payment obligations of contracting parties to be discharged by a single net payment obligation from one party to the other. This form of netting addresses the risk presented when parties’ obligations are not performed simultaneously, particularly where payment obligations are in the same currency to be performed on the same date. It assesses the parties’ mutual payment obligations and requires physical payment only from one of the parties, usually the one with the larger debt. 
Close-out netting on the other hand, is typically employed to minimise the risk of exposure to an insolvent counterparty. It applies to contracts having different settlement dates and results in dealings between the counterparties coming to a close.

Prior to CAMA 2020, insolvency netting was mandatory and it was not possible to enforce certain provisions under such agreements after the commencement of winding up without a court order. This was because under Nigerian law, any disposition of the property of the company made after the commencement of the winding up shall, unless the court otherwise orders, be void.

Furthermore, in line with the provisions of section 499 of the erstwhile CAMA, where the termination of obligations under netting agreements do not occur prior to commencement of winding up, the liquidator may have been able to “cherry-pick” and require the performance of contracts that he deemed beneficial while disclaiming the onerous contracts.

New close out netting provisions

CAMA 2020 now recognises and provides a legal framework for termination and close-out netting.

Close out netting is defined under CAMA 2020 to include the occurrence of “the termination, liquidation or acceleration of any payment or delivery obligation or entitlement under one or more qualified financial contracts entered into under a netting agreement”. Netting agreements are recognised to include a ‘master netting agreement’, a ‘master-master netting agreement’, and a ‘collateral arrangement’.

Section 721 of CAMA 2020 further provides that:

(1) “The provisions of a netting agreement is enforceable in accordance with their terms, including against an insolvent party, and, where applicable, against a guarantor or other person providing security for a party and shall not be stayed, avoided or otherwise limited by-(a) Any action of the liquidator;(b) Any other provision of law relating to bankruptcy, reorganisation, composition with creditors, receivership or any other insolvency proceeding an insolvent party may be subject to; or(c) Any other provision of law that may be applicable to an insolvent party, subject to the conditions contained in the applicable netting agreement.”

With this provision the perennial issue with derivative transactions in Nigeria, which was to the effect that only insolvency netting was possible, has been addressed.

In terms of obligations of the parties to a netting agreement surviving the commencement of insolvency proceedings, the only obligation/right, if any, of either party is to make/receive payment or delivery under a netting agreement which shall be equal to its net obligation/entitlement with respect to the other party as determined in the netting agreement.

Furthermore, the provisions under CAMA 2020 limit the liquidator’s powers to disclaim netting agreements as onerous contracts. It provides that:
Any power of the liquidator to repudiate individual contracts or transactionswill not prevent the termination, liquidation or acceleration of all payment or delivery obligations or enforcements under one or more qualified financial contracts entered into under or in connection with a netting agreement, and applies, if at all, only to the net amount due in respect of all of such qualified financial contracts in accordance with the terms of such netting agreement”.

Section 721(6) of CAMA 2020 also provides protection for netting agreements in that a liquidator is prohibited from avoiding the terms of such agreement unless there is clear evidence that the enforcing party made such transfer or incurred such obligation with actual intent to “hinder, delay or defraud any entity to which the insolvent party was indebted or became indebted”. The relevant time period is the period on or after the date that such transfer was made or such obligation was incurred.

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These new provisions mitigate the risks hitherto inherent in “qualified financial contracts” which includes a whole range of derivatives and will go a long way to enhance financial stability and investor confidence in the Nigerian financial sector.

Conclusion

There is no doubt that with the improved regulatory landscape, the CAMA 2020 has commendably set the tone for the actualisation of key innovations in the market, providing enabling legal backing for netting, bankruptcy remoteness and attendant regulatory frameworks for the smooth functioning of financial markets in Nigeria which would ultimately impact positively on transactions between counterparties and other participants in the market.

The Companies and Allied Matters 2020 is currently awaiting gazetting as the last step to its effectiveness. 

Ref:

1. The Bankruptcy Act, CAP B2, LFN 2004, s 33.
2. The Companies and Allied Matters Act CAP C20 LFN 2004, s 493.

3. The Companies and Allied Matters Act CAP C20 LFN 2004, s 413.
4. The Companies and Allied Matters Act 2020, s 718.
5. The Companies and Allied Matters Act 2020, s 721(2),(3).

6. The Companies and Allied Matters Act 2020, s 721(4).

Article by: Olayemi Anyanechi, Managing Partner at Sefton Fross

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Legal Business

Morenike George-Taylor: The fundamental term to include when raising investment

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Morenike George Taylor, Founder Reni Legal Consulting | County Support Consulting (Image: Supplied)

I remember a pivotal moment in my career that taught me a profound lesson about the importance of securing sufficient funding for a project. It all started when my team and I were working on an ambitious venture, a hotel to be located in Lekki, a high brow area in Nigeria. After months of planning, I found an investor who was excited about the potential. He assured me that he would provide the necessary funds to bring our vision to life.

Initially, the investor invested a portion of the money, which gave my team and I a glimmer of hope. With that commitment, I felt a surge of confidence. We began allocating resources, hiring a team, and setting timelines. Everything seemed aligned for success. 

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However, as we progressed, the promises began to wane. The investor started delaying further payments, citing various reasons that ranged from market fluctuations to unforeseen personal issues. Each time I reached out for updates, I was met with assurances that the funds would come through soon. Then, midway through the project, the investor informed me that he could no longer fund the project. 

This sudden withdrawal created a domino effect. We had already committed to other businesses that were relying on our funding to get started. As the primary business was still in development, those secondary businesses began to pressure me for repayments. They had their own obligations, and without the promised funds, they found themselves in a precarious position. It was an overwhelming situation, and I watched helplessly as relationships soured and trust evaporated.

The main business, which had so much promise, struggled to survive. Without the necessary capital, we couldn’t complete our operations or deliver our product to market. As the financial strain mounted, it became clear that our venture was on the brink of collapse. Ultimately, the business we had worked so hard to build didn’t make it.

This experience was a harsh but invaluable lesson. It underscored the critical importance of raising sufficient funding before embarking on any ambitious project and how this needs to be taken into consideration in any contract documentation you sign. If I had tied all our contracts and obligations to the complete funds being raised, we could have safeguarded our operations against such unforeseen circumstances.

This experience taught me that in business, clarity and preparation are paramount. Without sufficient funding, dreams can quickly turn into nightmares, and projects that hold so much promise can fade away before they even have a chance to succeed

In the world of business, securing adequate funding is crucial for success. Particularly, if you require $1,000,000 for example to execute your vision, it is essential to raise that exact amount and tie all your contracts to this figure, especially concerning repayment terms. This approach ensures that your business can commence operations without financial strain.

When you set out to raise capital, clearly defining your financial needs is the first step. If you determine that your project requires $1,000,000, raising exactly that amount helps avoid unnecessary complications. Insufficient funding can lead to a cascade of operational issues, including delays, inability to meet contractual obligations, and ultimately, project failure. By securing the full amount, you create a solid foundation for your business operations.

Tying your contracts to the $1,000,000 funding goal is a strategic move. This means that all agreements—whether with investors, lenders, or partners—should explicitly state that the commencement of business activities, as well as repayment obligations, are contingent on successfully raising this amount. If the funding goal is not achieved, the repayment terms should reflect that the business cannot commence. This protects you and your stakeholders from the risks associated with undercapitalization.

By ensuring that all agreements explicitly stated that the project’s commencement and the repayment terms hinged on successfully raising that target amount, we would have mitigated the risks of undercapitalization.  It became clear to me that having a well-structured funding strategy is not just a financial necessity; it’s essential for operational stability and long-term success.

Now, I always emphasize to entrepreneurs the importance of securing the full amount required before diving into a project. A well-capitalized venture is not just better positioned to navigate challenges; it can seize opportunities and grow sustainably.

 

About the author:

Morenike is an award winning business strategist and the founder of Reni Legal Consulting and County Support Consulting. She operates as a business consultant across various sectors, leveraging her extensive expertise to provide strategic insights and tailored solutions. With a keen understanding of the complexities of different industries, she helps organizations navigate challenges and seize opportunities for growth.

As a qualified lawyer, Morenike combines her legal knowledge with a strong foundation in data management, agile methodologies, and risk management. She is a certified Data Management Professional, a Disciplined Agile Scrum Master, and a Risk Management Professional. This diverse skill set allows her to approach each consulting engagement with a comprehensive perspective, driving operational efficiency and fostering organizational success.

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African Union, Google and Africa Practice launch Policy Framework to Transform Africa’s Startup Ecosystem

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In a groundbreaking move to drive innovation and entrepreneurship across Africa, the African Union and its partners, including Google and Africa Practice, have launched the AU Startup Policy Framework and Model Law. The Policy Framework and Model Law articulate principles, recommendations, and policy innovations to tackle the challenges hindering startups in Africa. It provides specific sample clauses to guide African Union Member States in developing or updating their national startup legislative and regulatory governance arrangements.

The Policy Framework and Model Law, developed in cooperation with Google in line with its Memorandum of Understanding with the African Union Commission, is set to harmonise approaches to enabling startups and innovation, in line with the African Union’s broader harmonisation objectives.

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Speaking during the launch held during the African Union 6th Mid-Year Coordination Meeting that brings together the African Union, the Regional Economic Communities, the Regional Mechanisms and the African Union Member States, H.E. Albert M. Muchanga, African Union Commissioner for Economic Development, Trade, Tourism, Industry and Minerals, said, “We are excited about the new prospects for our continent unlocked by the adoption of the Startup Policy Framework and Model Law which is set to leapfrog the startup ecosystem in Africa. As you know, small and medium-sized enterprises, including startups, represent most businesses in all sectors and are the primary source of job creation. Specifically, startups spur development by creating jobs in the digital economy, employing 34,000 people across the continent. Unfortunately, out of 1000 unicorns globally, only seven are in Africa. This is primarily due to complex regulations, limited funding, a scarcity of skilled labour, and fragmented markets in Africa. Therefore, the framework is expected to unlock some of these hurdles and set a strong foundation for the growth of  Africa’s startup landscape, projected to expand to USD 10 billion by 2056.”

H.E. Albert M. Muchanga went on to highlight that “Africa is a young continent, by 2050, the continent will account for 25% of the global population. Governments need to make the provisions to enable capital flow for the burgeoning ideas coming out of Africa. We need to create an environment that enables these innovative minds to catapult the continent to economic prosperity, and this framework is what enables this.” 

Google’s Regional Director, Sub Saharan Africa, Government Affairs & Public Policy, Charles Murito, noted, “Africa receives a disproportionately small share of global venture funding. In 2023, the continent raised a total of USD 4.5 billion from 545 disclosed venture capital deals, reflecting a 30% decrease in value and a 31% decline in the number of deals compared to 2022. Notably, 16% of the funding recipients were female-led ventures, only marginally up from 11% in 2020. Funding flows also skew towards the same sectors, exacerbating the financing challenge; with fintech continuing to lead deal volumes. The same destinations also receive disproportionately more of the financing flows into the continent: startups in Nigeria, Kenya, South Africa, and Egypt received 62% of the total deal volume.” 

While there’s no universal formula for fostering innovation and startups, the framework outlines principles derived from successful models. It is a call to action to ensure that startups — particularly those led by women and youth can be better supported. This Policy Framework and Model Law holds the potential to address gender disproportionality in financing flows, inspiring a new wave of innovation and growth. 

Marie Wilke, the Chief Innovation Officer at consulting firm Africa Practice, said, “The adoption of the Startup Policy Framework and Model Law marks the beginning of an exciting but potentially transformative phase. We must maintain momentum behind engagements with regional economic communities (RECs), regional organisations (ROs), and member states, to update and enact regional legal frameworks and national laws. Innovation is as much about finance and people as it is about drive. The future of Africa’s small and new businesses depends on our joint and decisive efforts to support them, paving the way for The Africa We Want.”

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The Legal Lore: Taking us from the bench to the fireside

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Photo Credits: Tonkin Clacey Inc

In the complex and intricate world of law, where every case is a story waiting to be told, the wisdom passed down from seasoned legal professionals holds immeasurable value. Within the hallowed halls of law firms and legal institutions, an age-old tradition persists-one that transcends formal training and case law. It’s the tradition of fireside chats, where senior legal practitioners weave narratives of their experiences, trials, and triumphs, igniting the flames of inspiration in the hearts of their junior counterparts.

In these intimate gatherings, the rigid walls of hierarchy crumble, and the barriers between senior and junior practitioners’ dissolve. Here, amidst the flickering glow of the fire, stories untold-stories of courtroom battles won and lost, negotiations that sealed deals or unraveled, and ethical dilemmas faced with unwavering resolve. Through these stories, senior legal practitioners impart not just legal knowledge but invaluable lessons from the trenches of practice.

For junior practitioners, these fireside chats serve as a beacon of guidance, illuminating the path ahead with the collective wisdom of those who’ve walked it before. They chats provide insights that textbooks can’t convey, painting a vivid picture of the complexities and nuances of legal practice. From navigating tricky client interactions to finding creative solutions to legal challenges, the stories shared in these informal gatherings offer a treasure trove of practical advice.

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Moreover, fireside chats help to build   a sense of fellowship and community within the legal profession. They create spaces where junior practitioners feel seen, heard, and valued—not just as legal novices, but as aspiring storytellers in their own right. Through the exchange of anecdotes and experiences, bonds are forged, mentorship relationships blossom, and a culture of continuous learning thrives.

Most importantly, these chats have the power to shape the trajectory of junior practitioners’ careers. By exposing them to diverse perspectives and real-world scenarios, these informal gatherings expand their horizons, instilling in them the confidence to navigate the complexities of the legal landscape. They inspire them to dream bigger, reach higher, and aspire to leave their own indelible mark on the legal profession. 

Photo Credits: Baker McKenzie

In a profession where the stakes are high, and the journey is fraught with challenges, storytelling becomes a guiding light—a compass that points towards excellence, integrity, and justice. The Advancing Women in the Workplace (AWW) program- a program to support women in leadership in South Africa adopted this approach of storytelling as a model. So, let us gather around, dear practitioners, and share our stories. For in the flicker of the flames lies the power to shape not just individual careers, but the future of the legal profession itself.

Acknowledgements

The AWW program, a program sponsored by Vance Centre in partnership with the South African Legal Fellows Network and the US mission.

 

Written by: Adaobi Adaobi Egboka and Dr Kim Lamont-Mbawuli. Africa Program Director, Cyrus R. Vance Center for International Justice, Vance Center Consultant and Director of KLM attorneys.

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