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Minimum Share Capital Requirement For Companies Under The Nigerian Law

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The required minimum share capital of a company is dependent on either the objects of the company, type of company or statutory provisions regulating that company. The primary law on the registration and regulation of companies in Nigeria is the Companies and Allied Matters Act, 2004 (CAMA) while the Corporate Affairs Commission (CAC) is the body empowered to ensure that the provisions of the CAMA are complied with during pre-incorporation and post incorporation stages.

As interesting as it may sound, the CAMA is not the only law that regulates the minimum share capital of a company as there are other laws, policies and regulations that dictates what the minimum share capital of certain companies should be. The CAC being the regulator at the initiation stage must ensure the compliance of companies before issuing a certificate of incorporation.

This article attempts to list regulated business activities and their required minimum share capital. It also discusses the laws and the regulatory agencies that ensure that the provisions of the law are complied with during the post-incorporation stage.

 

Minimum Share Capital By Category of Company

In this regard, a company’s nature determines its required minimum share capital. In general, the required share capital of companies is set at a very low amount in order to make registration of companies attractive to everyone. Thus it is stated in Section 27 (2) of the CAMA that the minimum share capital of a Private company shall be  N10,000 whereas a public company cannot fall below N500,000.

Private Company: N10,000

Public Company: N500,000

 

Minimum Share Capital By Classification

By virtue of the CAMA, a company can also either be a company limited by shares, an unlimited company or a company limited by guarantee. A company limited by shares is required to have a share capital as earlier discussed whereas an unlimited company which is also required to have a share capital had hitherto and before the act not fallen under the type of companies required to have a share capital.

A company limited by guarantee, however, is not required to have a share capital. This provision is contained in section 26 (2) which states that a company limited by guarantee shall not be registered with a share capital; and every existing company limited by guarantee and having share capital shall, not later than the appointed day, alter its memorandum so that it becomes a company limited by guarantee and not having a share capital.

It is worthy to note that a company limited by guarantee is also defined in the section as a company formed for promoting commerce, art, science, religion, sports, culture, education, research, charity or other similar objects, whose income and property are to be applied solely towards the promotion of its objects and no portion thereof is to be paid or transferred directly or indirectly to the members of the company except as permitted by the Act.

Private Company Limited by Shares: N10,000

Public Company Limited by Shares: N500,000

Private Companies Limited by Guarantee: N0

Public Companies Limited by Guarantee: N0

Private Unlimited Company: N10,000

Public Unlimited Company: N500,000

 

 Minimum Share Capital Of Regulated Objects

There are certain businesses activities and ventures that are regulated by specific laws that provide guidelines for the registration, licensing and regulation of the business activities or ventures.  These rules, policies and guidelines place an obligation on promoters of certain types of companies to ensure that the minimum share capital requirement of these types of companies are met. Failure to meet the required share capital will result in the registration being queried by the CAC. The rationale behind setting a higher threshold for certain companies is to provide a means of assurance that in the event of liquidation of the company, the assets of the company will be sufficient to pay a substantial part of any debt owed.  This means that any company which purports to carry out the activities under the regulated list whether public or private would not be registered by the Corporate Affairs Commission unless it complies with the minimum share capital requirement by law.

The regulated objects, the enabling law and the post-incorporation regulatory agencies are discussed below for better understanding of the minimum share requirements of the different categories of companies under this umbrella.

 

  • COURIER BUSINESS

By virtue of its power to regulate Courier Business in Nigeria as contained in Section 43 of the Nigerian Postal Service Act, 1992 the Nigerian Postal Service has set its guidelines for registration, licensing and operation of courier companies in Nigeria. The requirements which must be complied with before a courier company can commence operations includes registration of the company with a minimum share capital of N2 Million.

Courier Company: N2 Million

 

  • CAPITAL MARKET OPERATORS

The Securities and Exchange Commission (SEC) is empowered by section 8 of the Investment and Securities Act, 2007 to regulate investment and securities business in Nigeria as defined in the Act. Below are the list of investment companies regulated by the SEC and their required minimum share capital.

Issuing House: N200 Million

Brokers/dealers: N300 Million

Trustees: N300 Million

Fund/ Portfolio Managers: N150 Million

Stock Brokers: N200 Million

Stock Dealers: N100 Million

Inter- Dealer Broker (IDB): N50 Million

Corporate Investment Adviser (Registrar) : N150 Million

corporate Investment Adviser: N5 Million

Individual Investment Adviser: N2 Million

Market Maker: N2 Billion

Consultant Partnership: N2 Million

Consultant Individual: N500,000

Consultant Corporate: 5 Million

Under Writer: 200 Million

Venture Capital Manager: 20 Million

Commodities Exchange: 500 Million

Commodities Broker: 40 Million

Capital Trade Point: 20 Million

Rating Agency: 150 Million

Corporate/Su Broker: 5 Million

 

  • BANKS AND OTHER FINANCIAL INSTITUTIONS

The Central Bank of Nigeria (CBN) is empowered by the Banks And Other Financial Institutions Act, 2004 to regulate the Banking Industry and by virtue of section 2 of the Act, No person shall carry on any business in Nigeria except it is a company duly incorporated in Nigeria and holds a valid banking license issued under the Act.

Through its powers to regulate the banking business, the CBN from time to time make policies relating to the minimum share capital of the type of companies under its purview. Below is a list of the companies and their minimum share capital.

Commercial Bank With Regional Authorization: N10 Billion

Commercial Banks With National Authorization: N25 Billion

Commercial Banks With International Authorization: N50 Billion

Merchant Banks: N15 Billion

Micro Finance Bank (Unit): N20 Million

Micro Finance Bank (State & Fct): N100 Million

Micro Finance Bank (National): N2 Billion

Primary Mortgage Institutions: N2 Billion

Finance Company: N20 Million

Bureau De Change: N35 Million

Non-Interest Banks (Regional): N5 Billion

Non-Interest Banks (National): N10 Billion

 

  • REGISTERED INSURANCE BROKERS

The Nigerian Council of Registered Insurance Brokers is the body empowered in Nigeria to regulate the enrolment and operation of Registered Insurance Brokers. Section 15(1) of the Nigerian Council of Registered Insurance Brokers Act, 2003 empowers the Council to  make rules while subsection (1) (a) mandates the council to ensure that a Practicing Insurance Broker business should have a working capital of not less than N5 Million made up of verifiable movable and immovable assets and cash in proportion as the council may decide. Below is a list of insurance-related businesses and their required minimum share capital.

Insurance Brokers: N5 Million

 

  • INSURANCE BUSINESS

The National Insurance Commission Act, 1997 empowers the National Insurance Commission by virtue of section 6 to regulate insurance business in Nigeria. The section provides that the principal object of the commission shall be to ensure the effective administration, supervision, regulation and control of insurance business in Nigeria.

The commission through its powers has issued guidelines regulating the insurance business in Nigeria.

Life Insurance: N2 Billion

General Insurance Business: N3 Billion

Re-Insurance Business: N10 Billion

Life Microinsurance Business: N150 Million

General Microinsurance Business: N200 Million

General Takaful/Family Takaful: N200 Million

 

  • PRIVATE GUARD BUSINESS

The requirements for registration of Private Guard Security Companies are contained in policies made by the Civil Defence Corps made pursuant to Nigeria Security and Civil Defense Corp Act, 2003. According to section 3 of the Act, the Civil Defense Corps (the Corps) has the power to recommend to the Minister the registration of private guard companies. The Corps is also to supervise and monitor the activities of all private guard command and keep a register for that purpose.

Private Security Company/Consultant: N10 Million

 

  • PENSION FUND MANAGERS

The Pension fund business is regulated by the provisions of the Pension Reform Act 2004. The minimum share capital required for Pension Fund business is as follows:

Pension Fund/Asset Custodians: N2 Billion

Closed Pension Fund: N500 Million

Pension Fund Administrators: N1 Billion

 

  • NATIONAL HEALTH INSURANCE BUSINESS

Health Insurance Business is regulated under the National Health Insurance Scheme, HMO Accreditation Guidelines. Under this scheme, the following are the required minimum share capital.

Health Maintenance Organisations (HMOs) (National): N400 Million

Health Maintenance Organisations (HMOs) (Zonal): N200Million

Health Maintenance Organisations (HMOs) (State): N100 Million

 

  • LOTTERY, CASINO AND BETTING BUSINESS

Setting up a lottery business in Nigeria requires compliance with the regulatory authority which is the National Lottery Regulatory Commission. The commission is empowered by the National Lotteries (Amendment) Regulations, 2007. Also, the Lagos State has its own Lottery Regulatory Commission with a different set of permit requirements. Below are the required minimum share capital for Lottery Businesses.

Non-Sports Lotteries: N5 Million

Sport Lottery Businesses: N30 Million + Approval In Principle (AIP).

 

  1. AIR TRANSPORT BUSINESS

The air transport business is regulated by the Nigerian Civil Aviation Authority which issues guidelines to the operators in the sector. Section 32 of the Civil Aviation Act gives the Authority the power to regulate and issue licenses to aircraft operators. The Authority from time to time have issued guidelines and directives to airline operators and some of the guidelines relate to the minimum share capital.

Air Transport (International): N2 Billion

Air Transport (Regional): N1 Billion

Air Transport (Local): N500 Million

Air Ambulance/Fumigation/Private Jet: N20 Million

Aerial Aviation Services: N20 Million

Aviation (Ground Handling Services): N500 Million

Aviation (Air Transport Training Institutions): N2 Million

Agents Of Foreign Airlines: N1 Million

 

  1. AGRICULTURE BUSINESS

Generally, the agriculture business is not strictly regulated. However, the National Agriculture Seeds Act, 2004 regulates the business of Agricultural Seeds, Productions, Processing And Marketing. The Act establishes a National Agricultural Seed Council and gives it oversight functions over any business, actions, or activities regarding seed development and the seed industry in general including legislation and research on issues relating to seed testing, registration, release, production, marketing, distribution, certification, quality control, supply and use of seeds in Nigeria, importation and exportation of seeds and quarantine regulations relating thereto.

Thus any business relating to seed business is within the purview of the council and the minimum share capital is as stated below:

Agricultural Seeds, Productions, Processing And Marketing: 10 Million.

 

  1. SHIPPING AND MARITIME BUSINESS

The maritime business is controlled and regulated by the Nigerian Maritime Administration and Safety Agency (NIMASA) which was created by the enabling law, the Nigerian Maritime Administration And Safety Agency Act, 2007.

By virtue of section 22 of the Act, the agency is saddled with the responsibility of pursuing the development of shipping and regulatory matters relating to merchant shipping and seafarers.

Shipping Company/Agent: N25 Million

Cabotage Trade: N25 Million

Freight Forwarding: 5 Million

 

Conclusion

Notwithstanding, a company can choose to increase its share capital above the required minimum either at the time of registration or subsequently. However, the same company cannot reduce its share capital below the minimum either at the time of registration or subsequently unless it alters its object clause to exclude the activities requiring the required minimum share capital.

 

ABOUT THE AUTHOR

Ezra Akintonde is a lawyer with over six years of court room and non-courtroom practice experience. He is seasoned in many areas of law including civil and criminal litigation, business registration, company secretariat services, corporate compliance and the general practice of law.

He has won several cases for his clients both in court and in alternative dispute resolution. He is a writer and has written several legal articles.

CORE PRACTICE AREAS: Civil Litigation, Criminal Defence, Corporate Practice, Divorce & Matrimonial Matters.

Tel: 08063321721

Email: meetmrezra@gmail.com

Legal Business

Tiyani Majoko: New York City based legaltech startup Founder on 10 years in the legal industry

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Tiyani Majoko is a lawyer and the Co-founder of New York City based legaltech startup Anü, a legal services marketplace. She is experienced in product design, identifying customer segments (user and buyer personas), data analysis and Agile. Tiyani talks to Alaba Ayinuola on her 10 years journey in the legal industry, starting from Biglaw, to in-house counsel, to running a small firm, to starting a legal tech company and I am always exploring something new. Excerpt.

In the beginning:

Life in Biglaw

On 3 January 2011, I pulled up to 22 Fredman Drive which were the offices of Eversheds (now Hogan Lovells). It was my first day at work as a Candidate Attorney, a 2-year journey as an apprentice in a law firm which culminates with passing the attorney bar/board exams. I bounced out of bed both nervous and excited that I was taking the first step in my career. I asked my dad to help me iron my outfit for the day; white shirt and black slacks, then I tied back my dreadlocks and put on my sensible black heels that he had bought me.

My dad, who is also a lawyer, was visibly beaming that I had been selected as a Candidate Attorney at an international law firm and I was following his footsteps. He had taken 2 weeks off to help me furnish my apartment, get comfortable with the route to work (though I didn’t have a driver’s license yet) and settle into my new life as a solicitor. Then he returned to his own law firm and practice in Zimbabwe.

At the end of orientation week, I knew the law firm life was not for me. I started my first 8 months rotation in a litigation team, where the only highlight of that rotation was the team and free lunches at advocates chambers. During that rotation I may or may not have forgotten to go to court to note a judgment. The daily time sheets, indexing and pagination of court files, carting files up and down to advocates offices for a 0.4 time entry and forced interactions at month end drinks were the bane of my existence. People would look forward to, or dread, the month end billing report as it revealed who was rising or bubbling under budget.

It was only later when I learned what really matters isn’t what you bill, but what you invoice and eventually collect!

I also learned about office politics and the power players of the firm if you wanted to be offered a position as an associate at the end your 2 year period as a Candidate Attorney.

The rainmaker whose team operated by its own rules (coming in at 10am and leaving at 4pm), the partner who had been at the firm all his 40 year career, the partners who struggled to make budget and how we all tried to stay away from them because they wouldn’t be in a position to retain you as an associate. There was also the partner who never took on a female or black associates, the partner who only took on LGBTQ associates and so I made a concerted effort to join the team of the partner who only took on Black associates.

She ran the mining team, working with international mining companies in helping them to obtain and retain their licenses to operate. This was the first time I felt like I was doing something I enjoyed- it was an all Black, female team. We would go on long road trips to visit mining clients, communities or regulators. I got to spend a lot of time out of the office- away from my time sheet, going to mines and meeting regulators- often these trips would allow for some sight seeing, such as visiting the Big Hole in Kimberly and going underground in a coal mine.

As a mining lawyer I felt like I was doing something important by contributing to the development of communities. I got my first glimpse into politics in the wave of Marikana, investigating unsafe working conditions, developing environmental plans for rehabilitating mine property, working with corporate executives to understand their strategy and the adrenalin of speeding down the N1 from Joburg to Pretoria to meet arbitrary regulator deadlines for various submissions.

I loved the centrality of the role and how each matter brought new challenges.

Each client had a different problem and the partner I worked for gave us free rein on matters. This built my professional confidence to execute and communicate as a professional. Although she would manage the relationship with the client, I would send the emails, they clients would call me if they had questions, etc. My criticism of the team was that it was too familial for a work environment and we could have used more intelligent tools to track matters, create reports and be efficient- which would have helped us to bill more. In 2013 the Black bubble was burst and the gang broke up.

Throughout my career I wanted to maintain that feeling of being connected to people, processes and policies while creating a product that’s profitable.

Going In-House

After Biglaw, I tried a couple of different things. I went in-house in an oil and gas company, where my boss lived in Durban and I was based in Joburg- so basically I have been remote since 2013. It was my first time working alone, after being accustomed to an office with 400 lawyers. I had to learn to trust my work, be thorough, do research and create my own support network of mentors. I was running legal and business affairs- so I would put together decks, find co-investors on projects and lead meetings after a short phone call with him. He was part of the young, new money Black elite that had made money from government contracts and had former President Jacob Zuma on speed dial. He opened my eyes to a whole class of Black, young, rich entrepreneurs that traveled to Bali on private jets. In those environments I quickly learned how political favor is volatile and qualifications to do the work are optional. At the time Zuma was ousted, a lot of them- including my boss- went broke.

Starting Out

I was 5 years into my career and had been disappointed by employers, so I made a bet on myself. I had some savings, worked out a rent free living situation and talked my varsity best friend into starting one of the first legal consulting firms in South Africa. I learned about finding clients, keeping clients, expanding revenue streams, business models, leadership, networking and expansion. We were so adorable when we started, see our launch video below.

I also launched Africa’s first lawyer on demand service. As a founder, I was able to find that feeling again, but I quickly realized that our service was too manual for scale in a way that mattered. Part of it was not knowing what tools we could use for a small services focused businesses and as I set my sights on moving away from a lifestyle business- I knew that technology would essential to our success. I was 8 years into my career at this point, running a good profitable company and contemplating the hard pivot to grad school in a foreign country, with a 6 figure price tag.

Starting Up

Ultimately I made the decision and attended Cornell with the vision of going back to my business then things changed. Instead, I become a founder- again- which I wrote about here.

While in school I thought of becoming a Product Manager, however it wasn’t presented to the law students as a career option, it was solely for Engineers and MBAs. Initially, I didn’t care because I didn’t understand most technical terms and I was just trying to keep up with my own course work. In January 2020, the blitz interview season was upon us, the technical students and MBAs were filling up their diaries so fast and law students were high key scrambling. I started to look at the PM job requirements and I was like “Hey, I know this stuff.. well some of it.” I went to the career services office like:

I have always been of the opinion that whatever an MBA graduate can do; a lawyer can do- just with a calculator.

I was benched very hard and told to stay in my lane- to look for roles in legal tech companies- maybe doing business development, or sales if I no longer wanted to practice law.

If the school didn’t see what I saw for myself, then I had to make it happen. All this was happening on the backdrop of a Coronavirus outbreak, BLM protests and many graduates being unable to find work. I half-heartedly applied for jobs, while I turned my full attention to a class project that had some real-world traction. When I went full time with Anü, I looked at this as an opportunity to do 2 things — either run a successful tech startup or have enough skills to rebrand myself as a PM. Either way I was setting myself up to win.

Next

My 5th pivot is loading as I am staring down another path. It’s less scary because I have learned how to get good at taking wild bets on myself adaptability. In contrast, my father has been a lawyer his entire life. He graduated from law school 32 years ago, each year he has renewed his practicing license and I honestly envy him for finding the thing he is good at, that he also enjoys. I enjoy certain aspects of the law, but not all the ways that it is practiced. I need room to experiment, to be playful and to also not always follow precedent. I am extremely blessed because my dad has supported these expeditions. Now it’s time for his investment to pay off.

5 Tips on Making Career Pivots

  1. Create A Big Vision for Your Life.
  2. Be Intentional About Skills To Acquire.
  3. Know Your Core Competency.
  4. Network Like Crazy.
  5. Community (I created The Legal Werk for mid-career legal professionals who want to make a pivot, switch, climb or reset their careers to have a source of support.) If you want to join us sign up for updates here.
  6. Know Your Tolerance for Pain.
  7. Have Faith.

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Legal Business

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.

Also Read Closing The Gender Gap: An Interview with Dream Girl Global (DGG) Founder, Precious Oladokun

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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Banking / Insurance

Current Legal Issues Arising from Banking and Financing Arrangements

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In August 2020, Diagoe Plc’s Nigerian entity announced that it was struggling to refinance a $23 million debt and trim costs following a shortage of dollars in the local-foreign exchange market. While the lack of access to greenback (dollar) remains a growing concern for borrowers in Africa, the downturn in the revenue and profits as a result of COVID-19 has recently become a more prevalent cause for the inability of many borrowers to fulfill their contractual obligations.

The disruption of supply chains, compulsory quarantine, and social distancing regulations are a few examples of the effect of COVID-19 which in turn have materially caused economic instability and affected the ability of borrowers to meet their financial obligations. There is therefore a need for lenders and borrowers to critically consider the implications of the current economy on their financial obligations.

This article highlights some key implications the current financial terrain may have on borrowers’ businesses and their ability to comply with their contractual obligations. The article further sets out recommendations for lenders and borrowers who are faced with the task of funding and repaying loans under respective financing arrangements. While there are numerous impacts of the resultant effect of COVID-19 on covenants in finance documents, this article highlights only a few of such key legal consequences on financial obligations.

Financial Conditions and their Implication on Covenants in Finance Documents

Generally, financial covenants in a loan agreement are undertakings given by the borrower to test the performance of the business servicing the loan and to help the lender ensure that the risk attached to the loan does not unexpectedly deteriorate prior to maturity.  These performance covenants may cover the borrower’s business both back or forward to assess whether the business is showing any signs of distress that could potentially affect its financial obligations under the finance documents.

Also Read: Helios Investment Partners Backed Africa Specialty Risk Group Launches

However, as a result of the steps taken to combat the COVID-19 pandemic, many businesses have seen a severe and abrupt drop in income which has affected the ability of businesses to meet some performance covenants.Where these covenants have been breached as a result of the pandemic, the lenders may declare a default under loan documents and demand early payments of loan which acts as a drawstop, such that the borrowers will not have access to their facilities. A drawstop event means a breach by the borrower of a financial covenant which gives the lender the right to refuse to make further loan advances under a facility agreement.

In light of the foregoing difficulties that both lenders and borrowers may face in these uncertain times, the following paragraph sets out practical solutions that may be explored by the parties. 

Legal Considerations for Borrowers and Lenders

With the current unpredictability of the financial markets, it is important that borrowers and lenders conduct a critical review of their current loan documents to verify the implications of COVID-19 on their rights and obligations. Most importantly, borrowers have to fully disclose to their lenders the current situation of their businesses, highlighting any potential breach before it happens helps to build trust and to enable the lenders to have a clear picture when deciding if they will be willing to adjust financial obligations in line with the current realities of the economy and take into consideration some practical solutions set out below.

First, parties may agree to re-negotiate and subsequently amend their financial covenants, taking into consideration the impact of COVID-19 on the borrower’s ability to comply with their financial covenants. For instance, certain definitions in the finance documents may no longer reflect the current realities of the borrower’s business, such as EBITDA which is used as a metric for thelast four fiscal quarter periods of earnings before interest, taxes, depreciation, and amortization to measure the company’s financial performance.

Thus, where the EBITDA has been affected as a result of the pandemic an amendment to its substance will be an appropriate step in order to reflect the current financial condition of the borrower. Other re-negotiation may be in relation to compliance with certain conditions provided under the finance documents.For example, a facility agreement may include provisions requiring the borrower to fulfil certain further conditions precedent before it can access additional funding under the relevant facility.

It usually includes confirmation that:

(i) no Event of Default or a potential Event of Default has occurred and is continuing; and

(ii) the repeating representations are true in all material
respects, in each case, as at the date of the utilisation request and the proposed utilisation date.

In such instances, parties may either amend the provisions or the borrower may request that the lender grant waivers in the event that such conditions will not be fulfilled.

Another consideration that the borrower may explore (subject to the fulfillment of any available conditions or if waivers are granted by the lender) is utilizing any undrawn commitment under its existing facilities. Although, it has been highlighted above that material breaches of covenants may give right to the lender torefuse to provide additional funding, it may be in the interest of lenders to provide same. This is because additional funding may positively impact the borrower’s business and in turn improve the lender’s chances of full debt recovery.

Finally, parties may consider undertaking a full restructuring of the financing by re-negotiating substantial terms and entering into restructured facility documentation which may capture relaxation of financial covenants, obtaining a moratorium on interest payment obligations, all necessary requirements, amendments, waivers, and consents required by the borrower. Essentially, the restructured facility documentation is drafted on much better terms that reflect the current financial conditions and commercial needs of the borrower.

Conclusion

The global COVID-19 pandemic has no doubt placed a strain on the ability of some businesses to service their debts under finance documents. While many governments especially in developed countries have granted some aids, this may not be enough especially for companies in certain industries that have been seriously hit by the pandemic. The situation is even worse in undeveloped markets where there is little or no support from government. Thus, it is unavoidable that re-negotiation and restructuring are considerations that will likely be put forward by borrowers to avoid triggering defaults under their finance document during these unprecedented times.

It is advisable that lenders on the other hand, are more flexible with their approach with their borrowers and are willing to work around re-negotiating the financial covenants with the borrowers given the current uncertainties arising in the economy.

Written By: Bukola Adelusi recently completed her LL.M in corporate law at Western University, Ontario. Prior to her LL.M, she practiced with a top-tier law firm in Nigeria, where she specialized in banking and finance, M & A and private equity.

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