INSOLVENCY DISCOUNRSE BY DR. KUBI UDOFIA

Introduction

The Banking and Other Financial Institutions Act, 2020 (BOFIA 2020) was passed into law on 13 November, 2020. BOFIA 2020 repealed the Banking and Other Financial Institutions Act, 1991 (BOFIA 1991). This three-part discourse examines revisions which BOFIA 2020 has introduced to Nigeria’s bank resolution and insolvency legal framework. This is the second of the three part discourse.

Cooperation with the CBN in Banking Crisis

Section 36(1) of BOFIA 2020 mandates relevant government agencies to cooperate with, assist, grant waivers and forbearances as the CBN Governor may require for resolving banking crisis. Indeed, the foregoing provision imposes a mandatory obligation on relevant government agencies “notwithstanding the provisions of any other enactment”.

The banking crisis contemplated under this provision will occur when two or more of the following incidences occur: (i) when critically distressed banks control 12.5% or more of total assets in the industry, (ii) when 12.5% or more of total industry deposits are threatened, (iii) when 12.5% or more of the banking system’s total loans are non-performing, (iv) when 25% or more of banks have applied for liquidity support in excess of 50% of the aggregate takings from CBN’s window or total interbank funds in the market or have been suspended by their settlement banks for failure to meet clearing obligations.

The CBN Governor may vary the above conditions, or prescribe additional conditions as he deems fit.

Bail-in of Failing Banks and Bail-in Certificates

The importance which BOFIA 2020 places on facilitating rescue of banks is well highlighted by Section 37(1) which empowers CBN to take additional resolution measures in dealing with failing banks “notwithstanding anything to the contrary in any law or contract.” One of such measures is the bail-in. A bail-in involves the rescue of a failing bank by, and/or at the cost of, internal stakeholders such as creditors, bondholders or depositors.

In this regard, the CBN may direct that an eligible instrument which a failing bank has issued or is a party or subject to, should be cancelled, modified, converted or changed in form: Section 37(2). CBN will give this directive through a bail-in certificate where the CBN considers that the eligible instrument would be useful in facilitating the bank’s rescue. The CBN may also make the directive where the failing bank’s available assets are not sufficient to meet its liabilities as they fall due: Section 37(3).

“Eligible instrument” is defined as (i) any equity instrument or other instrument which confers or represents a legal or beneficial ownership in the bank, except an ordinary share; (ii) any unsecured liability and unsecured debt instrument which is subordinated to unsecured creditors’ claims of the bank that are not so subordinated; and (iii) any instrument with a right to be written down, cancelled, modified, changed in form or converted into shares on occurrence of a specified event: Section 39(6).

Failure to comply with a directive in a bail-in certificate will attract a liability of imprisonment for a term of not less than 6 months or a fine of not less than N2,000,000 or to both.

Moratorium and Regulations on Bail-In of Eligible Instruments

Another novel resolution measure introduced by BOFIA 2020, is the automatic moratorium on all claims and judgement debt enforcement relating to eligible instruments. The aim of the moratorium is to give the failing bank some respite to reorganise its affairs. It comes into effect on the date a bail-in certificate is issued and remains in force throughout the period indicated in the bail-in certificate or determined by the CBN Governor by a written notice: Section 39(1).

In furtherance of the above, the CBN may make regulations imposing a requirement on banks to ensure that contracts governing the eligible instruments: (i) contain a requirement that parties to the agreement agree for the eligible instruments to be subject of a bail-in certificate, and (ii) parties agree to be bound by a CBN-issued bail-in certificate: Section 39(2). This may be a surplusage considering that Section 37(1) empowers CBN to bail-in eligible instruments of failing banks in facilitating rescue “notwithstanding anything to the contrary in any law or contract.”

The regulations may also specify (i) types of eligible instruments and banks to which the requirement applies, and (iii) provide consequential/transitional matters: Section 39(3). In exercising the foregoing powers, CBN may have regard to the desirability of giving pre-resolution creditors and shareholders the priority they would have enjoyed in winding-up proceedings: Section 39(4).

Suspension of Contractual Termination rights

BOFIA 2020 empowers the CBN to suspend the exercise of termination rights in certain contracts. These contracts are those involving: (i) a bank that is a subject, or proposed subject, of a resolution measure; and (ii) an entity that is part of the same group as a bank where: (a) the bank is the subject, or proposed subject, of a resolution measure, (b) the termination right is exercisable on the bank’s insolvency or other financial condition, and (c) the entity’s obligation under the contract are guaranteed or supported by the bank: Section 40(1) and (2). This anti-ipso facto provision is aimed at ensuring that failing banks are not stripped of useful contracts which could consequently accelerate their failure.

Persons whose termination rights are suspended cannot exercise the right during the suspension period without CBN’s prior written consent: Section 40(7). Any exercise of such right of termination will be of no effect: section 40(6). Even after the expiration of the suspension period, a termination right may not be exercised on the ground of (i) the resolution measure taken for the bank, or (ii) occurrence of an event connected to the resolution measure: Section 40(8).

Asset Separation Tool

Still in relation to rescue of banks, BOFIA 2020 empowers CBN to transfer a failing bank’s assets to one or more Private Asset Management Vehicles (PAMVs) for a consideration: Section 41(1) and (3). The objective is for PAMVs to manage the assets with the aim of maximising value for an eventual sale or an orderly liquidation: Section 41(6). Asset-transfer to PAMVs will be effective without the consent of the bank’s shareholders or any third party. Further, the transfer will be effective notwithstanding non-compliance with any procedural requirements under any law or contract.

To forestall any interference with transferred assets, shareholders and creditors of a bank are disallowed from enforcing any right, judgment or claim against the transferred assets: Section 41(5). Further, PAMVs owe no responsibility to shareholders and creditors of a bank except where there is fraud or gross misconduct directly affecting the rights of such shareholders or creditors: Section 41(8).

Sale of Business Tool

BOFIA embodies a new sale of business tool empowering CBN to transfer shares or instruments issued by a bank to a purchaser. The CBN may also transfer all or any of the bank’s assets, rights and liabilities to a purchaser: Section 42(1). CBN is required to take all reasonable steps in obtaining commercial terms for such transfers: section 41(2).

Netting

BOFIA 2020 seeks to preserve netting agreements involving banks after the revocation of licenses, issuance of winding-up orders or appointment of liquidators. Section 54 makes netting agreements to be binding on the liquidator. Further, any payment or settlement instruction that has been delivered to another bank, the CBN or a third party under specified conditions will be binding on the liquidator. Any payment or settlement obligation or instruction that, inter alia, has been determined through netting prior to the revocation of licence, issue of winding-up order or appointment of liquidator will also be binding on the liquidator. Where a bank (prior to the revocation of its license or winding-up order) had provided an asset to the CBN or another bank as security for a loan in respect of its settlement or payment obligation, the asset may still be used to the extent required for the discharge of the settlement obligation.

Management and Control of Failing Specialised Banks and Other Financial Institutions

Section 62 of the repealed BOFIA 1991 which dealt with management and control of failing “other financial institutions” has been expanded in BOFIA 2020 to include “specialised banks”. Further, while Section 62(3) of BOFIA 1991 required any other financial institution whose license is revoked to be wound up by “a person” appointed by the CBN. BOFIA 2020 says either “the NDIC” or “a person” appointed by the CBN: Section 62(4). A newly introduced step which CBN is required to take in managing a failing financial institution is granting advances to non-interest banks in a grave situation or which the CBN determines require liquidity support: Section 62(2).

Avoidance of Pre-liquidation transfers

Section 73 of BOFIA 2020 embodies pre-liquidation avoidance provisions. A liquidator may set aside transfers and recover assets from: (i) gratuitous transfers to insiders or affiliates made within 5 years prior to liquidation; (ii) gratuitous transfers to third parties made within 3 years prior to the liquidation; (iii) transactions at an undervalue made within 3 years of the liquidation; (iv) transactions based on forged or fraudulent documents to creditors’ detriment; (v) actions intended to withhold assets from the bank’s creditors or impair their rights within 5 years prior to the liquidation; (vi) preferences to creditors done one year prior to the liquidation; (vii) attachment of security interest within 6 months prior to the liquidation.

The avoidance provisions may be employed to swell assets available for distribution to creditors. Prior to BOFIA 2020, a bank liquidator could make recoveries with the aid of the avoidance provisions in the Companies and Allied Matters Act. This may still be done, subject to the new avoidance provisions in BOFIA 2020; Section 55.