Adversarial Proceedings Against a Company in Liquidation (1)

INSOLVENCY DISCOURSE

Dr Kubi Udofia           info@kubiudofia.com

Introduction

The automatic stay is triggered when a court makes a winding-up order, or appoints a provisional liquidator for a company. It halts the continuation or commencement of actions or proceedings against the company. The objectives of the automatic stay are (i) ensuring the company’s assets are not dissipated on actions, (ii) ensuring some creditors do not gain an advantage over other similarly-situated creditors, and (iv) ensuring the winding-up court is in control of the liquidation process. 

Over the years, there have been a number of conflicting and erroneous decisions on (i) the court(s) in which the automatic stay operates, and (ii) the court(s) which may grant permission to proceed against a company in liquidation. This first part of a two-part discourse, seeks to provide clarity on these issues. It also examines the extent to which recent Supreme Court decisions, have clarified the uncertainties. 

The Automatic Stay Under Section 580 of CAMA

The automatic stay in Section 580 of the Companies and Allied Matters Act 2020 (CAMA 2020), is a replication of Section 417 of CAMA 1990. It provides that “If a winding-up order is made or a provisional liquidator is appointed, no action or proceeding shall be proceeded or commenced against the company except by leave of the Court given In such terms as the Court may impose”.

As the name suggests, the automatic stay is self-activating. It suspends all actions or proceedings against the company in liquidation, irrespective of the purpose or justification. To mitigate the arbitrary effect of the automatic stay, leave or permission may be sought and obtained to continue or commence proceedings against a company in liquidation for good reasons. In the past, the leave regime has been plagued with conflicting and erroneous decisions. 

Applying for Leave to Proceed

Section 868(1) of CAMA 2020 (previously Section 650(1) of CAMA 1990) defines “Court” as: “the Federal High Court, and to the extent to which application may be made to it; court includes the Court of Appeal and the Supreme Court of Nigeria.” Notwithstanding its clarity, there are several discordant and erroneous decisions on the proper court to grant leave and the court(s) which the automatic stay operates. In F.M.B.N Ltd v N.D.I.C [1999] 2 NWLR (Pt 591) 333 at 365A-B, the Supreme Court stated thus:

“What is prohibited by section 417 except with leave of court, is an action or proceeding pending or instituted in the Federal High Court for that is the meaning of the word “Court” as used in the section [650] … I think therefore, that the court below was in error when it held that leave was required before the plaintiff could proceed with its motion against the respondent in the High Court of Lagos State.”

The Court of Appeal in N.D.I.C. v. F.M.B.N [1997] 2 NWLR (Pt 490) 735 at 757-758H-A had held that the Federal High Court (“FHC”) was the proper court to grant leave to proceed with an action at the High Court of Lagos State and had nullified the proceedings for failure to do so. However, the Supreme Court held that the automatic stay was only applicable to actions at the FHC. In other words, leave to proceed was not required in courts outside FHC.

Contrary to the decision in F.M.B.N Ltd v N.D.I.C, Sections 417 and 650(1) of CAMA 1990 (now Sections 580 and 868(1) of CAMA 2020) do not limit the application/operation of the automatic stay to the FHC. The Supreme Court’s pronouncement that the automatic stay is only operative in the FHC, may have been influenced by its decision that only the FHC could grant leave to proceed. Accordingly, the court’s reasoning must have been that the FHC could only grant leave in relation to matters before the FHC. 

Assuming the intention of the lawmakers was to limit the operation of the automatic stay to FHC, this would have been easily done by stating that: “…no action or proceeding shall be proceeded or commenced against the company in the Court except by leave of the Court”. However, section 580 says that: “…no action or proceeding shall be proceeded or commenced against the company except by leave of the Court”.

Besides, narrowing the application of the automatic stay to the FHC would substantially whittle down its usefulness, considering FHC’s limited jurisdiction. Instructively, it has been rightly held that even proceedings before arbitral tribunals are within the ambit od the automatic: Atoju v Triumph Bank Plc [2016] 5 NWLR (Pt 1505) 252 at 312G-H.

The Supreme Court’s conclusion in F.M.B.N v N.D.I.C that only the FHC could grant leave to proceed, was a misconstruction of “Court” as defined in Section 650(1) of CAMA 1990. Section 868(1) of CAMA 2020 (previously Section 650(1) CAMA 1990) defines “the Court” as the FHC and “to the extent to which application may be made to it, court includes the Court of Appeal and the Supreme Court of Nigeria”. 

Unsurprisingly, the Supreme Court’s position in F.M.B.N v N.D.I.C that the automatic stay is not operative in courts outside the FHC has been cited with approval in some cases. In Okonkwo v. C.C.B. Plc (2003) LPELR-2484(SC), Tobi JSC in his dissenting judgement stated that, in line with F.M.B.N v N.D.I.C, leave under Section 417 of CAMA 1990 was limited to the FHC. 

In A.A.D. Enterprises Ltd v MV Northern Reefer [2009] 12 NWLR (Pt 1155) 255 at 270C-F, the Supreme Court relied on F.M.B.N v N.D.I.C. to hold that leave was not required to institute an appeal at the Court of Appeal against a company in liquidation. This was premised on the ground that, the automatic stay did not apply to actions outside the FHC. Similarly, in NITEL v Commercial Trust Bank Ltd [1999] 1 FHCLR 654 at 658, a FHC held that leave to proceed was not required because the action was before the High Court of Lagos State. 

There have also been conflicting and erroneous decisions regarding the proper court to grant leave to proceed against companies in liquidation. In Framan Enterprises Ltd v Spring Bank Plc (2016) LPELR-41394(CA), the Court of Appeal relied on MV Northern Reefer to hold that the appellant could not competently prosecute an appeal against a company in liquidation without leave of the FHC. This was a misapplication of MV Northern Reefer, which itself was erroneous. A religious application of MV Northern Reefer would have led to the conclusion that the automatic stay was not operative in the Court of Appeal, an argument which the appellant had made.

In NDIC v Barau [2017] 7 NWLR (Pt 1565) 501 at 514H-515A, the respondent sought to enforce a judgement of a High Court of Adamawa State against a company in liquidation at the High Court of the Federal Capital Territory (“FCT”). The Court of Appeal held that the respondent required leave of that High Court of FCT to proceed. The court made no reference to the definition of “Court” in Section 650 CAMA 1990 or previous authorities. This decision is plainly wrong.

In NDIC v Rahman Brothers Ltd (2018) LPELR-46781 (CA), the Court of Appeal nullified the proceedings of a High Court of Lagos State (“trial court”) on the ground that leave of the FHC had not been obtained to proceed with the suit at the trial court after the defendant went into liquidation. This was a correct application of Sections 417 and 650(1) of CAMA 1990 but in disregard of the Supreme Court’s position in FMBN Ltd v NDIC and MV Northern Reefer. An application of these authorities would have led to a conclusion that the automatic stay was inoperative in actions outside the FHC.

In Obe v Prosperfunds Ltd (2022) LPELR-57488(CA), the action was before the High Court of Lagos State. The Court of Appeal held that the appellant should have sought for leave at the FHC as the word “Court” in Section 580 of CAMA 2020 referred to the FHC. First, a proper application of FMBN Ltd v NDIC and MV Northern Reefer would have led to a conclusion that the automatic stay was not applicable considering that the case was not before a FHC. Second, the pronouncement that “Court” in Section 868(1) referred to the FHC is not entirely correct. It includes the Court of Appeal and Supreme Court in appropriate instances. 

Recent Supreme Court Decisions

Commendably, there are at least two recent cases in which the Supreme Court has correctly stated or applied the law in relation to (i) court(s) in which the automatic stay operates, and (ii) court(s) which may grant leave to proceed. 

In R.T.M.H. v All States Trust Bank Plc (2021) 17 NWLR (Pt 1805) 275 at 300G-H, Ogunwumiju JSC stated that Section 580 required the appellant to seek leave of the Supreme Court before filing its notice of appeal against a company in liquidation. Although her Lordship did not expatiate on this point, it is a departure from FMBN Ltd v NDIC and MV Northern Reefer where the Supreme Court had held that the automatic stay has no application outside the FHC and only the FHC could grant leave. 

In Universal Properties Ltd v Pinnacle Commercial Bank [2022] 12 NWLR (Pt 1845) 523, The Supreme Court rejected the appellant’s contention that only the FHC could grant leave and rightly held that the definition of “Court” in section 650(1) of CAMA 1990 (now section 868(1) CAMA 2020) includes the Court of Appeal and the Supreme Court in appropriate circumstances. In consequence, the Supreme Court put to rest the uncertainty caused by its decisions in FMBN Ltd v NDIC and MV Northern Reefer regarding (i) which court may grant leave to proceed, and (ii) which court the automatic stay applies. 

However, the appropriateness of the FHC determining whether actions or proceedings should continue or commence in courts/tribunals such as State High Courts, National Industrial Courts, Magistrate Courts, Investments and Securities Tribunals, Tax Appeal Tribunals etc. remains questionable. This sentiment was shared in Abekhe v N.D.I.C [1995] 7 NWLR (Pt 406) 228 at 243H where Uwaifo JCA (as he then was) stated that “it would be an abuse of exercise of jurisdiction for the FHC to decide that a suit before the Lagos State High Court is frivolous or has no chance of success … in the process of considering whether to grant leave for the action to continue”. Nevertheless, that is the “gatekeeping” poºwer which section 580 of CAMA 2020 has saddled the FHC with.

          To be continued