Liquidation of Heritage Bank Plc: Matters Arising (1)

Introduction 

In June 2024, the Central Bank of Nigeria (CBN) revoked the banking licence of Heritage Bank Plc (Heritage Bank). CBN claimed that its regulatory action was necessitated by Heritage Bank’s poor financial state, with no reasonable prospect of recovery. CBN also placed Heritage Bank in liquidation with the Nigeria Deposit Insurance Corporation (NDIC) as Liquidator, in accordance with Section 55(1)(a) of Nigeria Deposit Insurance Corporation Act  2023 (NDIC Act 2023). 

In line with global best practice, NDIC Act 2023 embodies a distinct legal framework for bank resolution (restructuring and liquidation). This special resolution framework is due to the crucial roles of banks and other deposit-taking financial institutions, in Nigeria’s financial ecosystem and economy. The framework is tailored to manage bank failures in a manner which protects public funds, maintains confidence in the banking system and minimises any adverse impact on the financial system and economy. The general corporate insolvency law in the Companies and Allied Matters Act 2020 (CAMA 2020), is not designed to achieve these objectives. Instructively, Section 56(1) of NDIC Act 2023 disapplies Chapter 21 of CAMA 2020 (which deals with compulsory winding-up of companies) and the Companies winding-up Rules, to banks and other deposit-taking financial institutions in Nigeria. 

The on-going liquidation of Heritage Bank, is the first liquidation of a deposit money bank under the NDIC Act 2023. It therefore, provides an opportunity to test and/or apply some of the novel provisions introduced in the NDIC Act 2023, which were not contained in the repealed NDIC Act 2006. Amongst other things, this three-part discourse examines the treatment of key issues and stakeholders of Heritage Bank in the liquidation process. It also seizes this opportunity to analyse some novel insolvency-related provisions of NDIC Act 2023.

Treatment of Depositors

Special Priority for Insured Deposits

A distinctive feature of bank resolution (compared to general corporate insolvency), is the special priority accorded insured deposits. In this regard, Section 72 of the NDIC Act 2023 requires payment of deposit liabilities to “have priority over all other liabilities” of a failed bank like Heritage Bank. In a similar vein, Section 84 requires liquidation expenses and liquidator’s fees (including litigation, valuation, investigation, administrative etc.) to be paid in priority to “all other claims except insured deposits”. The special priority given to insured deposits, is aimed at fostering public confidence in the banking system and financial stability generally.

NDIC’s Deposit Insurance Scheme

The maximum insurance coverage for Heritage Bank and other deposit money banks under NDIC’s deposit insurance scheme is N5 million in each insured bank. The coverage limit was raised by NDIC to N5 million from N500,000 on 2 June, 2024. Depositors with deposits below N5 million in Heritage Bank are fully insured, and would receive their full deposits. Depositors with more than N5 million may subsequently be paid additional sums as liquidation dividends (if such are available), from the sale of assets. According to NDIC’s data, about 4,000 deposits in Heritage Bank (constituting 0.01% of total deposits) were above N5 million. Also, by the end of September 2024, 84.98% of Heritage Bank’s depositors had been paid.

In settling deposit liabilities, all accounts of a depositor in Heritage Bank are merged and treated as a single account: Section 25(3) NDIC Act 2023. It is immaterial, that the separate accounts are held in different branches or cities. In contrast, where depositors hold two or more accounts in different rights (e.g. personal accounts on one hand and business accounts or joint accounts or trust accounts on the other), such accounts will be treated separately for the purpose of deposit insurance. Such depositors will receive payments, in relation to each of such accounts.

NDIC’s Right of Set-off and to Withhold Payment

There are circumstances where NDIC may lawfully refrain from paying, or making full payment to depositors under its deposit insurance scheme. First, NDIC is entitled to set-off a debtor’s debt to Heritage Bank or any other failed bank (which NDIC is liquidating) against that debtor’s deposit in Heritage Bank: Section 26 NDIC Act 2023.

Second, pending the determination of culpability by a court or tribunal, the NDIC may withhold payment of an insured or uninsured deposit: (i) where such deposit was obtained through or held in furtherance of criminal activities, or (ii) where the depositor had either connived with or assisted officials of Heritage Bank or had been party to or benefitted from the circumstances leading to Heritage Bank’s failure: Section 30(1) NDIC 2023.

Prohibition on the Making of Certain Orders

Section 29(2) of NDIC Act 2023 precludes courts from making any restorative or prohibitive order against the NDIC and in favour of a depositor, regarding the payment of insured deposits. The provision limits the remedy available to depositors against the NDIC in any action, suit or proceedings, to the amount of actual loss suffered and which shall not exceed the maximum insured deposit. 

This provision appears to be in violation of Section 6(6)(a) and (b) of the 1999 Constitution which provides for judicial powers to extend to (i) all inherent powers and sanctions of a court of law, and (ii) all matters between persons, or between government or authority and to any persons in Nigeria, and to all actions and proceedings relating thereto. 

Recently in AMCON v Shittu – Appeal No. CA/L/1266/2019, the Court of Appeal nullified Section 34(6) of Assets Management Corporation of Nigeria (AMCON) (Amendment No.2) Act 2019 which precluded courts from granting injunction, preservative or restorative, interim, interlocutory, perpetual or like orders against AMCON or its officials, in the exercise of their statutory powers to recover debts or realise security, and limited a claimant’s remedy in any action to monetary compensation. 

Treatment of Management and Employees

Termination of Employment Contracts

Compulsory winding-up order, terminates employment contracts. In Gbedu v Itie [2020] 3 NWLR (Pt 1710) 104 at 126E-F, the Supreme Court held that an effect of a winding-up order is that, “all employees of the company are dismissed, and the dismissal takes effect from the date of the winding up order made by the court”: Accordingly, the commencement of Heritage Bank’s liquidation terminated all its employment contracts. It also resulted in the replacement of its management by NDIC. Section 62(1)(c) of NDIC Act 2023 empowers NDIC to carry on Heritage Bank’s business, as may be necessary for its beneficial winding-up. The NDIC is also empowered to take over, manage and dispose of the assets of Heritage Bank and operate Heritage Bank with all the powers of the shareholders, the directors and the officers, and to conduct its business and perform its function: Section 62(1)(j) NDIC Act 2023.

Employees’ Pre-Liquidation Salaries and Entitlements

In July 2024, there were media reports of protests by erstwhile employees of Heritage Bank, at the premises of the National Assembly premises. The key demands of the aggrieved erstwhile employees were: (i) payment of their June 2024 salaries; (ii) payment of their “life savings” (that is, deposits) in Heritage Bank; and (iii) payment of severance benefits. Unpaid salaries and certain allowances of employees of Heritage Bank which were due before the commencement of its liquidation, are preferential claims. They rank above, and will be paid before, unsecured creditors and shareholders of Heritage Bank. They however, rank below insured deposit liabilities and liquidation expenses. The erstwhile employees’ “life savings” (deposits) in Heritage Bank, would be treated like other deposits under NDIC’s deposit insurance scheme.

Civil Actions against Employees

The NDIC is empowered to initiate civil actions against any employee, director or officer of Heritage Bank, whose actions or inactions had caused or contributed to the failure of Heritage Bank. Such an employee, director or officer would be personally liable in monetary damages: Section 76(1) of NDC Act 2023. Also, where unauthorised credit facilities had been granted by employees or directors in violation of any law or regulation, liability arising shall be personal and unlimited: Section 76(2) of NDIC Act 2023.

Treatment of Shareholders 

Impact on Shareholders

A legal consequence of Heritage Bank’s liquidation is that NDIC (as Liquidator) displaces Heritage Bank’s shareholders, and assumes “all the powers” of such shareholders. First, Section 62(1)(h) of NDIC Act 2023 provides that the NDIC (as Liquidator) by operation of law succeeds to all rights, titles, powers and privileges of any shareholder of Heritage Bank with respect to Heritage Bank and its assets. Second, Section 62(1)(j) of NDIC Act 2023 empowers NDIC (as Liquidator) to take over, manage and dispose of the assets of Heritage Bank, and operate Heritage Bank with all the powers of the shareholders.

Ranking of Shareholders in Distribution of Assets 

As is the case in general corporate insolvency, Heritage Bank’s shareholders rank at the bottom of the priority ladder. In most insolvent liquidations, there are usually insufficient assets for distribution to shareholders. This may likely be the fate of Heritage Bank’s shareholders. Heritage Bank’s shareholders would only receive liquidation dividends, if such dividends are available after distributions/payments have been made in full to other stakeholders who are ranked above shareholders such as depositors, liquidation expenses, holders of preferential claims and unsecured creditors. 

Treatment of Creditors 

Secured Creditors

Secured creditors of Heritage Bank, rank at the top of the hierarchy of creditors. They may enforce their security or be entitled to proceeds from the liquidation of the specific secured property. It is a settled principle of insolvency law, that only assets which are owned by the debtor are available for distribution to its creditors. It is impermissible to distribute to creditors assets which are owned by third parties, or have third party interests. In gathering and/or swelling the assets of Heritage Bank for distribution to its creditors, NDIC is not permitted to seize and/or distribute assets which belong to third parties. Notably, this includes properties subject to security interests, notwithstanding that they are in the possession of Heritage Bank.

Unsecured Creditors

Unsecured creditors of Heritage Bank rank below insured deposit liabilities, liquidation expenses (including litigation, valuation, investigation, administrative, civil and criminal actions): Section 84 of NDIC Act 2023. Unsecured creditors also rank below holders of preferential claims (that is, taxes and certain employees’ salaries and entitlements). Unsecured creditors would however, rank above, and be paid ahead of, Heritage Bank’s shareholders.