INTRODUCTION

The Novel Coronavirus Disease (“COVID-19”) continues to spread rapidly around the world.

Virtually every country has reported cases of COVID-19. Undoubtedly, the continuing spread of COVID-19 and the consequent lockdown and stay-at-home orders issued by the government of different nations to contain the spread of COVID-19 have had and continue to have distressing effects on businesses and commercial activities. The impact of COVID-19 on businesses in Nigeria may lead to the insolvency of and consequent winding up of many companies.

This is especially so because of the key provisions of the Companies and Allied Matters Act (the “CAMA”) on the insolvency of a company and its legal implications. The relevant sections[1] of CAMA provide that a company could be wound up if the company is unable to pay its debts (becomes “insolvent”) and the company shall be deemed insolvent if a creditor to whom the company is indebted in a sum exceeding N2,000 then due, has served on the Company a demand requiring payment of the sum so due and the company neglects to pay the debt three weeks (21 days) thereafter. In the light of the foregoing, will COVID-19 be a defence to insolvency proceedings against a Company? Where there is a force majeure clause in a contract between a company and its creditor, will COVID-19 pandemic qualify as a force majeure event and in which case, the company may be discharged from the performance of its payment obligations? These questions and many are what this article seeks to address.

INSOLVENCY UNDER CAMA

Section 408(d) of CAMA provides that “a company may be wound up by the court if the company is unable to pay its debt.” Whereas section 409(a) states that “a company shall be deemed to be able to pay its debt if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding N2000, then due, has served on the company, by leaving it at its registered office or head office, a demand under his hand requiring the company to pay the sum so due, and the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor”. (Emphasis supplied.) There are basically three conditions that must be met under s.409(a) above for a company to be regarded as insolvent. The first is that the company is in debt of a sum exceeding N2,000 (USD5.20); the second is that the creditor must have served on the company, a written demand for payment of the debt sum; and the third is that the company must have failed or neglected to pay the debt sum for three weeks after the written demand for payment.[2]

Additionally, in Air Via Ltd v Oriental Airlines Ltd3, the Supreme Court while relying on the case of Bowes v Hope Life Insurance & Guarantee Co.4 held inter alia that “for a company to be wound up on the ground of its inability to pay its debts, the following essential ingredients must be present: (a) there must be a debt; (b) the debt must be due; and (c) the company to be wound up is unable to pay the debt.” The ingredients enumerated by the Court in Air Via’s case re-emphasises those contained in CAMA, s. 409(a). That being the case, a company shall be deemed ins olvent and, on that basis, be wound up by the court on the petition of a creditor once the 3 conditions are present.

COVID-19 AS A DEFENCE TO INSOLVENCY PROCEEDINGS

Statutory consideration

As at today and from the provisions of CAMA, s. 409(a) analysed in the preceding paragraph, one thing is very clear; the provisions do not envisage the outbreak of a pandemic, such as COVID -19 as a defence to an insolvency proceeding. In an action for winding brought pursuant to CAMA ss. 408(d) and 409(a), the only defence that a company may raise is that of disputed debt. How and why? Under s.409(a), only a creditor has the standing to institute a winding up proceeding and where a petition is based on a disputed debt, the petitioner is not a creditor as contemplated in the section and thus, lacks the locus standi to bring the petition .[3] The other reasons are the issue of jurisdiction and the fact that recovery of debt is not a relief that can be sought in a winding up proceeding. The Federal High Court which is the court with the exclusive jurisdiction to entertain a winding up petition does not have the jurisdiction to determine the existence of a simple debt. Hence, it is advised that an intending petitioner whose debt is disputed seeks remedy in an action for debt recovery to establish the debt owed before bringing a petition for winding up against the debtor.

Also, a debtor may raise a defence to an insolvency proceeding where the company sought to be wound up is already under receivership. In other words, where a receiver had already been appointed to take over and oversee the affairs of the debtor pursuant to the terms of a contract between the creditor and the debtor, the debtor can raise same as a defence in the unlikely event that the creditor brings a petition for winding up of the debtor for its inability to pay its debt.

In the absence of the foregoing statutory and contractual defences, the outbreak of COVID-19 cannot serve as a defence by a debtor in an insolvency proceeding. Companies and businesses are therefore, at a great risk of being wound up under CAMA, s.409(a) following the COVID-19 pandemic. Nonetheless, we shall, in the subsequent paragraph examine whether covid-19 is a force majeure event that may likely serve as a defence to a company in winding up proceeding.

Contractual Consideration– Force Majeure Clause: Covid-19 As A Force Majeure Event

We have established in the preceding paragraph of this Article that COVID-19 is not a defence envisaged under CAMA in an insolvency proceeding. What remains is for us to determine whether

COVID-19 can be raised as a defence in an insolvency proceeding vis a vis the existence of a force majeure clause in a contract.

Whether or not COVID-19 is a force majeure event that will relieve a company from the performance of a payment obligation and serve as a defence to a winding up proceedings against it will depend on the following: (a) the existence of a written contract; (b) the existence of a force majeure clause in the contract; (c) the contemplation, in the clause of a pandemic beyond the reasonable control of the parties; (d) whether the company notified the creditor of the force majeure event; (e) the company complies with all the requirements for the applicability of the force majeure clause (as is contained in the contract); and (f) the time within which payment obligation of the company accrued.

Where there is in existence a contract between parties containing a force majeure clause which contemplates that the outbreak of a pandemic (which of course may be an act of God or an act of a man) may temporary or permanently disrupt the performance of the obligations of either party to the contract, then, upon the occurrence of the contemplated event, the non-performing party may be completely or partially discharged from the performance of the party’s obligations. This is in so far as it is compliance with the terms of the parties’ contract.

This is therefore to say that if a company which is in debt under a contract containing a force majeure clause (which contemplates a pandemic) is sought to be wound up by the creditor, the company may rightly raise the occurrence of a force majeure event (in this case, COVID-19 pandemic) as a defence. This is in line with the general principles of law that parties are free to contract as they deem fit[4] and are bound by the terms of their agreement[5]. Also. contract between parties are regarded as sacrosanct and the only jurisdiction which the court can exercise over same is its interpretative jurisdiction as it can neither make nor rewrite the parties’ contract.[6]

What happens where the payment obligation of a company has arisen before the occurrence of the force majeure event? If a company’s obligation to pay its debt has arisen before the happening of the force majeure event contemplated under their contract, the company cannot raise same as a defence in an insolvency proceeding. Hence, the company is bound to pay its debt or risk being wound up under CAMA, s. 409(a).

CAN A DEBTOR INVOKE THE COMMON LAW DOCTRINE OF FRUSTRATION IN THE ABSENCE OF A FORCE MAJEURE CLAUSE?

The doctrine of frustration (the “doctrine”) may apply to similar circumstances that would trigger a force majeure clause. Where there is a force majeure clause in a contract, the doctrine may not apply.

In Nigeria, the doctrine is applicable to all categories of contracts- AG Cross River State v. AG Federation & Anor.[7] Basically, the doctrine may be applied where there is the occurrence of a supervening event that is not the fault of either party to a contract. The frustrating event must significantly change the nature of the contractual rights and/or obligations and make it unjust to hold the parties to the contract. However, it is not sufficient if the event makes it more expensive or difficult or impracticable to perform the contract, or an alternative method of performance is available.[8][9]

Notably, it is at the discretion of the court to determine whether an, and what event constitutes frustrating event.11 Frustration occurs whenever the court recognizes that without default of either party, a contractual obligation has become incapable of being performed. This will, nevertheless, depend on the terms of a contract and the circumstances of the case presented before the court. Where the defence of frustration succeeds, the contract between parties is automatically terminated and the parties are discharged from performance of further obligations from the point of frustration. At common law, losses would usually lie where they fall in the presence of a frustrating event.

It is our opinion that even though a pandemic of this nature has not occurred in the longest time nor held by the court to be a frustrating event, the doctrine may still be invoked by a company as a defence in an insolvency proceeding. However, the company must, in order to succeed, establish that the outbreak of COVID-19 made it impossible for it to perform its payment obligations in the contract and show the measures it took to mitigate or avoid the impact on the contract. Failure to establish the foregoing would render the defence untenable and as such, the company may be wound up in favour of a creditor.

Note that, as in the application of a force majeure clause, obligations which fell due for performance before the frustrating event are valid, and if the obligation is not performed the innocent party can seek a remedy. As such, a company cannot raise this defence nor the defence of force majeure where its payment obligation has arisen prior to the outbreak of COVID-19.

CONCLUSION

The devastating result of COVID-19 on businesses and commercial arrangements are not in doubt. In the light of the current situation, we recommend that the National Assembly should swiftly amend the relevant section12 of CAMA to save companies and businesses that are undergoing financial crises from insolvency proceedings and consequent winding up by the court. The amendments could be an increase of the amount for filing winding up petitions from a paltry sum “above N2,000” to a galactic amount and the statutory demand period for debtors could be increased from three weeks (21 days) to 6 months or a year (this could also depend on the debt sum).13 In the absence of any amendment to the relevant section of CAMA and in the event that a company sought to be wound up does not have the statutory defence (i.e. disputed debts) discussed in this Article, the company may, flowing from its contract with a creditor raise force majeure as a defence to the proceeding, or where not available, the defence of frustration to excuse the non-performance of its obligations. The company must be mindful of the conditions to be met before any of the defences can avail it. These being said, we will look forward to seeing the attitude of the courts in future insolvency proceedings where either of these defences is raised.

Written by Eberechukwu Gloria Benjamin-Akaogu, 07065722819, [email protected]

409(a) and indeed any other relevant sections. The call for the amendment of CAMA by NASS despite knowing that the law-making processes involved is because CAMA is an Act of the NASS and its valid amendments must be an act of NASS.
This will be in line with what are obtainable in other countries. For instance, Australia, Germany, United Kingdom, Spain et.al have, in the light of this pandemic either introduced new insolvency rules or amended their extant insolvency rules to save companies and businesses from insolvency.
[1] Sections 408(d) & 409(a) of CAMA

[2] Hansa International Construction Limited v Mobil Producing Nigeria (1994) 9 NWLR (pt. 366)76 3 (2004) 9 NWLR (Pt. 878) 298; (2004) 18 NSCQR 292. 4 (1865) 11 HL Cas 389.

[3] In Weide & Co (Nig) v. Weide & Co Hamburg (1992) 6 NWLR (Pt. 249) 640, the petition was based on a debt the respondent denied owing. Having failed to prove the existence of the debt, the court held that the petitioner did not qualify as a creditor under section 409(a) of CAMA.

[4] Unilife Development Company Ltd v. Adeshigbin (2001) 2 SC 43. It is expressed in maxim as pacta sunt servanda, which literally means that agreement must be kept.

[5] AG Rivers State v AG Akwa Ibom State (2011) NWLR (Pt. 1248)31 at 81; Larmie v D.P.M.S Ltd. (2005) 18 NWLR (Pt. 958) 438

[6] Alade v. ALIC (Nig) Ltd & Anor. (2010) 12 S.C (Pt. II) 59 at 95; Ekiadolor v. Osayande (2010) 6 NWLR (Pt. 1191) 423, CA; A.G Ferrero & Co. Ltd v. HC (Nig) Ltd (2011) 13 NWLR (Pt. 1265) 592.

[7] (2012) LPELR-9335(SC).

[8] Nwaolisah v Nwabufoh (2011) LPELR-2115 (SC); Lewis v UBA (2016) LPELR- 40661 (SC).

[9] The courts have recognized certain the following events as frustration: subsequent legal changes; outbreak of war; destruction of the subject matter of contract; government requisition of the subject matter of the contract; Cancellation of an expected event etc. See the cases of Cricklewood Property & Investment Trust Ltd v. Leightons Investment Ltd. (1945) 1 All ER 252; Krell v. Henry (1903) 2 KB 740; Obayuwana v. The Governor of Bendel State (1982) Pg. 167; and Araka v. Monier Construction Company Ltd. (1978) 2 LME Pg.60.