Nigeria: The Companies And Allied Matters Act 2020 - What You Need To Know - Part 6 – Netting

BACKGROUND

The Companies and Allied Matters Act (Chapter C20) Laws of the Federation of Nigeria 2004 (“CAMA 1990”) was initially made law in Nigeria in 1990 as a decree of the military government.  It was modelled on the English Companies Act 1985.  For thirty years, there were no significant amendments to the CAMA 1990, notwithstanding that England has, over the past three decades, amended and replaced its own Companies Act.  Nigerian companies had to, essentially, rely on a 30-year old law to govern the way businesses operate in our dynamic and exponentially evolving global community.  However, this all changed on Friday the 7th of August 2020, when President Muhammadu Buhari, gave his assent to the Companies and Allied Matters Act 2020 (“CAMA 2020”). 

In the course of a 12-part series, Udo Udoma & Belo-Osagie will provide a review of the provisions of the CAMA 2020, highlighting changes that have been introduced into the body of Nigerian company law by this ground-breaking legislation.

WHAT IS NETTING?

Netting is the process by which risk is reduced in financial contracts by aggregating two or more obligations or payments and offsetting them against each other in order to achieve a reduced single net obligation.  Chapter 28 of the CAMA 2020 deals with the subject of netting and is one of the innovations of the CAMA 2020 (the CAMA 1990 does not contain any provisions on netting).  Netting is an essential element of many qualified financial contracts such as repurchase contracts and derivatives and is a process by which risk is reduced in financial contracts.  In insolvency, the mandatory rules relating to insolvency set-off, preferences and disclaimer are, to some extent, likely to conflict with the netting provisions in these financial contracts.  It is, therefore, necessary to protect obligations arising under financial contracts entered into pursuant to netting agreements.  The netting provisions of the CAMA 2020 are based on the International Swaps and Derivatives Association, Inc. (ISDA) 2006 Model Netting Act.   

PREFERENCES – NEW PARAMETERS

In the absence of netting legislation, there is a risk that any payment made or collateral transferred by an insolvent party to a solvent party during the relevant “preference period” could be voided on the basis that  it constitutes a preference. This is relevant as the preference rules were applicable in respect of the insolvency of a Nigerian counterparty by virtue of the CAMA 1990 and section 46(1) of the Bankruptcy Act LFN 2004. These provisions give a liquidator the power to invalidate any payment made by an insolvent party to a creditor within 3 months of its insolvency if it was made with a view to giving that creditor a preference over other creditors.  The preference provisions are also retained in section 658 of CAMA 2020, and the section provides that anything done during the “preference period” that gives a creditor, surety or guarantor undue advantage is invalid.  This could, therefore, cover payments made, or collateral transferred at this time and therefore could potentially disrupt the netting provision.  Chapter 28 of the CAMA 2020, however, provides that the liquidator of an insolvent party may not avoid a payment or transfer of collateral under a netting agreement on the grounds that it constitutes a preference by the insolvent party of the non-insolvent party to the netting agreement, unless there is evidence that the non-insolvent party made such payment or transfer with intent to hinder, delay or defraud an entity indebted to the insolvent party.  This provision seeks to ensure that any payment or transfer of collateral made by the insolvent party under the netting agreement during any “preference period” is not treated as a preference, and would, therefore, not be void.

SINGLE AGREEMENT

Chapter 28 of the CAMA 2020 reinforces the single agreement nature of a netting transaction, which is often set out expressly in netting agreements and, to that extent, reinforces the general affirmation of the enforceability of netting agreements in the insolvency of a party and the rule against cherry-picking discussed below.

ENFORCEABILITY OF NETTING AGREEMENTS GENERALLY

To ensure stability in the financial markets, the CAMA 2020 generally confirms the enforceability of netting provisions even if the counterparty is subject to insolvency proceedings. It also provides, subject to the terms of such agreements, that netting provisions cannot be limited by the action of a liquidator or the insolvency law provisions applicable to the insolvent party.  CAMA 2020 specifies that the only obligation or entitlement due to or from a party to such netting agreement upon the close-out netting of transactions is its net obligation or entitlement as provided by the relevant netting agreement. 

ENFORCEABILITY OF QUALIFIED FINANCIAL CONTRACTS OUTSIDE INSOLVENCY

Despite the fact that derivatives are legitimate financial contracts, there are certain elements of their structure that could appear to be similar to gaming contracts.  To avoid the risk of legitimate financial contracts being treated, under the law, as gaming contracts, the netting provisions in the CAMA 2020 provide that a qualified financial contract shall not be void or unenforceable by reason of laws relating to gaming, gambling, wagering or lotteries.

CHERRY-PICKING

The netting provisions also prevent a liquidator from accepting, pursuant to the netting agreement, only those contracts that benefit the insolvent party and disclaiming (under section 499 of the CAMA) the contracts that do not favour the insolvent party in a manner often referred to as “cherry-picking”.  This is to ensure that the single agreement nature of netting arrangements is recognised and that close-out netting would therefore not be undermined.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.