THE NIGERIAN INSOLVENCY LAW AND THE RIGHTS OF CREDITORS AND ACCOUNT HOLDERS OF INTERMEDIATED SECURITIES (VIS-À-VIS THE I

1. THE NIGERIAN INSOLVENCY LAW AND THE RIGHTS OF CREDITORS AND ACCOUNT HOLDERS OF INTERMEDIATED SECURITIES(VIS-À-VIS THE INSOLVENT INTERMEDIARY) Being a paper presented by Chief Anthony Idigbe SAN at SEC Seminar on Convention on Intermediated Securities Transcorp Hilton Hotel Abuja on 7th May 2009 PUNUKA Attorneys & Solicitors

2. OUTLINE • OVERVIEW • PART I: SECURED CREDIT AND GENERAL INSOLVENCY FRAMEWORK • PART II: THE SPECIAL PROTECTION AFFORDED ACCOUNT HOLDERS • PART III:THE UNIDROIT APPROACH - A SUMMATION OF BEST INTERNATIONAL PRACTICE ON THE ISSUE • CONCLUSION PUNUKA Attorneys & Solicitors

3. OVERVIEW THE NIGERIAN PARADIGM SHIFT : Securities as Chose in action and need for evidence. From Direct Holding of Securities to Indirect Holding System. Commercial Imperative PUNUKA Attorneys & Solicitors

4. OVERVIEW CONTD: WHO IS AN INTERMEDIARY? A Capital Market Operator… • Custodian Companies • Stockbroking firm • Depositories • Unit trust schemes • Portfolio investment companies ,etc Intermediaries present insolvency risk to the investor who holds securities through them PUNUKA Attorneys & Solicitors

5. OVERVIEW CONTD. ECONOMICAL & TECHNOLOGICAL FACTORS? • IT revolution and impact on business transactions • time & cost saving, • Simplicity of formalities • an electronic and speed of the light platform for deals • Remarkable growth of the Nigerian Capital Market and dealings in public company securities traded on the Stock Exchange. NSE capitalisation was =N=1.96 trillion in 2004 to =N=12.6 trillion in March 2008 • A more globally integrated Nigerian economy • Nigeria – an attractive environment for FDI PUNUKA Attorneys & Solicitors

6. OVERVIEW CONTD LEGAL FACTORS Legislative initiatives and reforms tailored to ensure certainty of transactions and address risks associated with economical development. • Cross-over from Traditional Company Law to Securities Law in 1999 (CAMA and abolition of Part enactment of ISA 1999 now ISA 2007). • Cross-over from Securities Law to the Law of Intermediated Securities (ISA 2007; SEC Rules; the Unidroit Convention influence) • Nature abhors vacuum so commercial imperative have overriden traditional direct holding requirements as intermediaries have provided services to capital owners who want to access market PUNUKA Attorneys & Solicitors

7. PART I SECURED CREDIT AND THE GENERAL NIGERIAN INSOLVENCY FRAMEWORK PUNUKA Attorneys & Solicitors

8. What is Secured Credit? • A transaction by which enforceable rights in property is given to a lender or capital provider as collateral to satisfaction of repayment obligation in event of default • An unavoidable feature in any modern day economy (UK Cork Committee, 1982 on the importance of a secured credit regime). Enables deployment of fund from surplus to deficit users of capital • An assurance or undertaking to guarantee repayment over and above the mere promise to repay inherent in all credit transactions • The underpinning of all company law transactions or relationship (Debt/Equity Capital): investors secured against the assets of the company. PUNUKA Attorneys & Solicitors

9. What is Insolvency? • Firstly and generally, the flip side of the coin: the framework that creates the necessary confidence and soundness in a secured credit system: management of systemic risk • An inadequate definition under the Nigerian general insolvency law (S650 CAMA) • A working definition; the inability of a debtor company to meet up with its commercial obligations/commitments • Insolvency and Restructuring (Mergers & Acquisition): the relationship • Balance Sheet Insolvency PUNUKA Attorneys & Solicitors

10. THE CONNECTING FACTOR? • An efficient and clear insolvency regime is needed for the purpose of credit risk management through the enforcement of securities. • Priority and ranking issues with respect to classes of investors only arises in the context of insolvency. PUNUKA Attorneys & Solicitors

11. THE NIGERIAN CORPORATE INSOLVENCY FRAMEWORK: THE GENERAL LAW OR THE DIRECT HOLDING SYSTEM CAMA: THE SUBSTANTIVE LAW (Cap C20 LFN 2004) • PART XIV – RECEIVERSHIP • PART XV – WINDING-UP • PART XVI – ARRANGEMENTS & COMPROMISES • Note that Nigerian Corporate Insolvency Regime does not make provision for Administration. • Restructuring, Mergers & Acquisition under ISA 1999 (now 2007): an additional aspect of corporate insolvency? (S122 (6) (d) ISA 2007). COMPANIES WINDING-UP RULES 2001: THE ADJECTIVAL LAW • These two statutes capture essentially Nigerian corporate insolvency framework PUNUKA Attorneys & Solicitors

12. REDISTRIBUTION OF ASSETS UNDER THE NORMAL LAW IN THE EVENT OF INSOLVENCY OF CORPORATE BODY • A Direct Holding or Certificated Securities System. see Ss 79, 91, 151, 152 on definition of membership to company. A host of other similar provisions in CAMA for debenture holders S169 etc. • Protection of investors in the company tied to possession of certificated securities (in its absence, equitable protection available but fraught with attendant frailties -recourse to litigation invariably) and registration of name of holder in the company’s records (legal recognition & protection ) PUNUKA Attorneys & Solicitors

13. REDISTRIBUTION OF ASSETS UNDER THE NORMAL LAW IN THE EVENT OF INSOLVENCY OF THE CORPORATE BODY-Contd. SALIENT STATUTORY PROVISIONS CREATING THE ORDER OF REDISTRIBUTION- CAMA • S. 393 (1), (cost of receivership factored in realization of security for secured creditors ) • S484 (liquidation expenses under winding up procedure, the highest priority), • S494 (the general rule on priority of interests) and • S495 (An exception : the concept of fraudulent preference). • S506 (An alternative not tested by litigation: fraudulent or reckless trading. Comp. with provision in UK Insolvency Act PUNUKA Attorneys & Solicitors

14. THE COMPETING INTERESTS OF VARIOUS STAKEHOLDERS: PRIORITY RULE IN THE DIRECT HOLDING SYSTEM PUNUKA Attorneys & Solicitors

15. THE PROBLEM OF THE PRIORITY RULES CREATED UNDER THE NORMAL LAW FOR CAPITAL MARKET INVESTORS • S495 applicable ONLY in context of winding up proceeding. • S494 fails to take cognizance of – • the peculiar nature of capital market and interests of investors investing indirectly with the issuer on an electronic/virtual or uncertificated environment (CSCS) • The interest of investors in the intangible assets (securities) of the intermediary acquired on behalf of/and with the funds of the account holders/investors. • Insufficient recognition of the concept of Trusteeship. Intermediated securities can be said to be sort of alien/incompatible with system created under the Normal Law with respect to ownership of shares and other securities and proof of title (S86 CAMA) PUNUKA Attorneys & Solicitors

16. SECTION 86 CAMA No notice of any trust, express, implied or constructive shall be entered on the register of members or be receivable by the Commission. PUNUKA Attorneys & Solicitors

17. THE PROBLEM OF THE PRIORITY RULES CREATED UNDER THE NORMAL LAW FOR CAPITAL MARKET INVESTORS Outcome of Normal Law where the debtor company is not asset-rich? • By failing to recognize investor’s beneficial ownership of securities indirectly held by the capital market intermediaries, the Certificated system created under the Normal Law allows the absurd situation where investors are positioned at the bottom of the pyramid of priority as mere trade creditors. • Defeats imperative of special protection of capital market leading to the repeal of Part XVII of CAMA by S263 (1) (d) of the then ISA 1999 as regards dealings in public companies securities • Special nature of capital market and SEC ignored. • Integrity of capital market and protection of investors undermined. • Hazardous resort to statutory exceptions to S86 of CAMA and to equity rules (Equity looks at what ought to be done as done) to provide basic protection to this special breed of investors. • S55 ISA 2007 on electronic means of issuing and transferring securities in direct conflict with CAMA’s several Ss 79, 86, 91, 151, 152 etc which requires registration of securities and thrives on the evidentiary system of share certificate PUNUKA Attorneys & Solicitors

18. HOW DID NIGERIA DEAL WITH CHALLENGE OF GIVING SPECIAL & PREFERENTIAL TREATMENT TO INVESTORS/ACCOUNT HOLDERS IN CERTAIN SECTORS OF THE NIGERIAN ECONOMY The Nigerian Legislator considered the- • Special nature of banking industry and need for protection of depositors • Special nature of capital market transactions and need for protection(dealings in a dematerialized environment). • The Mischief sought to be cured with respect to loopholes under the normal law and inadequate protection of account holders interests led to creation of special (insolvency) laws in these industries (pending a general insolvency framework reform) which derogate expressly from the normal Law– • NDIC Act 2006 and BOFIA 1991 as amended for banking. • ISA 2007 for Capital Market & SEC Regulations on Intermediaries PUNUKA Attorneys & Solicitors

19. PART II THE SPECIAL PROTECTION AFFORDED TO ACCOUNT HOLDERS IN THE EVENT OF INSOLVENCY OF INTERMEDIARIES (CMOs) PUNUKA Attorneys & Solicitors

20. SPECIAL TREATMENT OF ACCOUNT HOLDERS UNDER SPECIAL LAWS BANKING INSOLVENCY: NDIC ACT 2006 AND BOFIA CMOs INSOLVENCY: ISA 2007 AND SEC RULES ON INTERMEDIARIES Prevention of the Intermediary’s Insolvency R26B (1) (v), 27 (1) (vii) 27 (2) (a) (c) etc on stringent capitalization requirements so as to procure sufficient assets to serve as safety net distributable to sundry investors (fidelity bond value of 25% of paid up capital. Rules 26, 27 and 207 of SEC’s regulations on registration and regulations of custodians and other intermediaries Ss 197/198 on Investors Protection Fund Ss. 48 to 51 ISA 2007 on SEC’s take over powers to prevent or manage going concern in difficulty • Prevention of the bank’s Insolvency • Failing same, special preferential treatment afforded to account holders in the event of insolvency • S9 BOFIA on Minimum Paid up Share capital, • Ss. 13 BOFIA on minimum holding of cash reserves • Ss 16 & 21 NDIC Act 2006 on insurance of banking deposits with the NDIC • Ss. 7,31 to 35 BOFIA stating CBN take-over powers as well as NDIC take –over powers. Also ss 27 to 32, 37,38 and 40 to 43 NDIC Act subject to S54 BOFIA PUNUKA Attorneys & Solicitors

21. SPECIAL TREATMENT OF ACCOUNT HOLDERS UNDER SPECIAL LAWS BANKING INSOLVENCY: NDIC ACT 2006 AND BOFIA CMOs INSOLVENCY: ISA 2007 AND SEC RULES ON INTERMEDIARIES Special preferential treatment afforded to account holders in the event of insolvency Ss. 39 to 43 ISA 2007 on segregation of accounts by CMOs Ss 197/198 on Investors Protection Fund Rules 26, 27 and 207 of SEC’s regulations on registration and regulations of custodians and other intermediaries S42 states that money in intermediary’s trust account is not available for the payment of the intermediary's debt. See also R207A(8) and R207B (18) on segregation of accounts by market participants. • Special preferential treatment afforded to account holders in the event of insolvency of bank- • Ss. 20 and 21 NDIC Act 2006 • S54 BOFIA to the effect that assets of failed bank to be made available for payment of account holders over and above all other liabilities of the bank. • S55(2) on conflict resolution between BOFIA and CAMA (BOFIA prevails over the Normal Law rule) PUNUKA Attorneys & Solicitors

22. CRITICAL ANALYSIS OF THE PROVISIONS OF THE SPECIAL CAPITAL MARKET LAW IS CONFLICT WITH GENERAL LAW CLEARLY RESOLVED ON THE ISSUE OF PROIRITY AND SPECIAL PROTECTION OF INVESTORS? • Rules of interpretation: the specific prevails over the general. See case of Major & Co V Schroeder • S42 ISA juxtaposed to S494 CAMA not specific but in direct conflict with normal law (without a clear conflict resolution mechanism) • Ss. 54/55 BOFIA on the other hand is a very clear statute that clearly derogates to the Normal Law and the rule in S494. PUNUKA Attorneys & Solicitors

23. THE REALITY • DECANON V. ROYAL EXCHANGE • Here, stockbroker is claiming beneficial ownership of shares bought for account holder simply because they were bought in name of stockbroker • OTEDOLA / AP V. DANGOTE/ANNENIH/NOVA SECURITIES • Can account holder claim benefit but deny liability for other actions of intermediary on his behalf? PUNUKA Attorneys & Solicitors

24. WILL THE CONVENTION CHANGE ANYTHING? • Article 7- Will not affect municipal procedural and substantive law of insolvency. • Article 21- Seeks to lay guiding principles and establish right of account holder against insolvency administrators and secured creditors • Preserves power of insolvency administrator to challenge transactions: A strong tool against the objective of priority of protection of investor. PUNUKA Attorneys & Solicitors

25. MAKING THE CONVENTION EFFECTIVE • Like Bank account holders give priority • Enact new laws like • Uncertificated Securities Act • Electronic Business Act • Insolvency Act • Strenghten the regulator SEC • Amend CAMA PUNUKA Attorneys & Solicitors

26. THOUGHTS ON ROLE AND RESPONSIBILITIES OF JUDICIARY IN THE FACE OF GLOBAL MELTDOWN • Ubi jus ibi remedium: The judiciary has to provide effective and adequate remedies in commercial disputes, especially in the area of debt enforcement and insolvency in this current global situation. The attitude of courts would be crucial in building investors confidence in the Nigerian economy and enforcement of law. • It follows therefore that the judiciary as a whole must be able to – • Achieve the swift and efficient administration of justice and adjudication of commercial disputes as is expected for commercial litigation: time particularly of essence • Understand the dynamics of insolvency laws very well: need for further training and specialization of judges in addition to conventional education. • Provide different and collaborative avenues for remedies: the issue special jurisdiction and exclusive jurisdictions, domestic remedies, collaboration with statutory regulators • Promote reconciliation in commercial dispute taking advantage of its rules: in line with inherent nature of insolvency laws based on compromise, settlement between debtor and sundry creditors. • Give more effective justice: pursue the fraudulent directors of insolvent companies and making their assets available for distribution to companies creditors. See S506 CAMA PUNUKA Attorneys & Solicitors

27. CONCLUSION • Uncoordinated two (2) track development of traditional direct holding of securities and indirect holding of securities • Section 55 of ISA 2007 and Rule 98 of SEC Rules on Electronic Offer and Transfer of Shares now blaze the trail • A more comprehensive local approach now needed PUNUKA Attorneys & Solicitors

28. THANK YOU Chief Anthony Idigbe SAN PUNUKA Attorneys & Solicitors International Law Centre No. 45 Adjarho Street, Off Admiralty Way (Opposite White Dove) Lekki, Lagos TEL: 2704789, 2704791 FAX: 234 (0) 1 2704790 WEBSITE :www.punuka.com PUNUKA Attorneys & Solicitors