BANKRUPTCY AND LIQUIDATION

BANKRUPTCY
A bankrupt is a debtor (excluding a body corporate) against whom a court a court has made a bankruptcy order. The order signifies that the debtor is unable to pay his debts. Bankruptcy Vs Insolvency Bankruptcy can be defined as the compulsory administration of the estate of a permanent insolvent person by the court for the benefit of his creditors. The law regulating this is the Bankruptcy Act of 1979 (Bankruptcy Law CAP. 30 Laws of the Federation of Nigeria 1990) Insolvency is a temporary inability to meet financial obligation (state of being out of cash) as at when due While bankruptcy is a state of permanent inability to pay debts and lack of adequate asset to meet creditors claims. Purpose of Bankruptcy Law To secure the fair distribution of the bankrupts assets among his creditors To free the bankrupt from his debts To find out the reason(s) for the bankruptcy

Disabilities of a Bankrupt Although a bankrupt is not a criminal, an un-discharged bankrupt suffers the following legal disabilities: He cannot vote or be voted for He cannot be appointed as trustee He cannot join in the formation of a company or partnership He cannot act as a director of a registered company or take part in the management of such a company He cannot be the chairman or a member of any government parastatal

Every person (except corporate bodies) who has the capacity to contract may be adjudged a bankrupt, but special note should be taken of the following individuals: Alien: can be adjudged as a bankrupt if he has a house in Nigeria, carry on business in Nigeria or has a place of business in Nigeria.

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Imprisoned Criminal: he can be treated as a normal person for all debts before been imprisoned. Minor: only for debt owed in relation to contract of necessities and unsatisfied judgement in tort e.g. libel or negligence Persons of unsound mind: only for debts incurred when he was of a sound mind. Deceased Persons: cannot be bankrupt but his estate can be administered in bankruptcy. Bankruptcy Proceedings The bankruptcy proceedings comprise of seven (7) steps: Bankruptcy Petition This is the filing of a petition before the Federal High Court signifying the inability of the debtor to meet his obligations. Prior to filing a bankruptcy petition, the debtor must have committed an act of bankruptcy. An individual is said to have committed an act of bankruptcy where: A creditor obtains a final judgement against a debtor for an amount due and the debtor fails to pay or settle the creditor within fourteen (14) days of service of notice. An execution was levied on debtor by seizure of his property in action of the court and the goods involved were either sold or held plaintiff and the debtor did nothing to reclaim his goods by the

Where the debtor files a bankruptcy against himself. That is, the debtor applied to the court stating his inability to settle his liabilities.

The debtor must present the bankruptcy petition within three (3) months of committing an act of bankruptcy. Receiving Order At this point, the debtors property is placed under the custody and control of the court through an Official Receiver appointed by the court. The court shall only make a receiving order if the creditors satisfy the following conditions: The debt must be a liquidated sum (i.e. a sum certain and specific) The debt due must not be less than N2,000 The act of bankruptcy on which the petition was presented must have been committed within three (3) before the presentation of the bankruptcy petition The debtor should be a Nigerian resident in Nigeria or a foreigner who is resident in Nigeria or has a place of business or carry on business in Nigeria. The appointed receiver shall perform the following duties: Juliusaruya@yahoo.com Page 2

Protect the debtors property Summon a meeting of the creditors for the purpose among others Act as an interim trustee To manage the business of the debtor in line with the instruction of the committee of inspection

The receiving order in itself does not mean the debtor is already adjudged bankrupt nor does it strip the debtor of his title to the estate. It only denies him of possession and control. Filing of Statement of Affairs This is a statement giving account of the assets and liabilities of the debtors, creditors and securities, if any, held by the creditors and names of other persons holding property on behalf of the debtor (trustees). Unless the court grants an extension of time, the statement of affairs should be submitted within seven (7) or fourteen (14) days where the debtor files the bankruptcy petition and creditors respectively. The statement of affairs should be supported with a sworn affidavit by the debtor. Where the debtor is unable to file a statement of affairs, the Receiver may at the expense of the estate employ another person to prepare the statement. First Meeting of Creditors This is the calling of all the creditors to be formally informed about the development of their debtor. The intent is to deliberate on any proposal for a composition or scheme of arrangement put forward by the debtor in order to avoid adjudication. If the meeting accepts a composition put forward the bankruptcy proceedings is terminated. Public Examination The Official Receiver is entitled to apply to the court for the appointment of the time and venue for the public examination when a receiving order is made. The goal is to ascertain the affairs, dealings, conduct, property and causes of failure. The debtor will questioned on oath but hes not allowed to be represented by a legal counsel. The debtor will be excused from public examination under the following instances: Where he is absent from Nigeria Where he is physically disabled Where is mentally disabled

Adjudication Order This is the court order declaring the debtor bankrupt. On adjudication, the debtors property becomes divisible among his creditors and the title in the property

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passes to the trustee in bankruptcy for the purpose i.e. he loses both title and possession. Where a debtor is adjudicated bankrupt, he must in describing his names add the words a bankrupt after his name. Under section 20 of the Bankruptcy Act an adjudication order may be made in the following instances: If the creditors at first meeting or any adjournment by ordinary resolution resolved that the debtor be adjudicated as a bankrupt. If the creditors do not meet. If a composition or scheme of arrangement is not approved within fourteen (14) days after the conclusion of the public hearing. Discharge Order This is the court order freeing the debtor of his debts. After being adjudged as a bankrupt, a bankrupt may at any time apply to the court for an order of discharge. Where a bankrupt fails to apply, he may be invited for his discharge at the instance/request of the following: The court The Official Receiver The trustee in bankruptcy Any creditor who has proved his debt

The court may or may not make an order of discharge. Specifically, the court shall refuse in the following instances where: The bankrupt has committed any bankruptcy offence; The bankrupt has continued to trade knowing he is insolvent.; The bankrupt has previously been adjudged bankrupt; and The bankrupt has been guilty of any fraud or fraudulent breach of trust.

However, a bankrupt shall be discharged after five (5) years from the date a receiving order was made against him. An order of discharge releases the bankrupt from all debts proveable in bankruptcy except: Any debt incurred by means of any fraud or fraudulent breach of trust Any debt due to the government.

An order of discharge shall be a conclusive evidence of the bankruptcy and a validity of the bankruptcy proceedings. Finally, an order of discharge does not relieve a guarantor of a bankrupt or the bankrupts partner or co-trustee from liabilities which they are both liable to.

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Priority of Cost and Charges The property of the bankrupt shall be distributed in the following order of priority: Cost incurred in realizing the assets of the debtor Cost incurred by the Official Receiver in protecting the property of the bankrupt Fees, percentages, or charges due to the Official Receiver or Trustee. Remuneration of special manager(s), (if any) The taxed cost of the petitioners as approved by the court.

Priority of Debts All debts due from the bankrupt to the state as at the date of the receiving order and have become due and payable within twelve (12) months before the date of presenting the bankruptcy petition. For example tax, rent, rate, royalty, NSTIF deductions etc. Wages and salaries (including commissions) of any employee over a period of four (4) months to the date of the bankruptcy not exceeding N300 per employee. Landlord Right to Seize Bankrupts Property The landlord who is owed rent by the bankrupt is entitled to distrain on the goods of the bankrupt subject to the following limits: If the landlord distrain before the commencement of the bankruptcy proceedings, he is entitled to keep all the assets of the debtor for all the arrears of rent due to him. If he distrains after the commencement of the proceedings, he is allowed only six (6) months rent as priority debt, any amount in excess of six months rent is unsecured Bankruptcy of a Sole Trader/an Individual The private and the business property of a bankrupt will be administered to settle the liabilities except those exempted. The assets exempted are: Assets held by him in trust Tools of his trade Basic necessities such as beddings and wearing apparels

Bankruptcy of Partnership

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In a partnership bankruptcy, the separate estate of the partners shall be applied in the first instance in settling the separate creditors of the individual partners. In like manner, the joint estate of the partnership shall be applied first in settling the joint creditors of the partnership. Any surplus from the joint estate shall be distributed to the partners in their profit sharing ratio. However, if the joint estate is deficient, any partner who has surplus in his private estate must transfer the surplus to the joint estate. Accounting procedures The following accounting records are maintained under the bankruptcy of sole traders and partnerships: The Statement of affairs Surplus/deficiency account. statement of affairs shows how the assets are realized and

distribution/payments to the creditors. The two sides of the statement of affairs are similar to those of the conventional balance sheet. The surplus/deficiency account shows gains or losses on assets as they are realized. The sides of this account are in the reversed order of those of the conventional profit and loss account.

LIQUIDATION
Liquidation is a situation where the corporate life of a company is being brought to an end. In liquidation a company loses its going concern status. That is the company ceases to exist. The winding up of a company may be effected by the court or by the shareholders subject to the supervision of the court. Hence the two (2) of winding up are: Voluntary winding up that is, the winding up by the shareholders; and Involuntary winding up also known as compulsory winding up. That is, winding up by the order of the court. Conditions for Voluntary Winding Up According to Section 457 of CAMA 1990, a company may be wound up by members:

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When the period fixed for the duration by the articles of association has expired (duration of time); When an event occurs which the articles provided that the company be wound up; and Where the company restores by special resolution that the company be wound up.

Conditions for Compulsory Winding Up The company can be wound up by the court where: The company decided by special resolution that the company be wound up by the court The company is unable to pay his debts The court is of the opinion that it is just and equitable that the company be wound up Defaults is made in delivering statutory reports to the corporate affairs commission or in holding statutory meetings The members is reduced below two (2) When a new statute renders the company illegal

Commencement of the Winding Up of a Company By the court It is deemed to commence at the time of the presentation of the petition for winding up. It is deemed to commence if a voluntary resolution has been passed for the winding up, before a petition is presented to the court. A voluntary winding up shall be deemed to commence at the time of passing of the resolution for voluntary winding up. The Receiver A receiver is likely to be appointed for the undertaking of a company or part thereof in the following instances: The principal money borrowed by the company is in arrears The interest on loan is in arrears The security or property of the company is in jeopardy

The following persons cannot be appointed receiver/manager of a company in liquidation in accordance with section 509 (1) of CAMA 1990 An infant Page 7

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Any person found by a competent court to be of unsound mind A body corporate An undicharged bankrupt A director of the company An auditor of the company Any person convicted of any offence involving fraud, dishonesty, official corruption or moral ineptitude

Functions of the Receiver He is to manage the affairs of the company or part thereof Realize the property of the company and settle those on whose behalf he is appointed After the receiver has settled the creditors on whose behalf he is appointed, he shall be discharged and the affairs of the company will be handed over to the liquidator (section 394 and schedule II of the Act) Functions of the Liquidator Sell the property of the company that has not been realized by the receiver Collect all the debts due to the company Make the calls on all uncalled shares To distribute the proceeds of all his collections as follows: Settle all proved claims of the companys creditors Use the balance to settle the companys shareholders in line with their rights. Where the amount collected cannot cover the settlement of all the claims of the unsecured creditors, they will rank parri pessu in proportion of the cash available to settle them. After the settlement of all the claims including the liquidators expenses and remuneration, the company is said to have been liquidated. Preferential Creditors The Act defines preferential creditors as follows: All local rates and charges due within twelve (12) months before the relevant date All PAYE, assessed taxes due up to the annual day of assessment preceding the relevant date but not exceeding one year of assessment. All deductions under the NSITF All wages and salaries of any clerk or servant in relation to services rendered to the company Juliusaruya@yahoo.com Page 8

All wages of any workman or labourer whether payable for time or piece of work in relation to services rendered to the company All accrued holiday remuneration becoming payable to any clerk, servant, workman or labourer on the termination of his employment before or by the effect of the winding up order or resolution

All

amount due

in relation of

any compensation or

liability for

compensation accrued before the relevant date. All the preferential creditors shall rank parri pessu among themselves and paid in full unless the assets are insufficient to meet them in which case they shall be settled in equal proportion. Accounting Records The following are to be kept for companies in liquidations: Statement of affairs Deficiency accounts Receivers receipt and payment account Liquidators receipt and payment account Trading accounts (where the liquidator carries on the business of the company) Minutes of proceedings in meetings

Statement of Affairs The statement of affairs is usually prepared in a vertical format and will show the: Estimates of surplus/deficiency as regards creditors of the company Estimates of surplus or deficiency of members claims against the available assets. The claims can be done by successive deductions against assets in order of priority as follows: Secured creditors to the extent that their claims are covered by the assets charged. Any surplus of the assets charged over the secured creditors will be transferred for the purpose of settling other creditors. If the proceeds are insufficient to settle the secured creditors, they shall rank as unsecured creditors. Preferential creditors Debenture holders with a floating charge over the assets Unsecured creditors Shareholder or contributories Page 9

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Deficiency Accounts This is the account which sets out in details the items contributing to the deficiency commencing with the excess (if any) of capital and liabilities over assets. From the total of these items, is deducted the total all items reducing the deficiency. The balance will represent the deficiency disclosed in the statement of affairs. Items contributing to deficiency are: Excess of capital and liabilities over assets as at the date of preparing the statement of affairs Net trading losses Estimated losses other than trading losses written off Bills of exchange discounted Contingent liabilities of which provisions has not been made eg. Legal cost Liquidators Receipt and Payment The receipt and payment account of the liquidator is meant for the realization of the assets and settlement of the various classes of creditors and contributories in liquidation of a company. The sequence of items in the liquidators account must relate to the priority of payments as follows: Secured creditors charged against security Cost and charges of the liquidation Preferential creditors Debenture secured on floating charges Unsecured creditors Contributories

Receivers Receipt and Payment Account If the debenture holders appoint a receiver, the presentation of the receipt and payment account will differ. The receiver will prepare will prepare only the receipt and payment account for the receivership in respect of settlement only of the debenture holders and the preferential creditors. The receiver will transfer the balance to the liquidator who sells the remaining assets and settles the remaining liabilities and distribute the surplus (if any) to the contributories. Making Calls on Contributories Juliusaruya@yahoo.com Page 10

The preference shareholders and the ordinary shareholders are contributories. Their liabilities are limited to the amount of shares not yet paid at the point of winding up of the company. The preferential shareholders are expected to rank before the ordinary shareholders for the repayment of their contributions in the event of liquidation. However, the fact that they rank prior to the ordinary shareholders must be stated in the articles of association of the company otherwise both classes of shareholders will be deemed to rank parri pessu. The following are ways of making calls from the contributories by the managers of companies in liquidation: Where the preference shareholders rank prior to the ordinary

shareholders, the amount of the uncalled ordinary shares that will be sufficient to pay the creditors and settle the preference shareholders. The preference shareholders would be required to pay part or all of the unpaid liabilities on their shares if the call on ordinary shares is insufficient to pay creditors. Where the preference shareholders and ordinary shareholders rank parri pessu in the event of liquidation calls will be made on both classes of shares that is enough to settle the creditors.

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