Tuesday, May 15, 2018 /05:58 PM/ Nigerian Senate
The Companies and Allied Matters Decree No. 1 of 1990 was promulgated to repeal the Companies Act of 1968. Since its promulgation into law, the now Companies and Allied Matters Act, Cap. C20, Laws of the Federation of Nigeria, 2004 (the Act) is now over twenty (20) years with minimal amendments during the period. It became apparent that the entire Nigerian corporate landscape was heavily hamstrung by several provisions in the Act which have been described as impeding modern business practices in the light of national and global reforms; particularly as legislations which set up most of peer regulators have since been amended on different occasions. It has therefore been determined that the provisions of the Act are not in tandem with global trends and that same requires extensive amendments to make the Act more contemporary and relevant.
Nigeria was ranked 145th out of 190 economies in the 2018 World Bank Doing Business (WBDB) Ranking Index. One of the indicators the WBDB team measures is the relative ease or difficulty in establishing and running a business in Nigeria. In this regard, Nigeria is ranked on the Starting a Business indicator as 130 out of 190 economies and for the first time was also recognized as one of the top ten (10) most improved economies in the world. However, as one of the largest economies in the world, Nigeria needs to greatly improve on the rankings. The WBDB Index offers a useful and measurable assessment of economies around the world; and also serves as a resource for private sector and other stakeholders interested in investing in Nigeria.
The Act is one of the most critical pieces of legislation which impacts the Nigerian business climate and the Micro, Small and Medium Scale Enterprises (MSMEs). It also directly affects the influx of Foreign Direct Investment (FDI) into Nigeria because of its relevance to ease of doing business and ease of investing in Nigeria.
The 8th Session of the National Assembly recognizes the deficiencies in the business environment and places strong emphasis on increasing Nigeria’s competitiveness. The National Assembly Business Environment Roundtable (NASSBER) was created as a platform for the legislature and the private sector to engage, deliberate and act to ensure that the legal and regulatory framework within which businesses operate promotes enterprise, growth and the right conditions for investment and employment.
Nigeria’s system of Company Law and Corporate Governance is a critical part of this legal framework. It sets out the legal basis by which companies are formed, operated and managed. It provides the corporate vehicle that enables individuals to collaborate in business and as well as the legal structure through which companies are financed. It also sets the rules for company boards and shareholders and for the exercise of decisions on business growth and investment. It is the means by which individuals are held to account for the exercise of corporate power.
It is for the foregoing reasons that an effective legal framework of company law is a key building block of a modern and business friendly economy. A genuinely modern and effective legal framework can promote enterprise, enhance competitiveness and stimulate investment. Conversely, an ineffective or outdated framework can inhibit productivity and growth and undermine investor confidence.
Summary Of The Proposed Provisions Of The Bill For Repeal & Re-Enactment Of The Act (Bill)
The Bill reflects several key provisions which are discussed below:
Single Member Companies
By this Bill, provisions which make it possible for a single person to form a private company is being introduced for the first time in Nigeria. This provision is consistent with what is obtainable in several other progressive economies such as the United Kingdom, India and Singapore.
Limited Liability Partnerships
From a careful review of the provisions of the Bill, a new form of legal entity known as Limited Liability Partnerships was formed. The essential feature of a Limited Liability Partnership is that it combines the organizational flexibility and tax status of a partnership with limited liability for its members.
Companies will now be permitted to provide financial assistance to their shareholders under the new Bill. The current position is that a company and its subsidiaries are prohibited from giving gifts, loans, indemnities, credit or other assistance, for the purpose of aiding a person to purchase the company’s shares, where such financial assistance would result in a reduction in the net assets of the company or result in the company having no assets. The proposed Bill reflects a market friendly advancement from the current position. It also improves companies’ chances of attracting much needed investment, since there are now provisions in the Bill which enable shareholders/potential shareholders have access to funds which in turn enable them invest in such companies.
Reduction in Share Capital
In order to ease the process of doing business, amendments have been proposed in the Bill to the process by which a company can reduce its share capital, by enabling private companies to reduce share capital of such companies if a special resolution to that effect is passed, without the added burden of applying to court for a confirmation of the reduction.
The Bill introduces a company rescue and insolvency legal regime which is not focused on a company’s demise, but on rescuing companies from insolvency through inclusion of an insolvency framework. An effective insolvency regime in Nigeria have a dual aim: to save viable businesses, and to ensure that non-viable businesses can quickly exit the market, allowing deployment of assets to more productive firms. It will see to the following benefits: lower costs of credit; increased access and availability of credit; improved creditor recovery; strengthened job preservation through reorganization and business rescue; promotion of entrepreneurship; and other benefits for small businesses.
This in turn improves and increases overall economic stability in the country. The insolvency provisions will border on: (i) Administration - which serves as a rescue mechanism for insolvent entities and allow such entities to carry on running their businesses. One of the main advantages of this model is that the administrator is appointed to act in the interest of the company and not, as in the case of receivership, in the interest of the person that appointed him; (ii) Netting Provisions – which are geared towards addressing provisions contained in the insolvency provisions in the Bill; and (iii) Corporate Voluntary Arrangements – which is a procedure which allows a company to settle debts by paying only a proportion of the amount that it owes to creditors and also allows a company to come to some other arrangement with its creditors over the payment of its debts.
The Bill is seeking to further ease the regulatory burden of companies by making provisions which limit the requirements to appoint a Company Secretary to public companies, thereby making it optional for small companies and companies with one shareholder.
Annual General Meeting
Pursuant to the provisions of the Bill, small companies would no longer be mandatorily required to convene and hold Annual General Meetings.
Minority Shareholder Rights
The Bill is geared towards enhancing minority shareholder rights. It proposes to regulate related-party transactions and shareholders access to judicial redress. It also protects the shareholders rights in corporate governance as a proxy for Nigeria’s overall corporate governance standards and ease of access to financing from capital markets. Shareholders to bring actions both in respect of a company and any of its subsidiary companies and other companies related to the parent company.
The Bill has provisions which mandates the disclosure of beneficial interests in a company’s shares and prescribes punitive measures for failing to disclose such interests. In this regard, where a person holds interests on behalf of another in a nominal capacity in a company, both parties (the owner and the nominal holder) are required to disclose the beneficial interests to the company in question.
Exemption from Audit
The Bill has provisions which exempt small companies from appointing auditors. Specifically, the Bill exempts a company from appointing auditors: (i) if it has not carried on business since its incorporation; or in a particular financial year; and (ii) where the company’s turnover is not more than N10m and its balance sheet total is not more than N5m.
Economic Impact Of The Provisions Of The Bill
As earlier indicated in this document, the introduction of new provisions in the Act would greatly improve ease of doing business and generally enhance the business climate in Nigeria. Some of the economic benefits to be realized by Nigeria if the proposed amendments are passed into law include the following:
Ensure more business-friendly regulation for Micro, Small and Medium Enterprises: It has been determined from a collaborative survey by the Nigerian Bureau of Statistics (NBS) and the Small & Medium Enterprises Development Agency of Nigeria (SMEDAN) that the Act is currently designed to regulate mostly larger type companies and that the provisions of the Act impose unnecessary costs on smaller type companies. According to the said survey, there are over 37 million MSMEs in Nigeria which contribute almost 50% of the Gross Domestic Product in nominal terms and account for 84.02% of all Nigerian jobs. By making the provisions of the Act friendlier to MSMEs, the amendments to the Act have the potential to increase activities of MSMEs, thereby growing the Nigerian economy in the process.
Fewer reporting obligations for small companies: Another impact of the Act is to reduce the financial reporting obligations of small companies. Such companies, as stated above will be exempt from the yearly audit process. This invariably means that cost is reduced and more money can be ploughed back into the business for expansion. For the Nigerian economy, this translates to more jobs and a more stable economy.
Reduction in Time and Cost for Setting up a Company: The proposed amendments to the Act make it more attractive for small businesses operating within the informal sector, which contribute about 64% to the Gross Domestic Product (GDP) to the economy. These companies will be able to formalize their businesses by registering sat the Corporate Affairs Commission. This has the potential of widening the tax base of the country thereby increasing revenue earned from taxation of corporate entities, and thereby diversifying the economy.
Promotion of Financial Stability: The introduction of model netting provisions in the Bill as a means of mitigating credit risks associated with over the counter derivatives promotes financial stability and investor confidence in the Nigerian Financial Sector. The proposed provisions also minimize risks associated with the performance of certain large financial institutions, thereby making the financial positions of Nigerian financial institutions more secure.
Increasing Investor Confidence in the Nigerian Financial Sector as well as all sectors of the economy: Investor confidence in the Nigerian financial sector and indeed, all sectors of the economy is expected to significantly improve, due to a competitive and business-friendly environment where companies are regulated in line with global best practice.
Nigeria’s legal framework for undertaking business in the country must reflect the challenges of modern markets in which business and investment decisions are increasingly determined by global conditions. This increasingly global market place should incorporate regulatory conditions which are modelled around international best practice.
The proposed amendments to the Act would have the overall effect of making Nigerian Company Law more fit for today’s business realities, improve the business environment and performance across the Nigerian economy as a whole, as well as reduce direct compliance costs for businesses in Nigeria.