Critical assessment of Nigeria’s response to Covid-19 pandemic, insolvency risk
The Covid-19 pandemic has had devastating effects on businesses. Ironically but understandably, the measures adopted to contain the spread, such as lockdowns, quarantines and social distancing, have caused unprecedented disruptions to supply chains and paralysed commercial activities. Cash flows have been disrupted. Revenues have taken a nosedive and companies are facing acute insolvency risk.
Governments and Central Banks have responded with a raft of palliatives to keep companies afloat and protect economies. Some of these measures are unprecedented. Christine Largarde, the governor of European Central Bank, captured the prevailing mood when she stated in relation to the European Union’s €750 billion stimulus package that an extraordinary time requires extraordinary action. Indeed, the global community is presently navigating through uncharted waters.
This discourse assesses the measures adopted by Nigeria and a few countries in dealing with the insolvency risk posed by the Covid-19 pandemic.
New insolvency laws/rules
Some countries have introduced new insolvency rules or amended extant rules to fend off potential avalanche of insolvencies. The aim is to give business owners/directors breathing space for financially troubled (but viable) businesses to return to profitability.
Australia’s amendments to its insolvency law are to subsist for six months. The statutory demand threshold has been raised from AUD2, 000 to AUD20, 000. Further, the statutory demand period for debtors has been increased from 21 days to six months. Directors have also been granted temporary relief from any personal liability from trading while companies are insolvent.
Germany has suspended the statutory obligation of directors to file for insolvency within three weeks after they know, or ought to have known, that the company is insolvent. The suspension will apply to companies affected by Covid-19 pandemic until September 2020 and may be extended to March 31, 2021. Instructively, a recent survey by Association of German Chambers of Industry and Commerce revealed that one in ﬁve German companies perceives itself at acute risk of insolvency due to Covid-19 pandemic.
Spain has suspended a similar statutory obligation on directors to file for insolvency within two months. The suspension will subsist throughout Spain’s period of State of Alarm (i.e. Emergency, which was declared on March 14, 2020. Creditors’ rights to file for insolvency have also been suspended until two months after the end of the State of Alarm.
The UK has retrospectively suspended the operation of wrongful trading rules from March 1, 2020. The wrongful trading rules empower courts to order directors to contribute to the assets of a company if they failed to minimise losses and continued trading at a time when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation.
A Case for temporary/emergency amendment of Nigeria’s insolvency rules
Nigeria has not introduced any new insolvency rules to counter Covid-19 pandemic. A cash flow insolvent company may be wound up under section 409(a) of the Companies and Allied Matters Act, 1990 (CAMA). The provision stipulates that a company shall be deemed unable to pay its debts if a creditor, to whom the company is indebted in a sum exceeding N2, 000 ($5.20) then due, has served on the company a demand requiring payment and the company neglects to pay the debt three weeks thereafter.
Two amendments could be temporarily made to the above provision to protect companies from winding-up actions in these challenging times. First, the threshold amount for filing winding-up petitions could be astronomically increased. Second, the demand period could be extended from 21 days to 6 months or more. The latter measure would be more effective in fending off a deluge of winding-up petitions. It would delay the rights of all creditors to commence winding-up proceedings regardless of the quantum of debt. The rules could be given retrospective effect from March 1, 2020.
The above amendments would have to go through the usual lawmaking process given that CAMA is an Act of the National Assembly. There have been previous failed attempts to amend the 30-year old CAMA. In fact, the Nigerian Senate has in the last two years passed the CAMA Bill twice, namely on May 14, 2018 and March 10, 2020.
Stimulus measures in other jurisdictions
Introducing new insolvency rules may flatten the insolvency curve and postpone insolvencies. However, they may not (immediately) solve the liquidity or cash flow challenges. Governments have therefore rolled out stimulus packages to strengthen economies and cash flows.
Australia has earmarked an estimated $197 billion as stimulus package. In addition to other measures, the Australian Banking Association claims banks will grant a 6-month repayment deferral on existing loans worth $100 billion to small businesses. Germany has unveiled a €750 billion stimulus package – the biggest in its post-war history. About €600 billion is earmarked for loans to businesses. Spain has a $219 billion stimulus package. It has earmarked $110 billion of guarantees for loans to companies and €17 billion to keep enterprises afloat. The UK has earmarked $481 billion, which includes government-backed loans to businesses. The Bank of England has cut interest rates from 0.75 percent to 0.1 percent (the lowest in history). UK companies are exempted from VAT till June 2020 (worth $37 billion).
Several countries have also unveiled stimulus packages to cocoon companies from cash flow difficulties. The United States of America has a $2 trillion rescue package (the largest in its history). About $500bn is earmarked for company loans and $350 billion for small businesses. France has a €45 billion package for businesses and workers. Canada is preparing a package valued at $56.7 billion. It will cover 75 percent of payroll wages for small businesses and give companies access to one-year interest free loans. Denmark plans to cover some fixed costs, which companies cannot pay due to Covid-19 pandemic where they experience more than 40 percent drop in revenue. Denmark will also pay 75 percent of salaries of employees of private companies impacted by the pandemic.
Stimulus measures in Nigeria
Since the confirmation of Nigeria’s index case of Covid-19 on 27 February 2020, the Federal Government and the Central Bank of Nigeria (CBN) have rolled out palliatives to, among other things, keep businesses afloat. The CBN unveiled the first set of measures on March 16, 2020 when it (i) reduced interest rate from 9 percent to 5 percent for a year, and (ii) granted one-year moratorium on principal repayments on CBN’s existing intervention facilities with effect from March 1, 2020. Instructively, CBN’s intervention facilities are currently valued at about N3 trillion ($7.7 billion).
The CBN also announced a N50 billion ($128.4 million) facility for households and SMEs affected by Covid-19 pandemic. This was arguably a drop in the ocean when viewed against the size of Nigeria’s economy ($446.5 billion) and Nigeria’s projected budget deficit of N2.28 trillion ($5.9 billion) for 2020 fiscal year. It was therefore not surprising when the CBN bolstered the stimulus package by N1.1 trillion ($2.8 billion) on 18 March 2020. The Bankers’ Committee, on March 21, 2020, also resolved to provide an additional N2.4 trillion ($6.5 billion). About N100 billion ($2.6 million) will be channeled to pharmaceutical companies, N1 trillion for boosting manufacturing and import substitution in diverse sectors and N2.4 trillion as loans to small companies in the manufacturing sector.
From a perspective, Nigeria’s stimulus package appears inappreciable compared to the packages unveiled by some other countries. While Nigeria’s package is about 2 percent of her gross domestic product (GDP), Australia’s is 5.1 percent, Germany’s is 20.5 percent, Spain’s is 15.6 percent, UK’s is 16.6 percent and USA’s is 9.8 percent. The stark reality is that countries can only offer stimulus packages based on their resources.
The CBN has granted regulatory forbearance to banks to explore temporary and time-limited restructuring of the tenor and loan terms for businesses most affected by Covid-19 pandemic. To foreclose any form of abuse, CBN plans to work closely with banks to ensure that the process is targeted, transparent and temporary. This initiative is commendable as it offers banks and borrowers the opportunity to negotiate achievable terms devoid of red tape. Instructively, as of February 2020, loans from commercial banks to the private sector in Nigeria stood at N26.69 trillion ($68.6 billion). It is not certain if banks will take advantage of this initiative. However, it is certain that this category of borrowers are at the mercy of the banks.
The CBN plans to “strengthen” the loan-to-deposit-ratio (LDR) policy and explore incentives to encourage extension of longer tenured credit. In 2019, the LDR was upwardly reviewed twice within three months to force banks to lend to the real sector. Presently at 65 percent, it is still below the average LDR across Afric, which is about 76 percent. However, there are lingering concerns that the LDR policy may (i) weaken banks’ risk management criteria for lending, (ii) negatively impact assets quality and (iii) increase non-performing loans (NPLs). Interestingly, data from the Nigerian Bureau of Statistics indicate that despite the upward reviews of LDR in 2019, NPLs dropped to N1.05 trillion ($2.7 billion) from N1.79 trillion ($4.7 billion) recorded in 2018.
On March 29, 2020, President Muhammadu Buhari unveiled additional palliatives by ordering a three-month repayment moratorium for: (i) TraderMoni, MarketMoni and FarmerMoni loans, (ii) Federal Government funded loans, and (iii) Federal Government funded loans issued by Nigeria’s Bank of Industry, Bank of Agriculture and the Nigeria Export Import Bank. Although these additional measures are commendable, their impact may be limited given the negligible number of beneficiaries of these loans. For instance, in 2019, N10 billion ($26 million) was appropriated for distribution as TraderMoni. Besides, the 3-month moratorium may be inadequate given the magnitude of damage inflicted on businesses by the Covid-19 pandemic.
Dr. Udofia, a lawyer writes from Lagos
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