Filetype PDF | Posted on 22 Jan 2023 | 2 years ago
Authentication
digital resources
131x Filetype PDF File size 0.42 MB Source: www.olaniwunajayi.net
OCTOBER 2020 | NEWSLETTER
AN APPRAISAL OF NETTING PROVISIONS UNDER THE
COMPANIES AND ALLIED MATTERS ACT 2020
INTRODUCTION dishonour. These provisions as we had under
the repealed Companies and Allied Matters Act,
The new Companies and Allied Maters Act, CAP C20, Laws of the Federation of Nigeria,
1
2020 (the Act or CAMA 2020), made 2004 (Repealed CAMA) created heightened
significant amendments and introductions to risks and uncertainties with respect to
the Nigerian companies’ laws, one of which is enforceability of netting provisions under
the provision for statutory enforcement of derivative contracts entered into with Nigerian
netting arrangements. counterparties in the event of insolvency of the
In simple terms, netting can be described as Nigeria counterparty. Such uncertainties have
the process of reconciling and setting off two however been addressed with the introduction
or more obligations to achieve a reduced net of the netting provisions under the Act. We
obligation between two parties. It is used in have in ensuing paragraphs discussed in
financial contracts (such as derivative further details, the concept of netting vis-a-vis
contracts), to mitigate credit, settlement and set-off, the scope of the netting provisions
other risks, by aggregating two or more under the Act and appraisal of the implications
obligations to achieve a reduced net obligation. of the netting provisions and its impact on
Thus, with the introduction of the netting consummation of derivative contracts in the
provisions under Chapter 28 of the Act, Nigeria country.
became one of the countries which have NETTINGVIS-AVISSET-OFF
statutorily provided for the enforcement of
netting provisions in financial derivative Netting, even though used under the Act in the
contracts. This is a departure from what was context of derivative contracts, is applicable in
previously obtainable, where counterparties to respect of any contractual arrangement where
derivative contracts placed reliance on the payment or delivery obligations subsist. Thus,
sanctity of contracts and the believe that netting as a settlement mechanism is often
Nigerian courts, where faced with the used in the financial markets, for the
construction of a netting arrangement settlement and payment of competing rights or
pursuant to a financial derivative contract, will interests between counterparties. Netting of
uphold the terms of the contracts as agreed obligations is effected through an agreed
between the parties. Of course, there was also process of termination and evaluation of
the fact that the close-out netting arrangement contractual rights or interests and
under the derivative contracts, were subject to consolidation to one single (or ‘net’) payment
the Nigerian mandatory rules on insolvency from one party to another, thereby minimising
such as the rules on fraudulent preference, the the overall credit and settlement risk.
right of the liquidator to cherry pick contracts
to honour and which onerous contracts to
1. Which repealed the Companies and Allied Matters Act, CAP C20, Laws of the Federation of Nigeria, 2004
1
OCTOBER 2020 | NEWSLETTER
Netting can take different forms: settlement parties which is discharged to the extent of the
/payment, multi-branch, multilateral and close- other party’s monetary obligation.
out netting. The focus is however on the two
relevant types of netting for our purpose: What is important to note as between netting
payment and close-out netting. and set-off is that the two concepts are legal
techniques applied between persons with
Payment/Settlement Netting involves mutual rights and liabilities, replacing gross
aggregation of parties’ payment obligations positions with net positions.
and reduction of the payment obligations of
both parties into one payment balance to be NETTING PROVISIONS UNDER THE ACT
paid by the party with outstanding payment ANDITSCOMPLIANCEMETRICSWITHTHE
obligations. ISDA MODEL LAW AND LESSONS FROM
OTHERJURISDICTIONS
Close-out Netting provision on the other
hand is triggered upon termination of a As previously mentioned, prior to the
contract following an event of default, before enactment of the Act, there was no legislative
maturity of such contract. All obligations are framework for the enforcement of netting
accelerated, and a calculation is made which arrangements under a financial derivative
results in a single amount owed by one party transactions in Nigeria. Hence, legal advice as
to the other party. to enforceability of netting arrangements have
been based on contractual principles and
Irrespective of the form that netting takes, in reliance on persuasive English authorities
relation to financial derivative contracts, which have recognised the enforcement of
netting, particularly the close-out netting is netting provisions in financial derivative
used to hedge counterparty risks so the transactions. Due to the foregoing fact,
payment and delivery obligations between the enforceability of netting arrangements in
parties are accelerated, aggregated and their Nigeria were qualified and therefore subject to
values determined. mandatory legislative insolvency provisions
under the Repealed CAMA (as mentioned
Set-off can be described as the offset of above and further discussed below.
competing reciprocal debt obligations between
the parties which is discharged to the extent of The enactment of the CAMA 2020 has however
the other party’s monetary obligation. With ushered in a new legal regime for the
set-off, one party’s liability will be reduced or recognition and enforcement of netting
extinguished. Like netting, set-off comes in provisions in financial derivative contracts
different forms: legal, equitable, insolvency, between parties. Preliminarily, to understand
banker’s set-off and contractual set-off. the underlying policy behind the netting
provisions in the Act, it is important to state
Suffice to point out that the distinction, albeit that the netting provisions under the Act have
technical, between “netting” and “set off” is been modelled, (with modifications to reflect
that unlike netting which assesses parties’ local circumstances), in accordance with the
mutual payment obligation, and involves the 2018 International Swaps and Derivative
termination of obligations and replacement of Association (ISDA) Model Netting Act and
same by a single payment obligation, thereby Policy Guide (the Model Act) which is the
requiring payment of the net balance from only recognised international best metric for
one party; with contractual set-off, there is a examining the sufficiency of a netting
reciprocal monetary obligation between the legislation.
2
OCTOBER 2020 | NEWSLETTER
The Scope of the Netting Provision under Central Bank of Nigeria; the Securities and
CAMA2020 Exchange Commission; the National Insurance
Commission; the National Pension
The preliminary consideration in appraising the Commission; and any other financial regulatory
netting provisions under the Act is determining authority established by an Act of the National
the scope of the netting provision (i.e. the Assembly.
transactions, activities and persons covered)
2
under the Act. By the provisions of the Act, The implication of the foregoing provisions is
before the enforceability of obligations under a that the broad definition will accommodate not
derivative contract can be determined, certain only other forms of financial derivatives
requirements must be established, vis: (x) the contracts not listed in the Act, but also include
transaction in question must be a qualified any other form of financial contract that may
financial contract within the scope of the Act; be developed in the future. Thus, these
(y) the collateral set off to be enforced upon provisions clearly recognises the dynamic
the insolvency of a counterparty must by nature and continuing development in the
consequence amount to netting, and by Nigerian financial market. This is unlike the
agreement, qualify as a netting agreement restrictive approach applicable in other
within the scope of the Act; and (z) the parties jurisdictions like Ireland where the Minister of
must be within the category of persons Finance has the power to designate contracts
covered under the provisions of the Act on the to be excluded from the scope of the netting
3
enforcement of netting provisions. legislation.
These legal requirements have been Netting and Netting Agreement
considered as follows:
The second requirement under the Act is that
Qualified Financial Contracts the agreement between the parties as
evidenced by the QFC must be a netting
The first legal requirement is that the agreement and the consequences of the
transaction between the parties must be a activities required under the netting agreement
qualified financial contract (QFC). In this wise, must amount to “netting”. The Act defines a
section 718 of the Act defines a QFC in broad netting agreement as a “master netting
terms to include practically all forms of agreement” or a "master-master netting
financial derivative contracts including futures, agreement" between two or more parties that
forwards, options, swaps, amongst others. To provides for netting of present or future
further accommodate future expansion of the payment or delivery obligations or amounts
list, section 719 provides that a financial arising under or in connection with one or
regulatory authority, in relation to the relevant more QFCs. The definition also recognizes
sector it regulates, has, the power to designate collateral arrangement made pursuant to such
as QFC, any agreement, contract or netting agreements as QFCs.
transaction, or type of agreement, contract or
transaction, in addition to those listed in With respect to definition of “netting” the Act
section 718 of the Act. In this wise, a financial describes “netting” as the occurrence of:
regulatory authority is defined to include the
2. Section 718 of the Act.
3. See, Section 3(1) and (2) of the Irish Netting and Financial Contracts Act 1995.
3
OCTOBER 2020 | NEWSLETTER
“(a) termination, liquidation or companies and pension fund
acceleration of any payment or administrators, or any other body
delivery obligation or entitlement corporate (including statutory
under one or more QFCs entered into corporations or statutory bodies)
under a netting agreement; (b) whether organised under the laws of
calculation or estimation of a close-out Nigeria or under the laws of any other
value, market value, liquidation value jurisdiction, and any international or
or replacement value in respect of each regional development bank or other
obligation or entitlement or group of international or regional organisation.”
obligations or entitlements terminated,
liquidated or accelerated under The implication of this provision is that there
paragraph (a); (c) paragraph cannot be an excuse for non-enforcement of
conversion of any values calculated or netting provisions on the grounds that either
estimated under paragraph (b) into a of the parties is organised under any other
single currency; and (d) determination laws other than the Nigerian law, as the
of the net balance of the values definition captures foreign entities,
calculated under paragraph (b), as supranational and international organisations.
converted under paragraph (c), Enforceability of Netting Provisions vis-a-
whether by operation of set-off or vis existing insolvency provisions:
otherwise.”
It is worthy to state that unlike the Model Act Having considered the scope of netting
which counsels that netting provisions should provisions and persons covered under the Act,
commence with issuance of notice, the netting it is also important to consider the preference
provisions under the Act clearly does not accorded to the enforcement of the netting
require issuance of notice prior to enforcement provisions vis-a -vis the insolvency provisions
of netting provisions, meaning that the under the Act. Unlike what was obtainable
occurrence of trigger events simpliciter, as under the Repealed CAMA, where the
identified under the netting agreements insolvency provisions could override a netting
suffices to activate netting without requirement arrangement, netting provisions have been
for notice to the counterparty. accorded primacy over the insolvency
provisions as further discussed below.
Category of Persons Covered under the Primacy of the Netting Provisions over
Provisions other Laws
With respect to the categories of persons that To ensure the enforceability of netting
may take advantage of netting provisions arrangements made under QFCs, the Act4
under the Act, the Act defines a party to mean: introduced a primacy provision which grants
a person constituting one of the parties to a the Netting provisions, precedence over other
netting agreement. Further, the Act proceeds acts, laws, regulations or directives including
to define a person to include the following: any provision of law relating to bankruptcy,
“partnerships, companies, regulated reorganisation, composition with creditors,
entities such as banks, insurance
4. Under section 721(1)
4
no reviews yet
Please Login to review.
