Nigerian President Goodluck Jonathan approved a bill creating a company that will buy back debts from the

West African nations lenders and spur growth in Africas most populous country and top oil producer. The Asset Management Corp. of Nigeria, or Amcon, will help to stimulate the recovery of Nigerias financial system from recent crisis by boosting the liquidity of troubled banks, presidential spokesman Ima Niboro quoted Jonathan as saying in an e-mailed statement today. The bill, passed by parliament last month and sent to Jonathan for his assent on July 9, is expected to encourage the banks to resume lending to customers, according to the Abuja- based central bank. This represents a significant win for Nigeria, Razia Khan, Africa analyst at London-based Standard Chartered Plc, said today in an e-mailed note. The expectation is that market liquidity will receive a boost. The central bank sacked the chief executive officers of eight of the countrys 24 lenders last year over their handling of a debt crisis and injected 620 billion naira ($4.1 billion) into them to stave off a financial collapse. The asset management company will buy about $10 billion in bad debts by the end of the year, central bank governor Lamido Sanusi said on July 1. If Amcon does only half of its work well, this will still trigger a consolidation in the banking landscape, catalyze more foreign interest in the local market, and spur it to even higher values by year-end, Sebastian Spio-Garbrah, chief executive officer of New York-based DaMina Advisors said in a note on July 8. Banks, which make up about 60 percent of the Nigerian equities market by weighting, will lead the resurgence, he said. The countrys stock exchange plunged 46 percent in 2008 and 34 percent last year, making it one of the worlds poorest performers for the period. The bourses main measure closed today at 24,766.1. It has risen 19 percent so far this year.

Dealing with bank insolvency: Asset Management Corporation of Nigeria Act August 20 2010 Introduction Nature and powers of new corporation Administration and management Dealing with assets under the act Tainted eligible bank assets Comment Introduction As part of continuing efforts by the government and the Central Bank of Nigeria (CBN) to clean up the banking sector and manage the impact of the global financial crisis in Nigeria, on June 9 2010 the National Assembly passed into law an act creating the Asset Management Corporation (AMC).(1) This corporation is designed to resolve liquidity problems in the financial sector and revive the vital credit role of deposit banks and financial institutions through the severance or management of the toxic assets in their balance sheets. In 2009 the CBN injected N420 billion (about 1.6 billion) as a bail-out package to Nigerian banks (for further details please see "Dealing with bank insolvency: regulatory intervention and criminal prosecution"). The constitutionality of this decision was challenged in the courts, principally on the basis that legislative assent was not obtained. This loophole in the CBN's reform/restructuring agenda now appears to have been resolved by the new act. The AMC represents another business rescue policy option, in contrast to the traditional prosecutory legal framework articulated under laws such as the Companies and Allied Matters Act (Cap C20 LFN 2004), the Nigeria Deposit Insurance Corporation Act of 2006, the Banks and Other Financial Institutions Act (Cap B3 LFN 2004) and the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act (Cap F2, LFN 2004). Nature and powers of new corporation The AMC created under the new act does not function as a traditional asset management firm that invests its clients' pooled funds in securities matching its

declared investment objectives and provides clients with more diversification and investment options.(2) Rather, the act creates a statutory corporation with the predominant objective of absorbing toxic assets of banks in order to improve their liquidity and business operations. The funds being provided to the AMC consist of initial equity capital of N250 billion (over 10 billion), fully subscribed by the government and held in trust by the CBN and the Ministry of Finance.(3) The corporation may further be funded from the proceeds of bonds issuance (including government investment in the bonds of debt instruments issued). The corporation can also borrow or raise money with or without the guarantee of the CBN or engage in other investments (Section 6 of the act). Initially, the corporation was meant to have a limited lifespan of 10 years and to trade or manage toxic assets for seven years until their value improved. It was also meant to be managed jointly by the CBN and the Ministry of Finance. However, these provisions have been removed and the corporation is now a more permanent fixture. Thus, the corporation has powers to issue bonds or other debt instruments as consideration (not cash), and to purchase bank assets (non-performing loans), provide equity capital and borrow or raise capital. Although the act gives the corporation the powers to invest in and maintain a diverse portfolio of assets including equities, fixed income bonds and real estate,(4) just as any traditional asset management firm, this provision raises concerns regarding the independence of the regulator as the banks are not the investors or clients; rather, the investor is the regulator which manages the corporation. It may perhaps be neater for the corporation to focus only on the paramount objective leading to its creation (ie, which is toxic asset management/warehousing) more so as the corporation has other means to raise funds and the CBN is restricted in its powers to invest. Section 6 of the act on the powers of the corporation provides extensive leeway to the corporation in terms of the creation of debt securities and the initiation of debt recovery, particularly receivership, enforcement of securities and general restructuring procedures.(5) However, it does not make specific provisions on insolvency procedures, particularly winding-up procedures. In this regard, the provisions of the Companies and Allied Matters Act and the Nigeria Deposit Insurance Corporation Act may still be applicable alongside any other provision in the new act.(6) However, there may be an issue as to which of these respective provisions should prevail, as the conflict clause envisaged under Section 59 of the draft AMC of Nigeria Act before the Senate Committee, which would have clearly caused the new act to prevail in the event of conflict, was deleted.(7)

Administration and management Visible efforts have been made in the drafting of the act to provide for robust corporate governance procedures and to reduce the incidence of regulatory conflict. Within the context of the act, the corporation is expected to be "independent" in the discharge of its functions.(8) Essentially, this means that management and regulatory control is vested in the CBN, although certain checks have been put in place to curtail potential arbitrariness from the banking regulator.(9) This is reflected in the composition of the board of the AMC for example:
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a part-time chairman nominated by the Ministry of Finance; the managing director and a director nominated by the CBN in consultation with the finance minister; and other non-executive directors nominated principally by the ministry and the Nigeria Deposit Insurance Corporation.

This is also reflected in the qualified discretion of the corporation to exercise its power to compromise any claim or forgive or forbear any debt or obligation owed to the corporation only on approval by the ministry of a CBN recommendation to the effect that such compromise is in the public interest.(10) Moreover, the same considerations apply to the corporation's powers to cancel or redeem issued debt securities.(11) This is further reflected in the duty imposed on the corporation to exercise its powers of appointment of recovery agents on a selective competitive basis.(12) There are also several rules regarding disclosures and declarations of debt required from board members (Section 16). Section 30 of the act provides for cooperation with the Nigeria Deposit Insurance Corporation, the otherwise principal insolvency administrator and liquidator for banks, regarding the acquisition of interess in eligible bank assets. Dealing with assets under the act The CBN is to issue guidelines regarding the class of eligible assets in order to ascertain:
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what constitutes an eligible bank asset to be purchased/warehoused by the corporation; the valuation and purchase price thereof; and

the maximum percentage of the eligible asset to be retained by the bank.(13)

The corporation may decide to purchase such asset on a voluntary basis within three months of the asset being designated eligible, provided that the period of availability of such asset may be extended by the CBN to a maximum of three years. After the issuance of the CBN guidelines, the corporation can purchase the eligible bank asset:
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voluntarily; on the recommendation of the Nigeria Deposit Insurance Corporation (although not specifically stated in the newly passed act, certain assets on the balance sheets of intervened banks before August 14 2009 would qualify as eligible assets); or on the formal application of any affected bank or financial institution.(14)

However, it would seem best for the initiative to originate from the corporation itself in order for the bank to avoid steep requirements regarding information, warranties and representations.(15) As consideration for the purchase, the corporation would issue a seven-year bond instrument or other form of debt security guaranteed by the government. It does not require the consent of the borrower to purchase the eligible asset. The CBN and pension fund administrators may invest in these debt securities. The base to be used to value the debt instruments to be created by the corporation has not yet been announced. Other provisions as to the treatment of the assets acquired by the corporation may be quickly tested by litigation. For instance, the provisions of the act are laid down in such a way that they confer all rights and benefits to the corporation,(16) but shift any eventual liability to the eligible bank, notwithstanding the transfer of the asset. Aside from the provisions regarding warranties and representations mentioned above, the corporation will not be liable to borrowers where the eligible bank failed to disclose any representation or obligation that it undertook in favour of the debtor (the debtor's recourse is in an action for damages against the eligible institution). However, the corporation retains the right to be indemnified by the eligible bank in the event of any loss incurred by reason of the collateral to the asset acquired being invalid or unenforceable.(17) This means that the corporation

may enforce any creditor's rights accruing to the eligible bank to which it is subrogated in rights,(18) but will not be liable to debtors or other parties to the contract for breach of contract.(19) Under Section 36 of the act, the corporation may transfer assets, notwithstanding any restrictions placed on such assets by contract through the concept of trust. Thus, where an eligible asset is secured by landed property or a security interest which restricts the alienation of interest, such restrictive collateral tied to the asset acquired shall be held in trust by the eligible bank for the benefit of the corporation, and the trustee shall, at the sole direction of the corporation, realise the restrictive collateral and give the proceeds to the corporation.(20) Unfortunately, this provision seems to conflict with Section 39 of the act, which provides that transfer, assignment or any other disposal by the corporation will override any contractual or statutory restriction, meaning that the corporation will surely face litigation if it disposes of assets in breach of contractual or statutory restrictions. Section 36 is subject to the provisions of the Land Use Act, which in Nigeria has constitutional force regarding property rights. There is clear and unavoidable jurisprudence to the effect that any transfer of landed interest without the consent of the governor of the state in which the landed interest is located is void.(21) This raises the question of the constitutionality of Sections 34, 35, 39 and 41 of the act.(22) Also potentially litigious are the rules on priority and registration of securities created under the the act. Under the Companies and Allied Matters Act, a (secured) creditor takes an asset subject to previous encumbrancers;(23) therefore, where an asset is the subject of a charge, the first ranking chargee takes precedence, especially if it has obtained a vesting order. Section 40 creates a statutory power of the corporation to redeem or discharge the security as of right and not an option of an arrangement with the first charge or prior encumbrancers. Again, the act creates rules that are in breach of requirements of publicity and registration of securities. Under Section 36 and 45 of the act, the corporation is required neither to obtain any statutory consent to perfect its ownership of assets acquired, nor to register the acquisition of any assets or security tied to them, but it is meant to be the legal and beneficial owner of the securities with the plenitude of rights attached to legal ownership and priority of registration of interest. Litigation is bound to arise based on the confusion stemming from these provisions or in the event that the asset is sold by the debtor to a third party which has no notice of change of ownership.

Tainted eligible bank assets Section 37 of the new act is a result of deliberations on the draft by the Senate Committee on Banking and provides for steps that the corporation must take where it is discovered that any acquired eligible bank asset falls under the categories of asset that may be described as 'tainted' on the basis that the loans were obtained:
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by insiders of the financial institutions or persons related or connected to them or the eligible financial institution; in breach of rules and regulations of the eligible financial institution or the CBN; against the security of shares or other securities of the eligible financial institutions for the purpose of share buy-back; or for the purpose of market manipulations and market rigging and generally in breach of the provisions of the Companies and Allied Matters Act, the Banks and Other Financial Institutions Act and other banking and company laws.

In such cases, the corporation is expressly prohibited from reaching any compromise, forbearance, debt forgiveness or waiver, but rather is mandated to pursue vigorously all civil and criminal remedies available against such borrower.(24) To that extent, the act further strengthens the available criminal insolvency options by creating new offences under Part VII, such as the offence of making false claim in relation to any security at the time of its creation, with a view to defeating the realisation thereof when the borrower becomes indebted.(25) Unlike other offences created under the Banks and Other Financial Institutions Act and the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act, and where responsibility of prosecution is specifically vested in the Economic and Financial Crimes Commission under its enabling act, the initiative to prosecute lies with the attorney general. The act provides for the chief judge to designate judges for AMC of Nigeria Act cases. It is doubtful if this alone would guarantee speed in the dispensation of actrelated cases. Again, the risk of infringement of Section 36 of the 1999 Constitution, which requires every court to be constituted in such a way as to guarantee its independence and impartiality, must be overcome when interpreting the provision on designation of judges. Comment

As another tool for the management of banking insolvency through a business rescue approach properly endorsed by thre National Assembly, the AMC of Nigeria Act is a welcome, though belated, development. However, there are fears that the draconian powers of the corporation may infringe the constitutional rights of borrowers and debtors. The challenge is how implementation of the act will balance the conflicting interests of eliminating toxic assets from the financial system and ensuring constitutional due process. It is hoped that the act's objectives will help to encourage bank lending activities. For further information on this topic please contact Anthony Idigbe or Okorie Kalu at Punuka Attorneys & Solicitors by telephone (+234 1 270 4789), fax (+234 1 270 4790) or email (a.idigbe@punuka.com or o.kalu@punuka.com). Endnotes (1) The president signed the act into law on July 19 2010. (2) See Investopedia online for a definition of an 'asset management firm'. The investment services are provided for a fee. (3) This is in contrast to the initial draft that was reviewed by the Senate Committee on Banking, which provided for the CBN and the Ministry of Finance as initial and equal joint shareholders. The draft provision was presumably amended having regard to Section 31 of the CBN Act, which imposes restrictions/limitations on the CBN's investments. Section 2(2) of the act provides for the eventual increase of the authorised share capital of the corporation and external subscribers by approval of the president on the recommendation of the CBN. (4) Section 6(1)(b). (5) See also Sections 35(4) and 48. (6) Section 52(5). (7) See, however, Section 6(3), which provides that the corporation may carry out any of its functions without the consent or approval of any person or other authority except as provided under the act. (8) Section 1(4).

(9) See Sections 2(2), 4(c)(iv), 7, 8 and 10. (10) Section 6(5). (11) Section 45. (12) Section 7. (13) Sections 24 and 28. (14) Section 30. (15) Section 29(b). (16) Section 34(1). (17) Section 32. (18) Section 35. Indeed, the eligible bank is mandated to provide all assistance to the corporation in the enforcement of such rights. (19) Sections 42 and 43. (20) Section 36. This provision seem to have replaced the old Section 38 of the initial draft of the act and deals with the challenge of the corporation dealing with restrictive covenants in contracts between the eligible bank and the debtor in a more acceptable fashion. (21) See Savannah Bank v Ajilo (1989) 1 NWLR pt 97 p 305. (22) On validity of transfer of interest by mere document under seal from the corporation. (23) See Section 393(1) of the Companies and Allied Matters Act. (24) Which includes reliance on the provisions of the law on bankruptcy for natural persons, the piercing of the corporate veil and arguably, the pursuit of directors under provisions relating to their fiduciary obligations (Section 279 of the Companies and Allied Matters Act) and Section 506 of the Companies and Allied Matters Act for reckless and or fraudulent trading.