Why Nigerian Companies Still Fail Despite Insolvency Reforms Under CAMA 2020 -By Oluwaleye Adedoyin Grace

INTRODUCTION

Imagine owning a company that is struggling financially, but is still capable of surviving if given the right opportunity to restructure. Should the company automatically be allowed to collapse?

The Companies and Allied Matters Act 2020 (CAMA 2020) sought to answer this question by introducing corporate rescue mechanisms such as Company Voluntary Arrangements (CVAs) and administration. These mechanisms reflect a significant shift from an insolvency system focused largely on liquidation towards one that recognises the possibility of rescuing viable businesses. Yet, Nigerian companies continue to fail despite these reforms. This raises a critical question: if the law provides mechanisms for corporate rescue, why are they not preventing more businesses from collapsing?

This article argues that the challenge lies not simply in the existence of rescue mechanisms, but in their practical effectiveness. Issues including limited awareness, inadequate institutional capacity, creditor interests, lack of effective protection during the rescue process and insufficient insolvency expertise can undermine the objectives of CAMA 2020. The article therefore examines the gap between Nigeria’s insolvency reforms and their practical impact, and considers what must change for corporate rescue under CAMA 2020 to become more effective.

2. FROM LIQUIDATION TO CORPORATE RESCUE: WHAT CAMA 2020 CHANGED

Before CAMA 2020, Nigerian corporate insolvency was largely associated with the winding-up and liquidation of companies. CAMA 2020 introduced a more rescue-oriented approach by recognizing that financial distress does not always have to result in the death of a business.

Two important mechanisms introduced by the Act are Company Voluntary Arrangements (CVAs) and administration. A CVA allows a company to negotiate a structured arrangement with its creditors for the settlement of its debts, while administration places a financially distressed company under the management of an administrator with the objective, among others, of rescuing the company as a going concern.

These reforms represent a significant change in philosophy: the objective is no longer simply to determine how a failed company should be wound up, but whether a distressed company can still be saved.

However, having rescue mechanisms in legislation does not automatically mean that companies will be rescued in practice. The real question is whether these mechanisms are sufficiently effective and accessible to achieve the purpose for which they were introduced.

WHY THE REFORMS HAVE NOT TRANSLATED INTO WIDESPREAD CORPORATE RESCUE

The introduction of rescue mechanisms under CAMA 2020 is undoubtedly a positive development, but their existence alone cannot guarantee corporate survival. Several practical and legal challenges continue to limit their effectiveness.

3.1 Late Intervention

One major problem is that companies often seek restructuring only after their financial position has significantly deteriorated. Corporate rescue works best when financial distress is identified early. By the time a company considers a CVA or administration, its assets may already be depleted, creditors may have lost confidence, and recovery may have become considerably more difficult.

3.2 Limited Awareness and Expertise

The effectiveness of insolvency reforms also depends on whether directors, creditors and insolvency practitioners understand and utilize the mechanisms available under CAMA 2020. Limited awareness, coupled with the need for specialized insolvency expertise, can discourage companies from exploring rescue options at an early stage.

3.3 Weak Protection During CVA

A significant concern with CVAs is the absence of a comprehensive statutory moratorium comparable to the protection available in administration. Consequently, creditors may continue taking enforcement steps while a company is attempting to negotiate a voluntary arrangement, potentially frustrating the rescue process.

3.4 Creditor Interests and Receivership

Corporate rescue must also contend with the interests of secured creditors. Where creditors can pursue enforcement through receivership, they may have little incentive to support a collective rescue process if enforcement offers a quicker route to recovering their claims. The continued coexistence of receivership and administration therefore creates a structural tension within Nigeria’s rescue framework.

Ultimately, the problem is not that CAMA 2020 completely lacks rescue mechanisms. Rather, the mechanisms may not always provide the practical protection, incentives and institutional support necessary to make rescue a realistic option for distressed companies.

THE REAL PROBLEM: A GAP BETWEEN LAW AND PRACTICE

The persistence of corporate failures despite the reforms under CAMA 2020 demonstrates a fundamental reality: good insolvency legislation does not automatically produce successful corporate rescue.

A rescue framework can only be effective where distressed companies are identified early, directors are willing to seek assistance, creditors are prepared to consider restructuring, and insolvency practitioners have the expertise and resources required to manage the process. Where these conditions are absent, even well-designed statutory mechanisms may remain largely underutilized.

There is also a behavioral dimension to insolvency in Nigeria. Financial distress is often treated as something to conceal rather than a problem requiring early intervention. This can cause directors to delay action until the company’s financial position has deteriorated beyond effective rescue.

Furthermore, creditors may priorities immediate recovery of their debts over the long-term survival of the company. While such an approach is understandable, excessive individual enforcement can undermine collective restructuring and reduce the possibility of preserving a viable business.

Therefore, the challenge facing Nigeria is not simply whether CAMA 2020 provides rescue mechanisms, but whether the legal, institutional and commercial environment encourages their effective use. Until this gap between law and practice is addressed, corporate rescue may remain more of a statutory possibility than a practical reality.

WHAT MUST CHANGE?

If corporate rescue under CAMA 2020 is to become more effective, Nigeria must move beyond merely having rescue mechanisms on paper and create an environment in which those mechanisms can work.

First, early intervention must be encouraged. Directors should be more willing to recognise financial distress and seek professional assistance before the company’s position becomes irreversible.

Second, there is a need for greater awareness and specialized expertise. Directors, creditors and insolvency practitioners should be better informed about CVAs, administration and other available restructuring options.

Third, the legal framework should provide stronger protection for companies undergoing rescue, particularly by addressing the limitations surrounding the moratorium available during CVAs. This would reduce the risk of individual creditor actions frustrating collective restructuring.

Finally, Nigeria should strengthen its institutional and judicial capacity for insolvency matters. Efficient courts, competent insolvency practitioners and greater creditor confidence are essential to transforming CAMA 2020’s rescue mechanisms from statutory provisions into practical tools for business survival.

The ultimate goal should therefore be simple: identify viable businesses early, give them a genuine opportunity to restructure, and preserve economic value wherever rescue remains possible.

CONCLUSION

CAMA 2020 represents a significant shift in Nigerian insolvency law by recognizing that financial distress should not always end in liquidation. Through mechanisms such as Company Voluntary Arrangements and administration, the law provides distressed companies with opportunities for restructuring and survival.

However, a rescue mechanism is only as effective as the environment in which it operates. Late intervention, limited awareness, creditor pressures, inadequate expertise and weaknesses in implementation can prevent viable businesses from benefiting from these reforms.

The task, therefore, is not merely to create more insolvency mechanisms, but to make existing ones accessible, timely and effective. If Nigeria can bridge the gap between insolvency law and its practical application, CAMA 2020 can move from providing a legal possibility of rescue to delivering a real opportunity for business survival.

REFERENCES

Companies and Allied Matters Act 2020.

Aduma OC and Obi HO, ‘Examining the Introduction of Company Voluntary Arrangement as a Rescue Mechanism under Company and Allied Matters Act (CAMA) 2020’ (2022) International Journal of Law and Clinical Legal Education.

Anushiem MI and Ikekwuibe CD, ‘Corporate Rescue Mechanisms in Nigeria: A Comparative Approach’ (2024) 5 International Journal of Law and Clinical Legal Education.

Tolulope JS and Rachel EC, ‘Company Voluntary Arrangements (CVA) & Administration of Companies: An Appraisal of the Innovative Corporate Insolvency Procedures under the Companies and Allied Matters Act 2020’ (2023) 13(1) Nigerian Bar Journal 143–166.

Oluwaleye Adedoyin Grace, LLB. (Hons.)
Oluwaleyeadedoyingrace2001@gmail.com or 08106289069