“…In essence, it is clear that what the CBN and the NCC have done, is not to interfere with the corporate governance of Etisalat (now 9mobile), but to play a key role in ensuring the protection of the overall value of the firm, and the larger stakeholder interest…” Sanford U. Mba.
Sanford U. Mba, Doctoral researcher on comparative corporate insolvency and restructuring law at Central European University(CEU) writes the opinion below from Budapest. Mba_Sanford@phd.ceu.edu
This opinion responds to the opinion by Uche Doris (the author) titled “Etisalat and The Illogic of CBN and NCC’s Intervention” and published in the Leadership Newspaper of 25 June, 2017. This present opinion is a principled disagreement with the author’s perception of the role of both the CBN and the NCC as they intervened in the decision of Etisalat’s lending syndicate to commence insolvency proceedings (receivership) against Etisalat, pursuant to their ex ante financing agreement. The author highlighted amongst other things, the role and response of regulatory agencies as the events leading up to the divestment of the foreign and local equity stakeholders played out.
I personally find the opinion piece refreshing. First because it provides the only enlightened monologue on what may well be the biggest case of financial distress between the first and second quarter of 2017, which dangerously dangled on the precipice of the commencement of an insolvency proceeding and which attracted the intervention of Nigerian state institutions (CBN and NCC). Secondly, it brings to the fore, the urgent need for the reform of Nigeria’s insolvency law regime, to reflect international concerns for the rescue not just of distressed businesses, but businesses which are functionally socially important. Such businesses have been brilliantly described by Shlomit Azgad-Tromer as socially important non-financial institutions. The reader may also wish to refer to my earlier opinion titled “Recession, Preventive Restructuring and the Nigerian Draft Insolvency Bill: Lessons from the EU?” published 6th September, 2016, in the Thisday Newspapers. In that opinion, I addressed Nigeria’s current insolvency law reform efforts and the need for a prophylactic recourse regime that address financial distress of otherwise viable corporates.
The author of the piece, (subject of this rejoinder) does appear to loathe the “subtle resistance” of the CBN and NCC, thereby ultimately frustrating the desire of the lenders consortium, through their designated representative (United Capital Trustees Limited) to appoint a receiver/manager over the Etisalat. What the CBN and of course the NCC has done is something for which both institutions deserve some applause. The reasons for this are as follows.
Nigeria is still in the process of enacting a corporate insolvency legislation. The Nigerian Senate has already passed a version of the legislation. The need to pass this legislation cannot be overemphasized (kindly refer above mentioned opinion in the Thisday Newspapers). The insolvency options currently provided for in the Companies and Allied Matters Act (CAMA) are inordinately skewed to favour the creditors. Take the receivership (the preferred choice of the creditors, as reported in the media). Although the receiver, (if also appointed manager) should do more than cater to only the creditors, in practice, hardly does any other constituency benefit from the appointment of the receiver. Also in practice, the remit of the receiver will be to recover the debt owed to the appointing secured creditors. This desire of the receiver to recover for the secured creditors inadvertently evinces a pro-liquidation bias which ultimately could not have boded well for the rescue of a distressed, but essentially viable business enterprise such as Etisalat.
In fact, it is submitted here that until we are able to see the enactment of an insolvency regime which provides for a robust corporate rescue component, the ad-hoc intervention of the CBN may continue to provide an option to the currently liquidation oriented regime afforded under CAMA.
One question a percipient reader may ask will be: what has the CBN (as well as NCC) achieved through their action?
Vested with the responsibility of ensuring the overall stability of the economy, it may well be uncharitable to deny the strategic role which the CBN in conjunction with the NCC played with regard to the smooth easing out of the majority shareholders of the debtor. This has been achieved without doing much to destroy the going concern value of Etisalat. In fact, it has not only avoided a crisis of confidence, it has also contributed to helping the company retain value. It is widely acknowledged that bankruptcy may not be an efficient means to resolve the distress of socially important non-financial institutions, which one may be inclined to think Etisalat as one. Although the author argues that the signaling to foreign investors is negative, it is not necessarily so. Assuming without conceding this, the consequence of appointing s receiver over Etisalat may well have direr consequences for the debtor and other stakeholders in the firm. How so?
As the news of insolvency begins to gain ground, and as the receiver swings into action to liquidate the assets of the debtor, the sale of the assets of a debtor will most likely be priced at an undervalue. It is often for this reason that businesses over which receivers have been appointed hardly ever emerge from the receivership. The author does cite insider sources which point out that the intervention of CBN was to avoid the endangerment of the efforts by the government to attract foreign direct investment (FDI) for the country. This may not have been so elegantly stated. It may well have made better sense if we relate this to the desire of the regulators to attract foreign (and local) investors for Etisalat. Bearing in mind that the regulators understand the implication of Etisalat going into receivership, and given its interest in ensuring that the company continues as a going concern, the regulators deserve some credit for sticking out their heads first, in preventing a piecemeal sale at depressed value, and second, to keep the debtor intact in order to attract foreign equity investors for the distressed corporate.
The CBN and NCC have managed to preserve jobs of employees and protected connected trade creditors. It is no news that Nigeria is still trying to emerge from one of its worst recessions in its modern history. At a time when many Nigerians are struggling to make ends meet, the appointment of a receiver, and the attendant job losses and the loss for interconnected businesses that survive on their relationship with Etisalat require consideration in the decision to commence the receivership. Nigeria is in too much trouble already for the regulators to sit back idly and allow such a situation play out. It is therefore submitted that the CBN as well as the NCC deserve nothing but commendation for its timeous and principled response to what would have added to the continuing economic challenges.
The author also makes a case for a strict laissez faire approach to the dispute, so that the CBN and NCC does not interfere with the financing agreement which authorized the lenders to opt for the appointment of a receiver. In the words of the author, the government ought not to be “involved in trying to save Etisalat or any other company from the financial mess in which they find themselves.” The temptation is very strong to agree with the author. Indeed, when we think about justice in the realm of businesses, what comes to mind is certainty. In this context, the respect of the ex-ante bargain between the debtor and its creditors. However, even such rules of justice may well admit of certain concessions and exceptions. This is even more so where the dynamics are such that the corporate entity serves a social utilitarian purpose within the economy. The central banks of most developed countries have not shied away from taking steps to ensure that viable socially important non-financial institutions are not allowed to go under. In such situations, bailouts have been provided. In the face of the hue and cry against the use of taxpayer’s monies to rescue such companies, the role played by the CBN and NCC even becomes the worthier of applause. Thus, while the CBN has not involved itself financially, it has prevented what would have been a piecemeal disposition of the assets of the debtor, with the attendant losses that would have followed.
Although the author considered the intervention of the CBN and NCC as futile. On the contrary, I think it has steered the parties away from a course that will have resulted in less value for the other stakeholders in the survival of the firm. As firms begin to travel down the road of insolvency, the recovery value for junior and unsecured creditors may be worth next to nothing, while shareholders may have nothing at all left in terms of their equity value. The senior creditors and secured creditors on the other hand seem to be the claimants who may sail above the waters, depending on the value of the firm. This is essentially the result of our current system of receivership. But the thinking in corporate bankruptcy has evolved beyond this, to ensure that viable businesses with going concern value may be allowed to restructure their debt and emerge from bankruptcy. So far as the receivership system which obtains in Nigeria will have yielded this somewhat unfair result, the intervention of the CBN and the NCC is beyond reproach. It may well have appeared that the agencies applied their discretion arbitrarily. However, we cannot discount the fact that they have invariably succeeded in halting a descent down a slippery slope which would have further hurt an already ailing economy.
Let us even agree that the management of Etisalat has done a bad job with the management of the debtor through the harsh economic situation. The market for corporate control has been known to discipline errant or underperforming corporate managers. Given the dynamics, and the various interests which a modern corporate represents, I dare say that the market for corporate control does a more efficient job at penalizing management, more than the receivership option presently available in Nigeria’s insolvency regime. This again has played out as the management of Etisalat has been eased out. In essence, it is clear that what the CBN and the NCC have done, is not to interfere with the corporate governance of Etisalat, but to play a key role in ensuring the protection of the overall value of the firm, and the larger stakeholder interest.
Finally, the author argues that what the CBN has done is to protect a defaulting debtor at the expense of an investor. It is however argued here that this is not necessarily so, in the light of the arguments outlined above. Besides, the option to seek equity investors for the firm will eventually result in the repayment of the senior lenders and also importantly, it will ensure that the distressed debtor continues to operate as a going concern.
In the light of the foregoing, stakeholders must begin to pay closer attention to the ongoing reform efforts of insolvency law in Nigeria. Although the Nigerian Senate has done its bit in passing a piece of legislation, it is incumbent on stakeholders (creditor interest groups, insolvency practitioners, consumer advocacy groups, labor groups, the academe, etc.) to closely follow this process. This way, we may well see an end to ad-hoc interventions by regulators.