Statutory Demand, a Connected-Party Sale and a Race for Assets
Delta Steel Works Limited has a N900 million term loan from Abuja Bank secured by a floating charge over all its assets, trade payables of N240 million and unpaid salaries of N35 million. Its only significant free asset is a warehouse valued at N480 million by an independent valuer. Cash at bank is N9 million, and a creditor owed N48 million served a statutory demand 25 days ago. At a board meeting on 2 June the managing director proposed: (i) sell the warehouse to Hillside Properties Limited, a company owned by his brother, for N300 million, with completion in 10 days; (ii) use N20 million of the proceeds to repay a loan the managing director made to the company in 2022; (iii) continue trading and pay salaries; and (iv) negotiate with the bank. The company secretary has been asked to minute these decisions and to advise the board.
1. Set out the insolvency and rescue options available to Delta Steel and recommend a route.
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Diagnosis. A statutory demand left unpaid for three weeks deems the company unable to pay its debts, so a winding-up petition is now a live risk. The company is both balance-sheet and cash-flow insolvent, and the warehouse is the only asset capable of funding a rescue.
Options.
- Company voluntary arrangement: a proposal to creditors, supervised by a licensed insolvency practitioner, which can bind dissenting creditors if the statutory majority approve and the court is satisfied.
- Administration: aimed at rescuing the company or producing a better result for creditors than liquidation; it brings a moratorium on enforcement, including by the floating-charge holder, subject to statutory exceptions; the administrator must be licensed and may be appointed by the court or, in the circumstances set out in CAMA 2020, out of court by the company, its directors or a qualifying floating-charge holder.
- Scheme of arrangement: requires creditor approval and court sanction, and is slower.
- Winding up: ends the company and is the fallback.
Recommendation. Given the bank's floating charge and the need for breathing space, administration or a pre-packaged CVA is realistic. Continuing to trade while disposing of the key asset without a moratorium invites a petition and a challenge.
2. Analyse the directors' duties and the legal risk in the proposed warehouse sale and repayment of the managing director's loan.
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Duty. While solvent, directors owe their duties to the company; as insolvency approaches, they must act in the interests of creditors as a whole - preserving value, avoiding preferential payments and not stripping assets.
Sale. N300 million for a warehouse valued at N480 million is roughly 62% of value, to a company owned by the managing director's brother, at speed, without an independent valuation or member approval. It is a connected-party transaction at an undervalue, vulnerable to challenge by an administrator or liquidator, and a breach of the duties of good faith and of the conflict-of-interest rules; the managing director should have disclosed his interest and abstained.
Preference. Repaying his own loan from the proceeds while trade creditors and salaries are unpaid is self-dealing and a preference; it can be reversed and the sum recovered.
Consequence. The board should not complete the sale. It should obtain an independent valuation, run a proper marketing process and take insolvency advice; otherwise the directors risk personal liability, disqualification and, in serious cases, fraudulent or wrongful trading claims.
3. What is the company secretary's professional and ethical position if the board insists on proceeding?
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Advise, do not facilitate. The secretary's duty is to ensure the board is properly informed and that the minutes reflect what actually happened. Before the meeting, circulate a written note on the insolvency test, the connected-party issue and the statutory demand; at the meeting, record the managing director's interest, any dissent, and the absence of a valuation.
Records. If the board resolves to proceed, the minutes must not describe the sale as at market value or state that the conflict was approved when it was not. A secretary who signs false minutes or backdates a resolution breaches CAMA 2020 and the ICSAN code of conduct and faces personal penalties and professional discipline.
Escalation. Seek a written instruction from the chairman, recommend independent legal advice, and - where the conduct is clearly unlawful - use the company's whistleblowing channel or report to the regulator. Resignation is a last resort and should be done with a written statement of reasons, after taking advice, so that the secretary is not later treated as complicit.