The Frozen Foods Company With More Debts Than Assets
Frostline Foods Ltd owes ₦180 million to Zenith Bank, ₦60 million in unpaid salaries to 45 employees, and ₦25 million to the Federal Inland Revenue Service. Its only assets are a cold store valued at ₦90 million and receivables of ₦12 million. The bank served a 21-day statutory demand in March 2025. The company's director, Mrs Okafor, who is also the majority shareholder, paid herself a ₦15 million 'consultancy fee' in February and wants to declare a ₦10 million dividend in April. She proposes a company voluntary arrangement (CVA) under CAMA 2020, offering creditors 30 kobo in the naira over two years, while the bank has filed a winding-up petition. The employees have not been paid since December 2024. The company's accounts show a net liability of ₦163 million. The bank says the CVA is a delay tactic and that the company is plainly insolvent.
1. Advise the bank on whether it has grounds to wind up Frostline and how the CVA affects the petition.
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The bank has strong grounds. A company is unable to pay its debts if it fails to comply with a statutory demand for a sum exceeding the threshold within 21 days, or if it is proved to the court that it cannot pay its debts. Frostline has net liabilities of ₦163 million, has failed to pay salaries since December 2024, and has not satisfied the bank's demand. That supports a winding-up petition on the just and equitable ground and on insolvency.
The CVA does not automatically stop the petition. Under CAMA 2020, a company voluntary arrangement can bind creditors if it is approved by the requisite majority (75% in value of creditors) and the court is satisfied that it is fair. A CVA may be accompanied by a moratorium, but the bank can oppose it as a delay tactic. The bank should challenge the director's ₦15 million fee and the proposed dividend as evidence that the company is not acting in good faith. If the CVA is not approved or is unfair, the winding-up petition can proceed.
2. What are the priority claims and how would the ₦102 million realised be distributed in a winding up?
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On a winding up, the ₦102 million realised is applied in this order: (1) costs and expenses of the winding up; (2) secured creditors, to the extent of their security, if the bank has a fixed charge over the cold store-if it is unsecured, it ranks as ordinary creditor; (3) preferential debts. In Nigeria, preferential debts include certain employee remuneration (wages/salaries for a limited period), pension contributions, and certain taxes due to the FIRS. The employees' unpaid salaries since December 2024 and the FIRS claim are likely to be preferential, but only within statutory caps. (4) ordinary unsecured creditors, including the bank if unsecured, rank pari passu and share pro rata. (5) surplus to members.
Here the assets are far below the debts, so ordinary creditors will receive a fraction and members nothing. The director's ₦15 million consultancy fee may be recovered as a preference or transaction at an undervalue if paid within the suspect period, and the proposed dividend is unlawful because dividends can only be paid out of distributable profits.
3. What liabilities may Mrs Okafor face for the consultancy fee and proposed dividend?
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Mrs Okafor may be liable for breach of fiduciary duty, misfeasance, and unlawful distribution. The ₦15 million consultancy fee, paid to herself as majority shareholder when the company was insolvent, may be challenged as a preference if it gave her an advantage over other creditors, or as a transaction at an undervalue if there was no genuine service. The court can order her to repay it with interest.
The proposed ₦10 million dividend would be unlawful because dividends may only be paid from profits available for distribution; the company has none. If she pays it, she must refund it, and the directors who approved it may be personally liable. If the company continues to trade while insolvent, the court may find fraudulent trading (if intent to defraud creditors) or wrongful trading, and order the directors to contribute to the company's assets. She may also face disqualification. The employees and the bank should cite these facts in opposing the CVA and in any misfeasance application.