Filing for Bankruptcy in Nigeria: A Comprehensive Guide

The term "bankruptcy" in Nigeria technically applies to individuals and partnerships, while companies undergo "liquidation" or "winding-up" under the Companies and Allied Matters Act (CAMA) 2020. The legal framework is primarily governed by the Bankruptcy Act (Chapter 30, Laws of the Federation of Nigeria 1990, as amended) for individuals, while corporate insolvency falls under CAMA 2020 and the Insolvency Regulation 2022.

This guide covers the process, effects, benefits, and consequences of bankruptcy/liquidation for individuals and businesses in Nigeria.

Table of Contents

1. Understanding Bankruptcy vs. Insolvency in Nigeria
2. Who Can File for Bankruptcy?
3. The Bankruptcy Filing Process (Individuals)
4. Liquidation Process for Companies
5. Effects and Consequences of Bankruptcy
6. Benefits and Protections
7. The Automatic Stay of Actions
8. Priority of Debt Repayment
9. Alternatives to Bankruptcy
10. Rights of Creditors in Insolvency
11. Frequently Asked Questions

1. Understanding Bankruptcy vs. Insolvency in Nigeria

In Nigerian law, these terms have distinct meanings:

• Insolvency: A financial state where a person or company cannot pay debts as they fall due
• Bankruptcy: The legal proceeding involving an individual debtor, culminating in the distribution of assets - Bankruptcy Act (Chapter 30)
• Liquidation/Winding-Up: The legal proceeding for dissolving a company and distributing its assets to creditors (CAMA 2020)
• Administration: A business rescue mechanism for struggling companies (CAMA 2020)

Legal Definition of an Insolvent Person (under CAMA):

"Any person in Nigeria who, in respect of any judgment, Act or court order against him, is unable to satisfy execution or other process issued in favour of a creditor, and the execution or other process remains unsatisfied for not less than six weeks"

2. Who Can File for Bankruptcy?

A. Individuals (Personal Bankruptcy)

• Any natural person resident in Nigeria
• Those engaged in trade or business
• Partners in a partnership

B. Limitations for Companies

Companies cannot file for "bankruptcy" - they must pursue liquidation or administration under CAMA 2020 if insolvent.

C. Who Cannot File (Generally)

• Persons already adjudged bankrupt (until discharged)
• Persons who have not resided in Nigeria for the required period
• Minors and persons of unsound mind (through representatives)

3. The Bankruptcy Filing Process (Individuals)

Step 1: Debtor's Petition or Creditor's Petition

The process begins with a bankruptcy petition filed at the Federal High Court or State High Court with jurisdiction.

Two ways a bankruptcy can commence:

A. Debtor's Petition (Voluntary Bankruptcy)

The individual files their own petition, declaring inability to pay debts.

B. Creditor's Petition (Involuntary Bankruptcy)

One or more creditors file a petition if:

• The debtor owes at least a prescribed minimum amount (usually N200,000 or more)
• The debt is liquidated and due
• The debtor has committed an "act of bankruptcy" within 3 months before the petition

Acts of Bankruptcy include:

• Transferring property to a trustee for creditors' benefit
• Fraudulently transferring property to defraud creditors
• Allowing a creditor to take property in execution
• Filing a debtor's petition
• Giving notice of suspension of payments

Step 2: Court Hearing and Adjudication

The court hears the petition. If satisfied that grounds exist, it issues a Receiving Order and Adjudication Order declaring the person bankrupt.

Step 3: Appointment of Trustee/Liquidator

The court appoints a Trustee in Bankruptcy (often the Official Receiver or a licensed insolvency practitioner) to:

• Take custody of all the bankrupt's property
• Investigate the bankrupt's affairs
• Realize assets (sell them)
• Distribute proceeds to creditors

Step 4: Vesting of Property

All of the bankrupt's property (with certain exemptions) vests in the Trustee. This means the bankrupt no longer owns or controls their assets.

Step 5: Creditors' Meeting

The Trustee summons a meeting of creditors to:

• Confirm the Trustee's appointment
• Appoint a Committee of Inspection
• Receive information about the bankrupt's affairs

Step 6: Distribution to Creditors

After selling assets, the Trustee distributes proceeds to creditors according to the priority rules.

Step 7: Discharge from Bankruptcy

The bankrupt can apply for discharge (release from bankruptcy obligations) after a period, usually:

• Automatic discharge: Typically 1-3 years after adjudication
• Court-ordered discharge: Upon application showing good conduct

The court may grant:

• Absolute discharge (full release)
• Conditional discharge (with conditions)
• Suspended discharge (after a period)
• Refusal of discharge (for misconduct)

4. Liquidation Process for Companies

For corporate entities, the process is called liquidation or winding-up. The primary governing law is CAMA 2020.

Compulsory Winding-Up Process

1. Petition filed at the Federal High Court by:

• The company itself
• Any creditor (for unpaid debt)
• Regulatory authorities (CAC, NDIC for banks, etc.)
• Contributories (members)

1. Grounds for Winding-Up include:

• Company unable to pay its debts
• Special resolution of members
• Company has not commenced business within a year
• Just and equitable ground

1. Winding-Up Order: Court makes the order appointing a liquidator
2. Automatic Stay takes effect immediately
3. Liquidator takes control of all company assets
4. Asset realization and distribution to creditors
5. Dissolution of the company

5. Effects and Consequences of Bankruptcy

For Individuals (Bankruptcy)

• Loss of assets: All property (except basic necessities and tools of trade) vests in the Trustee
• Credit restriction: Undischarged bankrupts cannot obtain credit of any amount without disclosing their status
• Trading restriction: Cannot trade under a different name without disclosure
• Office disqualification: Cannot serve as a company director without court permission
• Professional restrictions: Certain professions (lawyers, accountants, etc.) may suspend license
• Bank account access: May be restricted; must disclose status to financial institutions

For Shareholders (Companies)

"Where the company is limited by shares, the liability of the shareholders to the company's creditors is limited to the amount unpaid in respect of the shares held by them in the company"

This means shareholders generally only lose their investment and are not personally liable for company debts unless they gave personal guarantees.

Review of Prior Transactions

The court may review and set aside certain pre-bankruptcy transactions:

• Transactions at an undervalue (selling assets below market value)
• Preferences (paying one creditor over others before bankruptcy)
• Transactions defrauding creditors

If you transferred property to family or friends before filing, a trustee may be able to recover it and distribute it to creditors.

6. Benefits and Protections

Key Benefits of Filing Bankruptcy

1. Automatic Stay of Actions

Upon a winding-up order or appointment of a provisional liquidator, "no such action, suit or proceedings may be proceeded with or commenced against the company except with the Court's permission"

This stops:

• Lawsuits
• Foreclosures
• Repossessions
• Wage garnishments
• Creditor harassment
• Collection calls

2. Discharge of Unpaid Debts

Most unsecured debts are eliminated upon discharge, giving you a "fresh start."

3. Equal Treatment of Creditors (Pari Passu)

The law ensures "similarly situated creditors are treated similarly". No creditor gets preferential treatment.

4. Protection from Individual Actions

Creditors cannot pursue individual collection actions outside the bankruptcy process.

5. Cessation of Interest Accrual

"Interest on any judgment debt ceases from the date of commencement of liquidation"

Your debts stop growing once bankruptcy proceedings begin.

6. Business Rescue Possibilities

For companies, administration allows business rescue "to achieve better results for the company's creditors as a whole, than would be likely if the company were wound up".

7. Professional Debt Management

A court-appointed trustee manages the process professionally, ensuring fair distribution.

Removal of Stigma

Filings increased significantly after the 2020 pandemic. In 2024 alone, over 2,000 formal insolvency filings were recorded across major urban centers as struggling individuals and businesses sought relief.

7. The Automatic Stay of Actions

One of the most powerful protections in bankruptcy is the automatic stay. This is a court order that halts all legal actions against the debtor immediately upon filing.

What the Automatic Stay Stops:

• All lawsuits and legal proceedings
• Foreclosure actions
• Repossession of property
• Wage garnishment
• Debt collection calls and letters
• Execution on judgments

Legal Standard (For Companies)

The Supreme Court of Nigeria has held that the automatic stay under Section 580 of CAMA 2020 is activated when three conditions are met:

1. A winding-up order is made or a provisional liquidator is appointed
2. A subsequent independent action is commenced OR a pre-existing independent action is continued
3. The action continued or commenced is against the interest of the company

Important Limitations

• Pre-existing actions against the company are automatically suspended upon winding-up order
• Leave of court must be obtained to continue any action against the company after liquidation commences
• Actions continued without leave are void for lack of jurisdiction
• The stay does not apply to actions by the company (only against it)
• The stay does not affect the winding-up proceeding itself

Consequences of Violating the Stay

If a creditor continues legal action without obtaining court permission:

• The proceedings may be declared void
• The court may sanction the creditor
• Any judgment obtained may be unenforceable

In one case, the Court of Appeal held that "the making of the winding-up order had stripped the trial court of the jurisdiction which it previously had" to entertain a suit against the defendant company.