Understanding Debenture Enforcement and Creditor Protection under CAMA 2020 — Sections 205 to 207 Explained

Understanding Debenture Enforcement and Creditor Protection under CAMA 2020 — Sections 205 to 207 Explained

Published by Bahas Books
Visit bahasbooks.com for practical insights on Nigerian corporate law, taxation, and business compliance.

In corporate finance, borrowing is often necessary for growth. Companies rely on loans, bonds, and debentures to raise funds — but when repayment fails, the law must provide a clear, fair, and structured process for enforcing those debts. The Companies and Allied Matters Act (CAMA) 2020, particularly Sections 205 to 207, lays out that framework for Nigeria.

These sections deal with the appointment of receivers or managers by the courts, how such appointments must be publicized, and how payments are prioritized when a company’s assets are taken over under a secured charge. Collectively, they ensure that the process of enforcing secured debts is not chaotic, abusive, or unfair — but guided by law, transparency, and justice.

Section 205 — Powers of the Court to Appoint Receiver or Manager

When a company borrows money using its property or assets as security, it grants the lender a charge — either fixed (on specific assets like land or buildings) or floating (on general assets like inventory or receivables). If the company defaults on repayment or breaches the loan terms, that charge becomes enforceable.

At this point, the lender may approach the court to appoint a receiver or manager — a neutral professional tasked with taking control of the secured assets, managing or selling them to repay the debt.

Subsection (1) gives the court the clear power to appoint such a person once the charge is enforceable. For instance, if a company defaults on a ₦500 million debenture secured by its factory and inventory, the court can appoint a receiver to take possession of the assets and ensure the lender recovers their money lawfully.

However, subsection (2) introduces a protective element for creditors under floating charges. A floating charge is unique because it covers changing assets (like stock or receivables) that the company can continue to use until default. Even if this charge hasn’t yet “crystallized” (that is, become legally fixed and enforceable), the court can still appoint a receiver if it believes the creditor’s security is “in jeopardy.”

Security is considered “in jeopardy” when the company’s behavior, financial instability, or pending transactions could destroy the creditor’s chance of repayment. For example, if a company under financial strain is about to sell vital assets at a loss, divert funds, or engage in reckless spending, the court can step in to protect the creditor’s interest. The aim is to prevent harm before it becomes irreversible.

Subsection (3) adds a crucial safeguard: the appointment of a receiver or manager cannot be used as a tool for enforcing unsecured debts. Only creditors with a legal charge over assets can benefit from this process. This rule prevents abuse of court powers and ensures that unsecured creditors must seek redress through regular recovery methods or insolvency proceedings.

In essence, Section 205 ensures proportionality — the court only intervenes where a secured creditor’s position is genuinely at risk, preserving both the creditor’s security and the company’s operational integrity.

Section 206 — Advertisement of Appointment of Receiver and Manager

Once a receiver or manager has been appointed, the next legal requirement is public notification. Section 206 mandates that this appointment be advertised in the Federal Government Gazette and in two national daily newspapers.

This rule serves a critical function: transparency and public awareness. The appointment of a receiver marks a significant shift in control — it means the company no longer has authority over its secured assets. Suppliers, contractors, employees, and other creditors need to be aware of this change so they do not mistakenly deal with the company as though nothing has changed.

By publishing the notice, the law ensures that everyone who interacts with the company is aware that the receiver or manager now acts as the legal custodian of the secured property. This protects both the receiver (from liability) and third parties (from fraud or confusion).

For example, if a company’s warehouse is under receivership, a supplier must not deliver new goods to it without confirming who is in charge. If the receiver’s appointment has been published, the supplier is deemed to have notice — they can no longer claim ignorance.

This public notice mechanism reinforces accountability, reduces disputes, and upholds the credibility of the receivership process.

Section 207 — Preferential Payment to Debenture Holders in Certain Cases

Section 207 deals with a vital question: who gets paid first when a receiver takes control of company assets secured by a floating charge?

Ordinarily, secured creditors (like debenture holders) have first claim to the company’s assets that were pledged as collateral. However, this section introduces a hierarchy of fairness — before debenture holders are paid, the company’s preferential debts must be settled.

Preferential debts are certain statutory or social obligations that the law prioritizes, such as:

  • Unpaid employee wages and accrued leave (holiday remuneration);

  • Pension or retirement contributions;

  • Outstanding tax obligations owed to the government.

Subsection (1) explains that even if the company has not been liquidated (i.e., it is not formally in winding-up), these preferential debts must be paid out of the assets under receivership before the debenture holders receive anything. This ensures that employees and the state are not unfairly left behind while secured creditors recover their money.

Subsection (2) expands this principle by referencing Section 657 of CAMA, which governs how preferential debts are treated during liquidation. Two important adjustments are made here:

(a) “Accrued holiday remuneration” — or payment for unused employee leave — must be treated as payable when employment ends or when the receiver is appointed, whichever comes first. This ensures employees’ entitlements are protected even if they lose their jobs due to receivership.

(b) The calculation of entitlements begins from the date of the receiver’s appointment, not from the date of liquidation. Since receivership occurs before winding-up, this guarantees that workers’ rights are recognized immediately.

Subsection (3) provides for recoupment — if the receiver makes preferential payments (like wages or taxes), those payments can later be reimbursed from the company’s remaining assets once the business stabilizes or other funds become available.

Through this section, CAMA establishes that insolvency is not purely a financial event but also a social responsibility. It ensures that human and statutory obligations are honored even as creditors recover their money.

How Sections 205–207 Work Together

These three sections operate as an integrated system for enforcing secured corporate debts in a way that is structured, transparent, and fair.

Section 205 empowers the court to appoint a receiver or manager when a company defaults or when its conduct endangers a creditor’s security. This ensures that debt enforcement is lawful and supervised, not arbitrary or self-serving.

Section 206 introduces mandatory publication, ensuring that the public, business partners, and creditors are informed about the change in control. This transparency builds trust and protects all parties involved.

Section 207 then deals with the delicate issue of payment priorities, ensuring that even in financial distress, employees and statutory bodies receive their dues before investors or creditors take what remains.

Together, these sections establish a balanced system that protects secured lenders, employees, the state, and the integrity of business transactions. They embody CAMA’s broader philosophy — that the enforcement of corporate debt must not only serve financial justice but also reflect social fairness and economic responsibility.

Conclusion

The Companies and Allied Matters Act 2020, through Sections 205 to 207, gives Nigeria a comprehensive legal framework for debt enforcement under receivership. It ensures that when a company’s finances fail, recovery is conducted with fairness, transparency, and respect for both private and public interests.

Through this structure:

  • Creditors can confidently lend, knowing the law protects their rights.

  • Employees and public authorities are assured that their entitlements come first.

  • The economy benefits from a predictable, just, and humane insolvency process.

For detailed guidance on Nigerian corporate law, insolvency, or compliance processes, visit bahasbooks.com — your trusted platform for clarity on taxation, business structuring, and financial regulation in Nigeria.

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