Commentaries on Companies Regulations, 2021 Published by CAC

Sunday, March 07, 2021 /06:00 AM / By Wole Obayomi/ HeaderImage Credit: KPMG Nigeria

The Honourable Minister for Industry, Trade andInvestment on 31 December 2020 approved the Companies Regulations2021 ("CR 2021" or "the Regulations"),pursuant to Section 4 of the Companies and Allied Matters Act (CAMA) 2020. TheCR 2021, which was published by theCorporate Affairs Commission (CAC or "the Commission"), replaces the CompaniesRegulations, 2012 issued pursuant tothe repealed CAMA, 1990.

The Regulations includes provisions that are aimed atleveraging technology to automate certain CAC's administrativeprocesses, clarifying certaincompliance requirements of the CAMA 2020, and providing a comprehensivegovernance and procedural framework, in line with global regulatory best practices.

We have highlighted below some of the significantchanges in the Regulations as follows:

1. Authentication of Documents

The CR 2021 provides for the automation of CAC's preand post-incorporation procedures in line with the FederalGovernment's mandate of improving theease of doing business in Nigeria. These procedures include electronicauthentication of documents submittedthrough the Commission's web portal, delivery of electronic certifiedtrue copies of documents in lieu ofphysical documents and online real-time update of changes to information alreadysubmitted to the Commission, amongothers.

Please click here to access previous Regulatory Alert in this regard.

2. Minimum Issued Capital

Paragraph 13 of the Regulations mandates all existingcompanies to issue all unissued sharesin their capital before June 30, 2021. The Registrar General of the CAC,in a recent stakeholder sessionorganised by the Institute of Chartered Secretaries and Administrators of Nigeriaon theimplementation of the Companies Regulations 2021, clarified that Paragraph 13 gives effect to theprovisions of Sections 124 and 868 of CAMA 2020 which redefined sharecapital as "issued share capital". Consequently, the concept of "unissued share capital" which derived from the repealed CAMA 1990 and allowed a company to have issued sharecapital that is less than itsauthorised shared capital, has effectively been obviated by CAMA 2020.

Further, Paragraph 13 of the CR 2021 imposes a dailydefault penalty on a company and every officer of the company thatfails to meet the June 30, 2021deadline as follows: N250 for small companies, N500 for private companies limited byshares other than small companies, and N1,000for public companies. It is debatable how the implementation of thedaily default penalty will apply tocompanies that fail to meet the deadline given that the Act did not prescribe anypenalty for non-compliance. Nonetheless, the Registrar General ofthe CAC noted that companies that areunable to meet the June 30 2021 deadline may apply for up to a maximum of2 years extension. It is expected thatthe Commission will issue an official public notice in this regard soon.

3. Turnover Qualifications for a SmallCompany

Paragraph 19 of the Regulations modifies the turnoverrequirement for a "small company" from N120 million stipulated in Section 394 of CAMA 2020 to the turnover prescribed in the Finance Act from time to time (whichis currently N25 million).Though Paragraph 18 of the Regulations seeks to align the definition of a smallcompany in both the Finance Act and CAMA 2020, it is doubtful ifthis provision can be implementedgiven that it amends the provision of the principal legislation, which is inappropriate.

4. Conditional Exemption of ForeignLimited Liability

Partnerships from IncorporationParagraph 25 of the Regulationsprovides that a foreign Limited Liability Partnership (LLP) may apply to theHon. Minister of Industry, Trade and Investment for exemptionfrom incorporation in line with theconditions provided for exemption of foreign companies under CAMA 2020. Theconditions are as follows:

i. The LLP is invited to Nigeria by or with theapproval of the Federal Government to execute any specifiedindividual project;

ii. The LLP is in Nigeria for the execution ofspecific individual loan projects on behalf of a donor country orinternational organisation;

iii. The LLP is owned by a foreign government andengaged solely in export promotion activities; or

iv. The LLP is an engineering and technical expertengaged in any individual specialist project under an approvedcontract with any of the levels ofgovernments or their agencies or with any other body or person.

5. Suspension of Trustees andAppointment of Interim Managers

Section 839 of CAMA 2020 provides that, under certaincircumstances, the Commission may byan Order suspend the Trustees of an association and appoint an InterimManager(s) to manage the affairs ofthat association.

Paragraph 28 of the Regulations provides theconditions that the Commission must fulfil in order to suspend a trustee,namely:

conducting a fullenquiry into the circumstances of the petition against the trustee by the authorisedpersons,
notifying theaffected trustee of the details of the alleged wrongdoings against him/ her per the petitionsubmitted to it by the authorised persons,
giving a fairopportunity to the trustee to respond to any allegation of wrongdoing, and
allowing thetrustee, a period of 30 days or such other period as may be extended by the Commission, whereapplicable, to remedy any wrongdoingestablished against him/ her, in line with provisions of Section 839 ofCAMA, 2020.

The above conditions are necessary to ensure that anaccused trustee is afforded theopportunity of a fair hearing and to discourage frivolous accusations fromauthorised persons.

Further, the Regulations provides guidelines for theappointment of Interim Managers,definition of their functions, powers, administration of duties and reportingobligations following the suspensionof a trustee.

6. Timeline for post-incorporationfiling for Incorporated

Paragraph 37 of the Regulations mandates that allpostincorporation applications for Incorporated Trustees, excluding annual returns, bi-annual statements andmiscellaneous filings, must besubmitted to the Commission within 15 days of the resolution or 28 days forpublished applications.

7. Merger of Associations

Paragraph 35 of CR 2021 provides an implementationframework for the merger ofassociations pursuant to Section 849 of the CAMA, 2020. The framework requiresmerging associations to, in additionto having similar aims and objectives, obtain a resolution of at least 75% of theirrespective members, publicize theapplication for the merger within the prescribed statutory timeline, andobtain a sanction of the scheme from the Federal High Courtbefore the merger can be approved bythe Commission.

The conditions prescribed in the framework, especiallythe approval of themerger by at least 75% of members, align with current global best practices and will ensureprotection of the interests of minority members in the mergingassociations.

8. Revocation of Certificates

Pursuant to the provisions of Section 41 of CAMA 2020,Paragraph 10 of the Regulationsrequires the Commission to publish notices of revoked certificates which wereobtained fraudulently, unlawfully or improperly in the FederalGazette and on its website after the conclusion of a full inquiryby the Administrative ProceedingsCommittee. This will promote transparency and protect unsuspecting investorsfrom investing in companies that arenot lawfully registered to do business in Nigeria.

9. Clarification on persons required todisclose compensation at the Annual GeneralMeeting

Section 257 of CAMA 2020 provides that compensationof managers of a company must bedisclosed to members at the Annual General Meeting. Consequently, Paragraph49 of the Regulations has defined amanager to include, "any person by whatever name called occupying aposition in senior management and who is vested withsignificant autonomy, discretion, and authority in theadministration and management of the affairs of a company (whether inwhole or in part)". This definition clarifies the category of employees noted in Section 257 of the Act.

However, the definition creates another ambiguity onthe interpretation ofthe meaning and import of "significant autonomy, discretion, and authority". It is, therefore, expected that the Commission would provide furtherclarification in its subsequentamendments to the Regulations to prevent potential misinterpretation of thedefinition of this phrase.

10. Model Articles of Association forall types of Companies

Unlike the erstwhile Companies Regulations, 2012, CR2021 provides an extensive governanceframework on the Model Articles of Association ("Model Articles") for private companies, public companies and companies limited byguarantee.

Some of the key provisions of the framework arediscussed under the relevant headers as follows:

10.1 Increased contribution by members of a companylimited byguarantee

The Model Articles has increased the contribution bymembers of a company limited byguarantee from N10,000 to N100,000 in the event of winding up thecompany.

10.2 Directors and their Proceedings

The Model Articles exempts single director companiesfrom therequirement for majority decision at directors' meetings andrecognises written resolutions by eligibledirectors for thepurpose of reaching unanimous decisions. Further, it includes provisions to address conflict of interest for directors, appointment andtermination of directors, functionsand duties of alternate directors, and renumeration and expenses ofdirectors.

10.3 Shares and Distributions

The Model Articles provides a framework for share-basedtransactions, such as powers to issuedifferent classes of shares, shares certificates, company's lienover partly paid shares, call onshares, forfeitures, surrender, share transfers and transmission, dividends and other distributions and capitalization of profits.Notably, the Model Articles providesthat a company's lien will take precedence over third party interest inthat share and shall extend to anydividend or other money payable by the company in respect of thatshare.

Further, for dividend and non-dividend distributions,a company maydecide to pay all or part of a dividend or non-dividend distributions by transferring non-cashassets of equivalent value including,without limitation, shares or other securities in any company, subject tothe terms of issue. Also, recipientsof such distribution may waive their entitlement to a dividend or otherdistributions in respect of a share bynotifying the company in writing.

10.4 Decision making by Shareholders

The Model Articles provides guidelines for generalmeetings, proxies and resolutionswhich include voting by show of hands or by poll, where demanded, andvoting electronically by count ofvoice concurrence for electronic meetings. Consequently, poll votesmay now be demanded in advance toensure that all members participate in decision making.

Further, it provides for the use of ordinaryresolution to amend a special resolution provided that suchamendments do not exceed correction ofgrammars or other non-substantive errors of the special resolution,if the changes are proposed by thechairman at the general meeting of the company.

10.5 Administrative arrangements

The Model Articles contains guidelines foradministrative arrangements ofcompanies, including modalities for communication, use of company seal,inspection of records, provision foremployees on cessation of business, borrowing powers and directors' indemnity and insurance. Consequently,companies are no longer required to have company seals, andwhere they choose to, the directorsmay decide by what means and in what form any common seal is tobe used.

Conclusion

We commend the CAC for the timely issuance of theRegulations following the passage ofthe CAMA 2020. In order to achieve the priorities of CAMA 2020, including a seamless digital transition, the CAC has given registeredentities up till 31 March 2021 to update andregularize their information and compliance status with the Commission. The automationof CAC's processesis expected to expedite regulatory compliance and minimize the administrative costs associated withthe erstwhilephysical storage and processing of documents.

However, there are still grey areas in CAMA 2020 whichwere addressed in the Regulations that can only be resolved by alegislative amendment. For instance,the mismatch between the turnover threshold stipulated for small companies in theAct and Regulations, respectively.Therefore, there may be challenges in the implementation of such conflicting provisionsof the Regulations.

Further, there are minor gaps in CAMA 2020 which maycreate compliance challenges for companies that the Regulations failedto address. These issues include:

The classification and treatment of irredeemablepreference shares issued under the repealed CAMA 1990 given thatcompanies are no longer allowed toissue irredeemable preference shares based on the amendments in CAMA2020.

How the register and data of LLPs created under thePartnership Law of Lagos State, 2009will be recognised by the CAC considering the provisions of CAMA 2020. Willthese LLPs be required to undergofresh registrations with the CAC? Or will the CAC integrate their existing records with the Lagos State into its system?

The timeframe for companies to disclose persons whoheld significant control in theircompanies prior to the commencement of CAMA 2020.

What fines or penalty are applicable to persons whofail to disclose their beneficial ownership/ significant control toinvestee companies based on therequirements of CAMA 2020?

What are the guidelines for companies transitioningfrom small companies with respect to their current regulatoryobligations under the CAMA 2020?

We, therefore, expect subsequent legislativeamendments to the CAMA 2020 and modifications to the Regulations toaddress the above noted gaps and alignboth the Act and Regulations with leading global regulatory practices.

In the meantime, registered entities are encouraged tocomply with the provisions of CAMA 2020 and the concomitantRegulations advancing its provisions,and update their records with the CAC accordingly.

Credits

* Thisstatement was first published in the Issue 3.2/ March 2021 Newsletter of KPMGof Friday, March 05, 2021. For further enquiries, please contact the author, Wole Obayomi via [email protected]