On 21st September 2018, the same week that bankers and regulators across the world were examining the lessons learnt from the Lehman Brothers’ collapse a decade after and the challenges ahead, the Central Bank of Nigeria (CBN) withdrew the operating license of Skye Bank Plc and mandated that its assets and liabilities be taken over by Polaris Bank – a newly licensed bridge bank set up by the CBN to manage the affairs of the defunct Skye Bank until its subsequent sale to credible and financially sound third-party acquirers that will assume control of its assets and liabilities. Owing to the intricate nature of corporate restructuring – especially that adopted by the CBN for Skye Bank, many media houses and commentators have unwittingly categorized it under various heads of corporate restructuring, all of which bear no semblance with what actually happened with Skye Bank under the relevant Nigerian legal framework. This intervention seeks to demystify the corporate/legal intricacies surrounding the withdrawal of Skye Bank’s operating license vis-à-vis the coming of Polaris Bank.
Reports have it that the trouble with Skye Bank started when it decided to acquire Mainstreet Bank, a nationalised bank sustained by regulatory oxygen in 2014. Worse still, the directors of Skye Bank surprised financial experts by agreeing to pay N126 billion for a bank with net asset value of N59 billion. This turned out to be a calamitous business deal as the acquisition triggered a gradual and steady decline in the financial condition of Skye Bank. There were also reports that the bank’s erstwhile Chairman and shareholder, Mr. Tunde Ayeni, and another director/shareholder, Dr Festus Fadeyi, had borrowed heavily from the bank. Whilst Ayeni and his partners were alleged to have taken loans to fund their acquisitions of the Ibadan and Yola Electricity Discos, NITEL/M-Tel, and an energy services firm, Ascot Offshore Nigeria Limited respectively, Fadeyi, through Pan Ocean, took loans to fund the firm’s oil and gas upstream projects operated under Joint Operating Agreements and Production Sharing Contracts with and on behalf of NNPC.
Consequently, the Bank had a low liquidity ratio and was unable to meet its financial obligations. Meanwhile, the CBN had in its Monetary, Credit, Foreign Trade and Exchange Policy for fiscal years 2016/2017 required commercial banks to maintain a minimum liquidity ratio of 30%. With the towering bad loans and recurrent losses, Skye Bank struggled to meet the 30% benchmark. Thus, it was placed on the regulatory oxygen of CBN through liquidity support from the apex bank.
The persistent decline in the bank’s financial health led to the intervention of the CBN on 4th July 2016, with the sacking of the Chairman and all Non-Executive Directors on the Board as well as the Managing Director, Deputy Managing Director, and the two longest-serving executive directors on the management team.
To this situation CBN stated: “These proactive moves have become unavoidable in view of the persistent failure of Skye Bank Plc to meet minimum thresholds in critical prudential guidelines and capital adequacy ratios, which has culminated in the bank’s permanent presence at the CBN Lending Window. In particular, Skye Bank’s Liquidity and Non-performing loan Ratios have been below and above the required thresholds, respectively, for quite a while”.
There are times when the liabilities of a company are in excess of their assets, thus the need to restructure, reposition or re-organize. This is known as corporate restructuring. Corporate restructuring is, thus, the reorganization of the legal, operational, ownership or other structures of a company. Corporate restructuring options can either be internal or external or a combination of both. The option to adopt is usually a product of business decisions and legal exigencies. Internal restructuring involves the company along with its members or creditors while external involves the company and other third parties. Example of internal restructuring include arrangement on sale, arrangement and compromise, management buy-out, reduction in share capital, share reconstruction/consolidation. External restructuring options, on the other hand, include mergers and acquisition, takeover, purchase and assumption et cetera. Whichever method of corporate restructuring a company chooses to adopt, a key thing to keep in mind is that it is usually governed by the provisions of the Companies and Allied Matters Act, Investment and Securities Act, Securities and Exchange Commission Rules and Regulations, Federal High Court Civil Procedure Rules and other sectoral laws. Of all the corporate restructuring options identified above, the one that concerns us most is purchase and assumption, otherwise known as P&A.Purchase and Assumption (P&A) is an external restructuring option which aims at rescuing investments in a moribund or failing company. This involves another company purchasing the assets of a failing company, usually at an auction price, and assuming its liabilities. It is usually effected through a duly executed Deed of Purchase and Assumption executed by the parties and the resolutions approving the transaction or government white papers in the case of government corporation purchased and assumed by a regulatory agency such as CBN, NDIC or AMCON. An application must be made to the Federal High Court (FHC) for the P&A to be sanctioned. The deed and other documents for the perfection are filed along with the processes at the FHC. The use of the deed makes it easy to transfer assets which are legal interests in land.
Thus, P&A reduces the loss of investment by allowing another company or investors to purchase the liabilities of the failing company and assume ownership of its assets, usually at an auction price. The assumed company does not go through the formal winding up process but is dissolved through a judicial sale of its assets and liabilities to the purchasing company. It must be noted that here all the liabilities of the failing company are taken which is a major difference between P&A and Cherry picking. Some of the variations which P&A may take include:
- Whole Bank P&A
- Partial P&A
- Loss sharing P&A
- Bridge Bank
Again, of all the variations of P&A, the one that is most relevant to our discourse is bridge banking, hence a detailed consideration of same below.
It is apposite to properly demystify what the concept ‘bridge banking’ entails. A bridge bank transaction is a type of P&A in which the deposit insurer acts temporarily as the acquirer. It is a new, temporary, full-service bank, designed to “bridge” the gap between the failure of a bank and time when the deposit insurer can implement a satisfactory acquisition by a 3rd party. The original bank is closed by the authority and placed in receivership. Bridge bank is operated for a limited time period, with provision for limited extensions, after which time it must be sold or otherwise resolved. Bridge bank is especially useful where a failing bank is large or unusually complex. Before establishing a bridge bank, a cost analysis must show that the estimated operating cost of the bridge bank is less costly than a payoff. The use of bridge banks has played a key role in the resolution of bank failure in Korea and Japan. The USA had used bridge bank 10 times between 1987 and 1994 by creating 32 bridge banks for 114 separate institutions. Following reforms in the banking sector, Nigeria adopted the bridge bank model in 2011 when Mainstreet Bank, Keystone Bank, and Enterprise Bank, newly incorporated bridge banks, assumed the assets and liabilities of Afribank Nigeria, Bank PHB and Spring Bank respectively. When discussing bridge banking within the Nigerian banking landscape, two enactments readily come to mind viz, Banks and Other Financial Institutions Act (BOFIA) and the Nigerian Deposit Insurance Corporation (NDIC) Act. Section 12(1) of BOFIA provides:
- The Governor may, with the approval of the Board of Directors and by notice published in the Gazette revoke any licence granted under this Act if a bank
- ceases to carry on in Nigeria the type of banking business for which the licence was issued for any continuous period of 6 months or any period aggregating 6 months during a continuous period of 12 months;
- goes into liquidation or is wound up or otherwise dissolved;
- fails to fulfil or comply with any condition subject to which the licence was granted;
- has insufficient assets to meet its liabilities;
- fails to comply with any obligation imposed upon it by or under this Act or the Central Bank of Nigeria Act, as amended.
In the same vein, Section 39(1) of the NDIC Act provides:
The Corporation, in consultation with the Central Bank of Nigeria, may organise and incorporate, and the Central Bank shall issue a banking license to one or more banks, to be referred to as bridge banks which shall be insured institutions to assume such deposits and/or liabilities, and shall purchase such assets of a failing institution and perform any other function or business as the Corporation may determine.
In Nigeria, the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) administer the deposits and liabilities of a failed bank. Under the arrangement, the NDIC is authorized to operate a failed bank for a period until a buyer can be found for its operations. When in the opinion of CBN, an NDIC insured bank is in financial trouble, the CBN and NDIC may establish a bridge bank to:
- Assume the deposits of the closed bank;
- Assume such other liabilities of the closed bank as the Deposit Insurance Corporation may determine to be appropriate;
- Purchase such assets of the closed bank as the Deposit Insurance
Corporation may determine to be appropriate; and Perform any other temporary function which the Deposit Insurance Corporation may prescribe in accordance with this Act.
Bridge banks are authorized to seek to liquidate failed banks, either by finding buyers for the bank as a going concern or by liquidating its portfolio of assets, within two years, which can be extended by an additional year. Should the bridge bank fail to wind down its operations within the allotted time, the bridge bank must notify the Governor of the CBN of its intent to dissolve the bridge bank. Under this situation, the NDIC is appointed as the receiver of the bridge bank’s assets.
The bridge bank may also be prematurely terminated if any of the following occur within its limited lifetime:
- The merger of its assets with that of an insured institution that is not a bridge bank;
- The sale of a majority of its equity to any person other than another bridge bank or the NDIC;
- The assumption of all or substantially all assets or deposits and other liabilities of the bridge bank by an insured institution that is not a bridge bank;
- The dissolution of the bridge bank by the NDIC before the expiration of the two years or additional year.
Having demystified the corporate/legal intricacies surrounding the withdrawal of Skye Bank’s operating license vis-à-vis the coming of Polaris Bank, it is apposite to conclude that the incorporation of Polaris Bank to assume the assets and liabilities of Skye Bank is an archetypal example of a Purchase and Assumption. Consequently, Skye Bank was dissolved through a judicial sale and became a no going concern whilst the depositors’ monies were protected by the assumption of their NDIC-insured deposits by Polaris Bank. This is the result of the return match between CBN and Skye Bank and a predictable result for any under-capitalised bank that defies every attempt at resuscitation.
Umar-Faruq Hussain and Olayanju Phillips are law graduates based in Nigeria .