An analysis of the close-out netting provision under sections 718-721 of the Companies and Allied Matters Act 2020 of Nigeria

The recent Presidential Assent to the Companies and Allied Maters Act, 2020 (‘‘CAMA’’) (the “Act”), has given the business climate of Nigeria a major boost. This Act repealed the Companies and Allied Maters Act, 2004 (the “Repealed Act”). Netting provisions under Sections 718-721 of the Act was one of the new additions to the Act. Netting provisions as it concerns close-out netting will be the centre of this piece, with the aim of discussing the benefits and disadvantage and offering possible recommendation where need be.

Netting is a process by which an exposure or obligation is reduced by combining two or more positions. The value of multiple positions is analyzed and offset, and eventually, the parties that need to be paid and pay are determined. [1]Globally, there is an express provision for netting under International Swaps and Derivatives Association (ISDA) Master agreement to be made in the same currency or otherwise.[2]

There are different types of netting, such as settlement /payment, novation, bilateral or multilateral and close-out netting. 

In settlement netting, the concerned party will aggregate and offset all the amounts it owes/receives, and the difference or the netted amount will be paid to the party with the larger exposure or obligation. In netting by novation, the existing obligation is nullified and replaced with a new obligation. This is typically used in currency transaction. Bilateral netting or multilateral netting is when there are two or more parties involved. When multilateral netting occurs, the parties employ the use of a clearinghouse or central exchange to regulate the transactions and impact of netting and close-out netting. Close-out netting occurs during default of obligations by a party.  

The benefits of netting are enormous, they are listed below, viz a viz:

Netting is used to reduce the risk exposure to a party. For example, if a party owes money on one trade position and is supposed to receive money on another trade position, netting will allow him to reduce the risk of interacting with two counterparties and help him offset the loss with the gains.

Netting also simplifies transactions where multiple parties are involved, netting allows a party to convert multiple parties’ transaction (invoice and accounts) into a single invoice or transaction. If used for foreign currency transactions, netting can reduce the number of transactions generated per month thereby saving transactional cost and also reduces the foreign exchange conversion charge on various transactions. 

Furthermore, in foreign currency exposure, a party can employ exposure netting to hedge the currency risk by offsetting the exposure of one currency with another similar currency. To hedge the risk, the party needs to find the correlation of exposures of the various currencies it transacts in. If the correlation between two currencies is positive, a long-short approach would be feasible (use gains from one currency to offset losses from the other). If the correlation is negative, a long-long strategy would be appropriate.[3]


Close-out netting occurs where, for example, two (2) parties in a lending transaction are indebted to each other to the tune of 10, 000, 000 (Ten Billion Naira). Where A is indebted to Party B to the tune of 4 billion and B is indebted to A to the tune of 6 Billion. If party A goes insolvent, B will net a 2 billion obligation to A.  

The benefit of using the netting provisions outweighs the disadvantages. The notable disadvantage is perhaps excessive payment to a third party during a multilateral netting arrangement. Also, currency interest default may occur, this disadvantage can be mitigated by hedging the currency/ interest and agreement of a base netting currency during netting transactions.

In Nigeria, the repealed Act did not have any provision for close-out netting. Under the repealed Act, certain agreements related to netting are governed by the insolvency law upon default and suffered unenforceability. Close-out netting is contained under Sections 718 – 721 of the Act. Specifically, S.721 of the Act states that the provisions of a netting agreement are enforceable in accordance with their terms, including against an insolvent party, and, where applicable, against a guarantor or other person providing security for a party and shall not be stayed, avoided or otherwise limited by: (a) the action of a liquidator; (b) any other provision of law relating to bankruptcy, reorganisation, composition with creditors, receivership or any other insolvency proceeding an insolvent party may be subject to; or (c) any other provision of law that may be applicable to an insolvent party, subject to the conditions contained in the applicable netting agreement..[1]

Under the repealed Act, parties could not claim until creditors with superior ranking have had their obligations satisfied. However, under the Act, such netting provisions are now enforceable and free from insolvency hard rules of pari passu, fraudulent preference, disclaimer of onerous contracts, etc. Derivatives transaction similarly suffered enforceability of obligations under the Repealed Act.  Thus, the birth of the Act is a major barrier to the development of the derivative market in Nigeria and enabled commencement of enforceability of netting obligations. 

The commencement of netting regime in Nigeria is triggered by the actual commencement of insolvency proceedings against counterparty.[2] Therefore, parties who use market-based performance measures of the counterparty to track the counterparty’s solvency and market stability may rely on their actual knowledge or reasonable suspicion of looming counterparty insolvency to activate their early termination rights; However, such party cannot trigger close-out netting on account of early termination but wait for the actual commencement of insolvency proceedings or commence it before closing out. Evidently, these provisions have enabled certainty and credibility in transactions and creditors under a netting arrangement will now have super-priority on the asset of the insolvent party.

Conclusively, the enactment of the Act is a very big step in ensuring the protection of counterparties in transaction, it assures protection of interest upon default and this has also brought financial transaction in compliance with ISDA global standard which will further deepen the derivatives market in Nigeria and help identify Nigeria as a global financial and business destination.