Balance Sheet Restructuring in Public Companies: Applying Share Premium to Eliminate Accumulated Losses Under CAMA 2020

Publicly listed companies in Nigeria occasionally face the challenge of accumulated losses that distort their balance sheets, restrict dividend declarations, and complicate capital-raising or restructuring initiatives. A lawful and effective response to this challenge is to apply part of the share premium account to offset accumulated losses — a process that can be implemented under CAMA 2020 through a Court-sanctioned Scheme of Arrangement. Although sometimes misunderstood, this mechanism is firmly grounded in the statutory framework of CAMA 2020, and its use is actively being examined within regulatory circles as a legitimate form of capital reorganisation, with the SEC engaging issuers and advisers on the statutory basis and safeguards.

1) The Legal Architecture
Section 145(4) of CAMA 2020 lists recognised applications of the share premium account (bonus issues, writing off preliminary and issue expenses, and providing for redemption premiums). The section uses the permissive ‘may’, which indicates the list is not exhaustive and should be read together with the Act’s broader capital-maintenance and reorganisation machinery. Section 133 empowers a company, by special resolution confirmed by the Court, to reduce its share capital. In Nigerian corporate practice, share premium is treated as part of paid-up capital for purposes of a court-approved reduction. Sections 715 and 716 establish the Scheme of Arrangement mechanism, which once sanctioned by the Court, becomes binding and provides the instrument of authority to implement the capital reorganisation — including any reclassification of share premium to negate accumulated losses. Where a public company’s Articles expressly authorise reduction or reorganisation of share capital/premium (subject to law and necessary consents), the constitutional position aligns with the statutory route.

2) Why the Scheme Route Works for Public Companies
For listed issuers, a Court-sanctioned Scheme of Arrangement (subject to SEC review and NGX disclosure rules) offers a transparent, creditor-sensitive, and shareholder-protective framework to clean up historic losses without any cash distribution. The transaction is a reclassification, not a distribution; total equity remains unchanged as the debit in accumulated losses is neutralised by a debit to share premium. The process includes built-in safeguards, transparency through SEC and NGX review, and full disclosure to shareholders and creditors.

3) Typical Process & Timetable
·       Board approval of the proposed reorganisation and scheme structure.

·       Regulatory engagement with the SEC for a ‘no-objection’ to convene meetings.

·       Application to the Federal High Court to convene shareholder and creditor meetings.

·       Scheme meetings and approvals by statutory majorities under Section 715(2).

·       Petition to the Court for sanction and post-sanction filings with the CAC.

·       Announcements to the NGX and completion of statutory filings.

4) Directors’ Duties, Creditor Protection & the Court’s Role
Directors must act in good faith and for proper purpose, ensuring that the scheme addresses a genuine capital issue and advances the company’s interests as a whole. Creditors are protected because no cash leaves the business and total equity is unchanged. The Court’s review focuses on procedural compliance, class fairness, and the overall fairness of the scheme to affected stakeholders.

5) Accounting & Disclosure Considerations (IFRS-Aligned)
The entry is within equity (debit share premium; credit retained earnings), not through profit or loss, so EPS and profit remain unchanged. It does not create distributable profits artificially; it simply clears legacy deficits so that future profits can be distributable. For transparency, issuers should show before-and-after balance sheets and explain that there is no impact on cash.

Explaining ‘Past Losses Are Eliminated in Equity’
When we say that past losses are eliminated in equity, we mean that the company is not generating new profits or cash but simply reclassifying figures within its equity section. For example, where a company has accumulated losses shown as a debit in retained earnings, it may debit its share premium by the same amount and credit retained earnings to remove that negative balance. This neutralises the deficit without changing the total shareholders’ funds — total equity remains the same, but its composition changes. The process does not affect profitability or cash flow and is intended solely to restore balance sheet flexibility and transparency for future operations.

6) Interaction with SEC & NGX Requirements
The SEC typically reviews the statutory footing, disclosures, financial effects, fairness considerations, and explanatory statements to shareholders. The NGX requires timely announcements, including board approvals, meeting notices, and Court sanctions, ensuring transparency and market confidence. The current dialogue between regulators and issuers seeks to harmonise CAMA’s capital-maintenance framework with practical balance sheet management.

7) Commercial Rationale & Shareholder Value
·       Restores balance sheet credibility and improves key ratios.

·       Unlocks the ability to declare dividends once future profits are earned.

·       Enhances investor perception and access to financing.

·       Demonstrates proactive governance and sound financial management.

8) Conclusion
A Court-sanctioned Scheme of Arrangement that applies part of a public company’s share premium to eliminate accumulated losses is consistent with CAMA 2020, when grounded in Sections 133, 145, 715 and 716 and supported by the company’s Articles. It represents a lawful and transparent reclassification within equity, not a distribution of profits or capital. As regulatory engagement continues, this framework provides a clear and credible path for Nigerian public companies to realign their balance sheets, strengthen investor confidence, and position themselves for sustainable growth.

This article is for general information only and does not constitute legal advice. Specific transactions should be assessed on their facts, constitutional documents, and applicable regulatory requirements.