Have you run out of options? …  Just wait

Entrepreneurship requires a high degree of resilience. Business owners need to mitigate risks while meeting consumer demand. Common reasons for small business failure include a lack of funding, inadequate management, faulty infrastructure, and unsuccessful marketing.

Businesses that are on the brink of foreclosure might feel like they have exhausted all of their options and that trying out a hundred different plans as a last-ditch effort is rarely a good plan. 

Business owners can revive and enhance profitability by focusing on incremental improvements rather than resorting to drastic changes.

The delicate global and local macroeconomic situation is expected to prompt many businesses to restructure their financial position and potentially shut down. Small and Medium sized Enterprises (SMEs) are usually taken down by financial distress, which is not an overnight occurrence.
 
Several businesses are dying because they have not consulted on how best they can rise again and survive the harsh business environment. In Uganda,when companies are failing, what are some of the options?

Counsel Waiswa Abudu Sallam, head of legal at the Uganda Communications Commission (UCC), says there are many reasons why businesses are struggling.

This, he says, could result from the fact that, for instance, when you file your application for administration, it could take six months or one year before a judge gives you that protective order. During that time, Uganda Revenue Authority (URA) could attach your property and a bank can sell your property.

“When your business suffers distress, do not disappear. Look for professional advice. Consult business doctors or experts who can advise you on a step-by-step procedure that you should pursue to protect your business from losing value because many of these businesses still have potential. They can continue protecting people and living long, but they are not getting a chance to treat the symptoms that unfortunately end up causing premature death,” Waiswa explains.

Businesses facing operational challenges often explore options for reorganising their operations, highlighting the importance of understanding business rescue procedures. Your business could survive and be protected from creditors through the Insolvency Act.

“Most of these businesses collapse due to financial distress, and because of that, most of the solutions help a business reorganise its operations and financial status.” Waiswa notes. 

For a business on the verge on collapse, informal approaches, like directly contacting the lender and initiating a conversation, often yield positive results, as they may grant a grace period or negotiate what is commonly known as an arrangement or compromise.

However, he quickly notes that while informal negotiation can be effective, it also comes with risks. For instance, while you are in discussions with one creditor, another may resort to more aggressive measures such as seizing assets or selling property, potentially endangering company assets.

This explains why the Insolvency Act 2011 came up with a law for more insolvency and business rescue procedures.  The primary one, known as administration gives the company room to turn around the business.

 “Administration is like a process that allows a failing business to go into a state where an independent professional called an insolvency practitioner is appointed to oversee the management of that company, and during that time, the company’s assets are protected from all creditors,” Waiswa elucidates.

He reveals that it is better to appoint an administrator rather than a receiver or liquidator because liquidators don’t help the business grow.
 According to the Insolvency Journal of Uganda, Vol. 1, 2023, by the Uganda Registration Services Bureau (URSB), there is considerable evidence that the field of insolvency, especially as it relates to legal entities, is topical more than ever, largely because the failure of legal entities causes significant damage to the economy and results in increased sovereign credit risk. To prevent future repeats, regulators respond via several channels.
It further indicates that the Insolvency Act 14 of 2011 (as amended), Laws of Uganda, is one such response, providing for both individual and corporate insolvency and rescue mechanisms such as receivership or administration. The Act also provides for the regulation of insolvency practitioners and cross-border insolvency.

Change business focus
Ms Mercy Kainobwisho, the Registrar General of the Uganda Registration Services Bureau (URSB), says in most cases when you start a business and register it, you look forward to its growth and survival.

 She notes that it is crucial to change your business focus. For instance, there may be a business for technology or a business support structure for the next five years. This implies that after the next five years, you would want to construct. This calls for continuous research and having a business plan.

 “Many business owners start small and start struggling, but they also start a YouTube channel and can pick up,” Kainobwisho explains, noting that this implies that you ought to have had a business plan before starting your business. 

The registration services bureau is in charge of insolvency and business rescue. This is filled with a team of different practitioners who can help you understand your business.

These, she says, can advise if a business is overly ambitious and expanding. The team will understand that it is overwhelming for you, and advise you to concentrate on a few branches to get a return on your investments.
Mr John Walugembe, executive director of the Federation of Small and Medium Enterprises, concurs that a business in distress can hire new managers because it might be an internal problem that is leading to the failure of the business.

 “You can either hire new managers or they can look for private equity investors who can come in with new management to kind of turn things around,” Walugembe says.
 In addition, looking for finances in the form of loans can help the business stay afloat. 

Changing business models
Walugembe adds that business owners can shift their current model by identifying strengths and weaknesses, adopting new strategies such as e-commerce, and offering different pricing. Businesses in distress can opt for a merger.

“Merging with a competitor offers cost-effective growth, increased market share, and competitive advantages, making it a viable alternative to shutting down a business,” he notes.

Winding up a business  
Winding up is the process of dissolving a business by selling off its assets and satisfying the creditors from the proceeds of the sale. A company may wind up for different reasons amongst which are insolvency, upon satisfaction of its objects under the Memorandum, but whatever the reasons, legal procedures need to be undertaken to minimise the risk to your personal assets, estate, and credit. 

The Insolvency Act and Regulations provide corporate bodies that have declared insolvency with mechanisms aimed at rescuing the business from its inability to pay its debts. Some of these mechanisms are aimed at enabling the company pay its debts to continue being operational, while others are aimed at enabling the company to pay its debts so that it can safely be shut down or de-registered.

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