Rescuing a failing business

The headquarters of Uganda Telecom in Kampala. To prevent its liquidation, government placed UTL under the administration of URSB registrar to stabilise the company. PHOTO BY Michael Kakumirizi

What you need to know:

Several businesses have run into trouble, forcing them to shut down yet their end could have been avoided. Taking Uganda Telecom’s case, Eronie Kamukama explains how a business on the verge of collapsing can be salvaged.

The number of companies winding up in Uganda are on the rise. But why would a country that is very good at starting businesses be the first to bury them? The reasons are many with Private Sector Foundation Uganda saying that business people lack the knowledge and grit critical for business success. Some businesses are closing because owners are abandoning an idea or an expected deal failed to materialise. Management issues, external factors such as hard economic times and indebtedness are eating up these businesses. Uganda Registration Services Bureau (URSB) reports that companies shutting down because of the former reasons are many and for the latter (insolvency) are fewer but real.

What is insolvency?
Insolvency is the inability of a debtor to pay his debts as and when they are due.
“Insolvency is a reality, we are not theorising it. Look at Uchumi, Nakumatt and Uganda Telecom,” URSB’s liquidation manager Mr Mustapher Ntale says.

Sometimes URSB knows when a business is at risk of defaulting on its debts but this doesn’t come easy.
“This is because we do not regulate your day to day operations, what you pay out and your creditors. A company files its annual returns and as far as we can go, is to require those audited books,” Mr Ntale says.

Insolvency helps to put a redeemed asset to better use and in turn do a better job for the economy. But insolvent businesses are still an issue for economies. Not only do they affect businesses that feed off them such as suppliers, bankers, landlords and employers but they take some down too.

Signs
Mr Charles Ocici, Enterprise Uganda executive director, said in an insolvency conference recently that there are tell-tale signs that a business is in trouble and is headed for insolvency. He actually has a checklist. For some businesses, fire-fighting to make payments of maturing bills becomes routine.

You wake up every day to get the best explanation to the landlord on why you need to postpone rent payments. You are telling suppliers to wait a little bit as you await money from the bank. Your taxes are due and you are wondering if you can dodge the taxman.
“If you are fire-fighting, you have lost vision, leadership for your business and you are no longer concerned about the customer. You are thinking about costing one day at a time and if you are in this situation, every day you are digging a grave for burial,” Mr Ocici says.

With time, you lose good accounts of suppliers and you remain unbothered. You lose key staff not because they got a better job but because they cannot withstand the state of affairs. The number of your customers, especially the loyal ones, begins to dwindle.

Meanwhile, the cost of financing your business also escalates and you move from cost-free supplier credit to suppliers not providing anything until you pay cash.
“If your cost of financing is going up because your suppliers are saying ‘to hell with you,’ it goes up because you have left Stanbic bank which lends at about 20 per cent and gone to a microfinance which lends at 32 per cent, look for a lawyer and an accountant to fix the obvious. Cost of financing should be getting lower and cheaper to get overtime,” he says.

Finally, your language gives you away. You prefer to talk about the past and no longer about the future. Now under, you apportion blame to your competitors other than appreciating and learning from them.
In this situation, a business can file for bankruptcy, liquidate the company and wind up under court supervision.

Rescue options
But URSB, despite the collapse of many businesses, has been optimistic saying going to the grave is not always necessary for businesses. There are options to rescue businesses if the business owner accepts there are problems to be fixed.
Mr Ntale stressed the importance of administration the moment a company realises it has financial difficulties.

A company is placed in administration when its directors are of the opinion that the company is insolvent or likely to become insolvent. Administration is a formal insolvency procedure in which an insolvency practitioner or the Official Receiver is appointed as the administrator of the company. A provisional administrator, is appointed to manage the company in the interim. He exercises his power to ensure the survival of the company and a more advantageous realisation of the company’s assets than would be effected in liquidation.

The company applies for an interim protective order from court. The insolvency practitioner comes up with an action plan which if approved by creditors and executed by the company marks commencement of administration.
The administrator supervises the implementation of the action plan. The company is returned to the shareholders at the end of administration.

Other companies that run into trouble
UTL is not the only renowned company to run into trouble. Telecom operator Vodafone’s small subscriber base and high business costs left it ailing.
Recently, Construction Company Spencon Services Limited collapsed into receivership.
Supermarket chains Nakumatt and Uchumi were other casualties only that they closed shop. They were financially bleeding.

Bonus of administration
The advantage of being placed under administration is that legal proceedings against the company are unacceptable.
“An interim order affords the company protection for a period of time. So creditors cannot launch proceedings, against the company to cover debt or attach assets and petitions to wind up the company,” Mr Ntale says.

For instance, a case in which UTL was asked to pay up to Shs20b was dismissed after court was informed that the telecom is under administration.

It is easier to access financing even from people who are creditors during insolvency. Because the law on insolvency spells criteria on paying creditors, if you do not embrace insolvency proceedings, the more money one pumps in your business, the riskier it gets for you. If you embrace insolvency proceedings, the money you receive after insolvency is not part of the liabilities and therefore it has to be paid.
“It is easier for you to draw a line. These debts that you accrued before you appeared before court and admitted to insolvency will be handled in accordance with applicable laws so you can ask for a loan which you will pay and that is permissible,” Mr Ntale explains.

There is also a possibility of negotiating with creditors on how much they can part with. It also gives an opportunity to investigate the affairs of the company such as poor management or fraud.
“Some of these issues may not be properly investigated if the people responsible for those actions are still in charge of the company,” Mr Ntale says.

Downside
However, the downside is that for some contracts, insolvency can be reason for termination. This spills over even in the Public Procurement and Disposal of Public Assets Act which excludes insolvent entities though some insolvency practitioners believe this should only apply if a company is headed for liquidation. Internally, if a company is placed under administration, it is possible that it could slide into liquidation especially when proposals presented to creditors are fruitless.

As a business makes considerations, Mr Ntale advises that it is important to detect financial problems in the earliest stage possible and remedial action is critical because by the time you bring on an insolvency practitioner, you find that there is nothing much to reverse.

Businesspeople need to review the market conditions, according to him, because at times the reasons for failure are not necessarily internal.

In relation to that, companies must understand the causes of their financial difficulties and look into the available options.

Mr Ntale advises, “Even if the options would not work, the burden of business is always higher than a business which has closed. Even if a business is to end up in liquidation, you need money in the process as well. If you know a business has no future, it may be better to alert the stakeholders at the earliest stage.”

UGANDA TELECOM’S CASE
Take for instance Uganda Telecom (UTL) which was once a renowned brand. With 18 years on the market, it is part of the telecom companies that revolutionalised how Ugandans communicate. When it was launched on the market, it introduced mobile voice calls and another range of services including data products and a mobile wallet service came along the years. But as years went by, UTL fell far behind its competitors MTN and Airtel which offered similar products and services.

In 2015, Uganda Communications Commission (UCC) noted the company’s liabilities had exceeded its assets. It was choking on debt, more than Shs500b reports show. Its employees were stealing from it too. The final straw was after Libyans who owned majority stake through UCOM quit early 2017, leaving behind a management crisis.

To prevent its liquidation, government placed UTL under the administration of URSB registrar general Mr Bemanya Twebaze. His job was to stabilise the company and find investors to save it.

Six months under URSB, bids from buyers were solicited. In January 2018, government called for expression of interest for UTL’s acquisition. In October 2018, it handed it over to Nigerian firm, Taleology.
“The company is up and in better shape,” Mr Ntale says.

In April 2017, UTL’s liabilities stood at Shs709b, assets at Shs148b, network availability at 75 per cent, wage bill at Shs2b and revenue at Shs4.28b. Today, liabilities stand at Shs536b, assets at Shs306b, network availability at 97 per cent, wage bill at Shs1.09b and revenue at Shs4.5b.
“Since its administration, UTL’s liabilities have been reduced by 24 per cent. Its asset value grew by 51 per cent, network availability improved by 22 per cent, wage bill reduced by 45 per cent, cost of internet to government agencies reduced by 76 per cent and company revenue increased by 5 per cent,” Mr Ntale says.

Why some businesses fail
Inadequate cash flow. Businesses must bring in money to pay their dues.
“But many are not generating enough cashlow to float,” Mr John Kakungulu Walugembe, the executive director of Federation of Small and Medium Enterprises.
Poor book-keeping and financial management. If a business can not track its income and expenditure, it becomes a challenge to continue operating.

Administration
Administration is one of the rescue measures of saving a failing business. Here, an external person is appointed to take charge with the view of returning it to profitability.
During administration, you should detect the problem early. Review the business prospects or market conditions and understand the root causes of financial difficulties.
During administration, you should detect the problem early. Review the business prospects or market conditions and understand the root causes of financial difficulties.

Insolvency law
The 2011 Insolvency Act, does not consider bankruptcy and insolvency as a sign of failure but an opportunity for rehabilitation of distressed individuals and companies.