Business recovery: Rescue options for financially distressed companies  

Stanbic bank recently took over assets of oil marketing company Mogas Group over outstanding loans.
According to Stanbic, Mogas has been a client of Standard bank group and multi-borrowed across several jurisdictions including Uganda. 
Stanbic bank is now leading the asset as a last resort after protracted negotiations over the last three years. Mogas has been placed under receivership until all the debt is recovered. 

Similarly in 2017, Bank of Uganda took over management of Crane Bank and subsequently progressed it into receivership. The Central Bank later ordered for the winding up of Crane Bank affairs. 
The two scenarios of Mogas and Crane Bank provide anecdotal evidence of business rescue when ‘things go south’ for companies. 
Such companies in financial distress can either be liquidated, or placed under receivership and administration. These legal terms are interchangeably used depending on the severity of a company’s situation.
The idea of business rescue  is aimed at not only saving a failing business but also protecting the creditors’ and third party business interests.  

As Dr Chrispas Nyombi, an international law expert, in his research on Insolvency law, notes that most companies rely on the credit market as a source of finance. 
Such dependence creates a double problem where companies may struggle to survive without access to credit finance and those who facilitate the use of credit risk not being repaid. 

Donald Nyakairu, a partner at ENSafrica Advocates, writes in his guide that business rescue involves undertaking proceedings to facilitate the rehabilitation of a company that is financially distressed by affording it the opportunity to reorganise its affairs and room to fix the issues affecting the business in order to survive. 
This can be achieved through various actions such as cutting expenses, debt restructure, laying off staff and selling non-core assets for the business to continue operating as a going concern. 

Business rescue measures normally keep creditors at bay for the duration of the restructuring process.
Creditors may be required to make certain financial sacrifices, such as accepting a reduction in the debt owed, extending the repayment period, exchanging their debt for equity or any other terms as may be agreed by the parties.  They will nonetheless receive more value than they would have had the business been shut down and are potentially better off with business rescue rather than liquidation.

Uganda Registration Services Bureau  (URSB) is the official receiver on rescuing insolvent companies and individuals by encouraging them to adopt business rescue mechanisms. 
A company is declared insolvent when it fails in its contractual obligations to pay off debts as and when they fall. At this stage, the company may undergo liquidation, administration and or, receivership. 

Liquidation of a company
This is an option available to a business that has no reasonable expectation of recovery and does not foresee any future cash flows. It is the process of selling all assets of a company. 
Nyakairu says liquidation may take the form of a voluntary liquidation, court based liquidation and court supervised liquidation.

 The different modes of liquidation may be initiated by the directors, shareholders, creditors, contributories, or the official receiver as provided under the Insolvency Act.
When a company is liquidated, it ceases to carry on business except as may be required for the winding up of its operations. 

The liquidator takes custody and control of all the assets in the company, disposes of these assets and distributes the proceeds from the assets in accordance with the Insolvency Act.

Mr Mustapher Ntale, director, Insolvency and Receivership at URSB, says this process could be based on several factors such as; the company having achieved its objectives for which it was set up, shareholders losing interest in the business the company was undertaking, or the company may be facing financial difficulties and is unable to continue in business.
“In such cases, the company may be wound up and a liquidator is appointed for this purpose. The liquidator will sell off the assets of the company (if any), pay the debts, distribute any balance to the shareholders and the life of the company will come to an end,” he says. 
A company is deemed officially liquidated once it has gone through any of the modes of winding up mentioned above and has been struck off the register of companies. 

Administration
Administration is an ideal solution as opposed to liquidation, and its an insolvency procedure designed to help a company survive. 
During this process, the company is given ‘breathing space’ within which to re- organise its affairs with an aim of turning around the business to profitability and achieving a better result to the creditors. 
Before administration ensues, the company is first placed in provisional administration and an interim protective order is made. 

The provisional administrator appointed by the company is required to call for a creditors’ meeting to confirm his appointment, and present his proposals towards the future of the company for consideration by the creditors. 
If the creditors by majority vote agree to the proposals, an execution deed is executed and the company goes into administration. If administration fails, the company goes into liquidation, and final dissolution. 
“The decision to liquidate a company may be based upon financial difficulties making its operations almost impossible,” he says. 

Receivership 
Receivership, according to URSB, is a remedy available to a secured creditor to recover amounts outstanding under a secured loan in the event that the company defaults on the loan. 
A company is placed under receivership upon failure to pay an outstanding amount due to a secured creditor. 
The receivership terminates upon satisfaction of the purpose of the receivership or upon a Court Order terminating the receivership.
A receiver usually a lawyer or a law firm, may be appointed under a debenture or a deed creating security over the company assets or by Court.
 
A receiver’s main focus is to realise assets and manage the business of a company for the benefit of the security holder, and conduct investigation on the state of affairs of the property under receivership
Ntale says the powers of directors cease with immediate effect except with the receivers’ approval. 
The directors are expected to make available to the receiver all documents and information relating to the company and to all the property under receivership and give all assistance reasonably required by the receiver. In case a company fails under receivership, it can progress into liquidation.