Can administration help in rescuing failing companies?

At the end of 2008, Uganda Telecom (UTL) held a substantial market share in Uganda’s telecom space.

By then, Uganda had over 8.5 mobile subscribers. UTL held a cut throat competition in market leadership in terms of dominance with MTN for mobile and fixed telecom markets.

However, things fell apart in 2011 for UTL, which for long had been the second largest telecom network in the country.

UTL’s troubles can’t be told in a single day. However, as senior lawyer Phillip Karugaba, the head of ENSafrica says, UTL troubles started as far back as 2011, with its performance characterised by heavy indebtedness, decline in market share, losses due to inadequate investment, competition pressures, a dilapidated network and governance challenges.

The telecom’s crisis was further exacerbated by the Libyan crisis, which saw its majority shareholder being sanctioned by the United Nations.

Following protracted negotiations between the Ugandan government and majority shareholders of UTL, the majority shareholder declined to avail further funding.

By 2017, UTL had to pass a special resolution agreeing to make a settlement with its creditors, appointed a provisional administrator and applied for an interim protection order from the court.

These actions effectively placed UTL under provisional administration, and subsequently led to permanent administration.

Mr Karugaba says UTL’s provisional administration was the first of its kind under the Insolvency Act, 2011 and presents a good opportunity to test looming insolvencies.  

In April, the Uganda Registration Services Bureau (URSB) data showed that the number of firms registering for liquidation had risen to 94 in the 2020/2021 Financial Year across the country.

Statistics obtained from URSB further indicate that out of the 94 companies, at least 26 companies have been liquidated, while two are in administration to help them survive their next phase of growth in the FY 2020/2021.

 More data from URSB show that between 2018 and 2020 Financial Years, over 21 companies were liquidated while 13 are currently under administration.

Mr Ntale Mustapher, the director of Insolvency and Receivership at URSB, also notes that more than 150 companies register for liquidation at URSB every year.

There is growing evidence that most Ugandan firms prefer being liquidated to undergoing administration.

Liquidation is a broad term which covers liquidation by reason of insolvency, and voluntary liquidation. The former means a process of selling all assets of a company, while the latter means the inability to pay one’s debts as and when they fall due.

Mr Ntale said in Uganda, the actual insolvency cases are not many. In a year, URSB records less than 10 cases. This low number is explained by the fact that the economy is not really formalised.

“We have so many businesses operating but in an informal way. Therefore many exit quietly. This data is not captured since URSB only considers registered entities.  Unfortunately, the law does not prescribe a penalty,” he says.

Why consider administration?   

Mr Karugaba opines that companies with high debt levels may consider entering into administration instead of completely winding up.

When a company enters provisional administration, a provisional administrator is appointed to take over control and custody of the company’s assets.

According to Ntale, the new Insolvency law states that before an insolvent company thinks about exiting business, the law allows it to negotiate with creditors through provisional administration.

The company must apply to court and get an interim protective order and court provides 30 days and an extension, to protect the insolvent company to allow for negotiations to continue.

The interim protection from court cushions the insolvent company from having their assets attached by creditors or commence any court proceedings or liquidation.

The provisional administrator is required to prepare, and present to the creditors for their consideration and decision, a proposal on how to conduct the administration.

The creditors must then decide to either execute an administration deed, in which case the company goes into administration, liquidate the company or end the administration.

“Initially, there was no protection for the debtor. If the creditors were unhappy with the negotiations, they would take over the assets,” he says, adding: “But now, we have resolutions that a debtor must obtain an interim protection order from court and negotiate with them.”

Profitability

Ntale says through administration, there is an agreement with creditors on the repayment model. This provides time for the insolvent company to reorganise its affairs and perhaps, suspend all payments.  During this process, the company is given breathing space with an aim of turning around the business to profitability and achieving a better result with creditors.

The administrator is required to give the creditors a progress report every six months showing details of receipts and payments during that period and details of the assets that are yet to be realised.

Ntale likens administration to the proverbial jungle law of the lion and antelope chase.

“At times, it is a mindset issue, in most cases, when you look at a company and if you’re to liquidate it. Its like a young antelope which is grabbed by the lions. It is also possible that lions can agree to let the antelope fatten such that each lion can get satisfied.”

Robert Kirunda, senior lawyer and law don at Makerere University, says the benefits of administration can give relief to the creditors and debtors.

 “You can take a break and hand over the management of the business. Let people manage it to good health, pay off the debts and give back your business,” he said.

So far, UTL has shown progress after being under administration for the last four years.

At the beginning of 2020, former administrator of the UTL, Mr Twebaze Bemanya said that through engaging professional valuers, the asset market for the company stood at $84m, a 110 per increase from only $40m left behind by the former management.

He further boasted of having reduced the claims of creditors from $250m to $145m.

The law

The insolvency law also requires that the powers of directors of a company that goes into administration are curtailed. A director and secretary cannot exercise any powers, functions or duties without the administrator’s approval.

 However, in a recent revelation, Nelson Nerima, a senior lawyer and Insolvency practitioner, said administration may fail in case company directors have overbearing influence on the administrator.

Liquidation

Most Ugandan firms prefer being liquidated to undergoing administration.

Liquidation is a broad term which covers liquidation by reason of insolvency and voluntary liquidation.

Mr Ntale said in Uganda, the actual insolvency cases are not many. In a year, URSB records less than 10 cases. This low number is explained by the fact that the economy is not really formalised.