The effect of the Covid 19 pandemic is difficult to imagine and has led to the collapse of many businesses. Others are limping and on the verge of collapse. Jobs have been lost and many more will will lose jobs. Millions of employees are on half pay. The devastation is hard to imagine! Did you know that Uganda’s Insolvency law provides remedies that could actually save your business, create even more jobs and actually revive the economy to thrive once more? This article will give an insight on how the law can be a tool to attract investment, create employment, boost revenue and propel Uganda in the middle-income status despite the ravages of Covid-19 pandemic.
The approach to insolvency all over the world has changed. Previously, if you were an individual and you went bankrupt or if you were a company and you became insolvent, society frowned upon you. It was bad. The law was harsh. People went to jail for it.
The basic idea was that if you are a financial failure, then you are ostracised and everything was done to ensure that whatever debts you had were recovered in the harshest way possible and without preserving any value.
Financial crisis sometimes called insolvency, generally refers to a situation when a debtor cannot meet his/her financial obligations as and when they fall due.
When a situation like this arises, the debtor can either opt to revive the business through administration proceedings for companies and arrangement for individuals or go out of business through liquidation of his assets.
An effective insolvency legal regime, therefore, plays an integral role in liberating productive resources from an unproductive enterprise. This would ensure that creditors and potential investors in other enterprises are protected in the event of business failure.
Now the law has changed. The approach is that it is normal for business to experience financial difficulty. Sometimes businesses suffer because of hard economic times such as the time we are in now where the effects of the Covid-19 continue to ravage economies worldwide including Uganda.
In the year 2011, Uganda passed the Insolvency Act. So, what does the new law bring on table?
The law now provides for avenues for business rescue. The law provides for administrations.
This law has proven important as it serves as a safety net for business activity, ensuring that when businesses face financial difficulties, mechanisms are available to either rescue them or maximise the value realised from their assets through their deployment to more productive firms.
The idea is to assist the business to exist. A sound insolvency system is an incentive and has a direct impact on economic performance.
The Insolvency law is there to say, “Is it a problem of how the business is managed? Did the business use inappropriate funding? Can we give it a new lease of life? Do we need to inject more capital in it? The idea is that we should not always kill a business that is experiencing difficulty..
Insolvency Act 2011
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.
The author is an insolvency and commercial transactions lawyer.