Save that business on the brink of collapse

Tuesday April 20 2021
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Traders in downtown Kampala. Several businesses came face to face with dropped sales while others closed as a result of the Covid-19 pandemic. PHOTO/Alex Esagala

By Lydia Namono

In the throes of an unprecedented disruption, thousands of businesses have closed permanently. 

Sectors such as education, hospitality, tourism, entertainment, and main-stream businesses have suffered the wrath of the Covid-19 pandemic. While some businesses have thrived, others have wound up for good.

When Uganda confirmed her first case of Covid-19 in March 2020, several businesses experienced both supply and demand shocks.

Limited international trade and unemployment pegged to employee lay-offs, low industrial production, low tax revenue collection, drastic closure of businesses triggered by the pandemic literally shook the economy.

Preventive measures intended to contain the spread of the Covid-19 pandemic such as the  lockdown, social distancing, curfew hours, border and transport restrictions, closure of working premises for companies, and quarantine were instituted immediately. Much as these measures have largely contained the spread of the pandemic, they have negatively affected business progress. 

Some businesses and companies have halted operations, increased operating expenses, downsized their employees causing unemployment, and borrowed more money to increase liquidity, which may lead to insolvency if poorly handled.

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But what kind of recovery mechanisms can businesses use to manoeuvre through these hard times? 

Much as company closures may be inevitable in some circumstances, watching dreams and efforts go down the drain is unbearable especially where the company can be given opportunity to thrive through formal corporate rescue mechanisms.

But is closure, informal liquidation of the company and business the best option when the law provides for corporate rescue mechanisms to breathe life back to financially ailing and distressed businesses?

Mr Mustapher Ntale, the director Insolvency & Receivership at Uganda Registration Services Bureau (URSB) - the official Government receiver charged with administration of insolvent companies, says corporate rescue mechanisms under the insolvency laws of Uganda are an alternative to liquidation that keep financially distressed companies afloat to avert their eventual failure.

“Corporate rescue mechanisms are therefore strategic, formal rescue approaches applied to a distressed and financially ailing company aiming at achieving its preservation and sustenance after a difficult time,” Mr Ntale says. 

Turnaround plan

A business can turnaround through undergoing Administration as opposed to liquidation. Here, an administrator is appointed to manage the daily affairs of the company with the aim of turning it around. 

Under the Ugandan insolvency laws, corporate rescue entails; provisional administration, administration and voluntary corporate arrangement. Provisional administration and administration are formal processes where, a provisional administrator or  administrator who is required to be an insolvency practitioner is appointed by the company or its creditors or court to manage the distressed company for an agreed period, with an arrangement on how to settle creditors and fulfill company duties owed to other stakeholders during its difficult time.

Provisional administration is started by a company special resolution that proposes to the creditors, the need to enter a settlement to cover their respective debts. The company then petitions Court for the grant of an interim protective order which ringfences all the company’s assets against creditors’ recovery actions.

The appointed provisional administrator assumes duty to prepare and present the settlement proposal for approval by the creditors. Where the creditors approve the settlement proposal, an administration deed is executed by the company and the administrator. The administration process then commences once the administration deed is executed and the Administrator appointed by the administration deed takes over the management and control of the company with a view to return it to profitability. The administrator is required to implement the administration deed, make periodic progress reports on receipts, expenditures, company assets status, and creditor settlement status. By this far, the funds to run the company during administration are derived from the usual sources it was deriving its revenue before the administration. 

Administration can be terminated by the creditors, or administrator, or liquidation process to wind up the company. Where the company undergoes administration successfully, the company continues to trade and operate in the economy as a going concern. In instances where the company administration is unsuccessful, the company commences liquidation process.

Administration saves jobs, promotes rehabilitation for the troubled companies, protects interests of the stakeholders and the economy at large. Further, administration gives the company breathing space during which the administrator performs corporate rescue duties. During administration, creditors are prohibited from initiating legal and alternative insolvency proceedings against the company.

The pandemic’s impact can be mitigated by businesses and companies through corporate rescue mechanisms.

“Drastic decisions to close may not be viable, especially if informally conducted out of panic yet businesses and companies can be granted opportunity to float and thrive in their difficult times through formal corporate rescue mechanisms,” Mr Ntale says.

 Use liquidation as last resort

According to Roland Kokasi Odinga, an insolvency and commercial transactions lawyer says liquidation should be the last resort.

Liquidation is a situation where a business would seek voluntary winding up or is wound up by an order of court for failure to meet its financial obligations when they fall due.

“There will be struggles financially. There will be business failures. But the most important thing is to take lessons from that situation, ensure preservation of value and avoid asset stripping,” Mr Odinga says.

Recovery plan

Administration versus liquidation.

A business can turnaround through undergoing Administration as opposed to liquidation. Here, an administrator is appointed to manage the daily affairs of the company with the aim of turning it around. 

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