The corporate world in Ghana is about to witness a significant transformation in the options available to rescue distressed companies. Under the new Corporate Insolvency & Restructuring Act, 2020 (Act 1015), companies have now been presented with an opportunity to emerge from financial distress to financial viability if they act dutifully and responsibly within the new legal rules on administration.
From the days of the Gold Coast, Ghana has always recognized the fundamental principle of company law that the company is a legal person whose existence is distinct, separate and independent from those who birth and direct the affairs of the company. A company was, therefore, responsible for its own debt. Where a company defaults on the payment of its debts and liabilities, the remedy available under the law has been to obtain judgment and attach the assets of the company in satisfaction of the judgment debt. Additionally, creditors, owners and the Registrar of Companies can exercise the option to put the company into liquidation. That was the state of the law until 30th April, 2020, when for the first time in corporate history in Ghana, the law ushered in the era of corporate administration which provides the option of rescuing a distressed company.
The introduction of administration is in line with the development of insolvency and bankruptcy laws in other jurisdictions, where the emphasis is not on “killing off” companies in distress through outright liquidation but on providing viable but distressed companies with a chance of survival through corporate rescue measures. The motive behind administration is that not all financially “sick” companies must be allowed to “pass on” but they must be given a lifeline to recover and continue as a going concern. That is, the law must provide a way to nurse financially distressed companies back to financial health. The introduction of administration in Ghana has established a new era for this. As the Chairperson of the Business Law Reform Committee of Experts, Justice S. K. Date-Bah, stated, “The first response of the law to a distressed company that is unable to honour its credit obligations as they fall due should not be to liquidate it. This is too drastic a remedy which is not responsive to the inevitable ups and downs of business life. A legal system that provides principally for only liquidation can fairly be characterised as primitive, from the business point of view…it is better to save the company than allow it to go under.”
Who must be interested?
The concept of administration introduced under Act 1015 must be of interest to businesses generally, including financiers, investors, creditors, property owners, regulators, professional advisors such as lawyers, financial advisors, accountants and bankers. The era of administration will affect a number of transactions including the following:
- claims for recovery against companies and options open to avoid litigation;
- employment contracts as labour rationalisation is one option in restructuring;
- lending and financing arrangements as banks and other financial institutions will be hampered in debt recovery where the company (i.e. the borrower) is put in administration. Administration must therefore inform loan documentation and security arrangement for secured lending;
- property rights of lessors, tenants and property owners generally;
- corporate transactions as dealings with companies in administration will have to be with administrators and not the directors, and more importantly in accordance with the legal framework of administration;
- acquisitions – whether shares or undertaking of companies.
These are but a few of the likely impacts that will be seen in this coming era. As companies experience financial downturn due to the effect of the current Covid-19 pandemic, administration may also offer opportunities for survival. Businesses should, therefore, evaluate administration as an option available to them to stay afloat in these turbulent times.
What is administration?
A financially distressed company that is unable to pay its debts or satisfy its liabilities opens itself up to attack from its creditors. Secured creditors proceed against assets of the company in a manner that adversely affects the business of the company, aggravating its distress. Other creditors take legal action against the company and upon obtaining judgment, attach the assets of the company leading to the same effect. More importantly, the publicity of legal actions can damage the reputation of the company and further cripple its business. The end result is that the company is suffocated to its death. At the end, the company may go through a formal termination process of liquidation. Liquidation thus ends the life of a company. Given the recognition that financial distress may be temporary and that a company may be able to reorganize its operations, continue in existence and satisfy its liabilities, the necessity of the administration process becomes evident.
Administration is, therefore, a corporate rescue mechanism to avoid the traditional insolvency procedure of official or involuntary liquidation. Administration refers to formal insolvency proceedings which primarily give a financially distressed company a breather to recuperate. Under Act 1015, two situations are deemed to constitute a financial distress where a company can be put in administration. An administrative process is applicable in an insolvency situation – either the company is insolvent or likely to be insolvent – or the company has a negative net worth. A company is insolvent for the purposes of administration, if the company is unable to pay its debt or obligations when the debt falls due, or it is determined that the company is likely to be insolvent. A company has a negative net worth where the total liabilities, including contingent or prospective liabilities, of the company exceed the total assets of the company. Either of these two situations relate to the fact that the company has difficulty with its debt portfolio.
The Act seeks to widen the scope of access to administration with the intention of encouraging companies to make use of administration not only as a curative measure but also as a preventive one.
Administration as introduced under Act 1015 provides a legal regime for, among other things, the restructuring of the debts of the company and provides a restraint on the right of creditors and other claimants to institute actions against the company. This offers opportunity to the company to operate its business as a going concern whilst it discharges the restructured liabilities in a manageable manner. In order to achieve that, the Act places a temporary freeze on the rights of creditors and other claimants against a distressed company. The purpose of the administration process is to lead to the development and implementation of a restructuring plan which results in a better return for creditors and shareholders of the company than would result from the immediate winding up of the company.
Stages of Administration
The process of administration provided under Act 1015 covers three stages – stage one is the appointment of an administrator; stage two is the conduct of administration; and stage three is the post-administration or restructuring stage and the implementation of the restructuring plan agreed.
Appointment of an Administrator
Administration begins with the appointment of an administrator. An administrator may be appointed by the company through its directors, the liquidator of the company in a private liquidation, the holder of a floating charge or the High Court on application by a creditor, the liquidator or the Registrar of Companies. The grounds upon which the High Court can appoint an administrator on application by the persons indicated include:
- the company is or may become insolvent;
- it is likely that the company and the assets may survive as a going concern if an administrator is appointed;
- administration offers a better advantage at realizing the assets of the company and any related company than winding-up;
- administration provides a more advantageous means of realization and expeditious settlement of duties and liabilities owed by any person to the company or any related company; or
- it is just and equitable to do.
A person is qualified to be appointed as an administrator if that person qualifies as an insolvency practitioner. Three categories of professionals qualify as insolvency practitioners. These are chartered accountants, lawyers and bankers in good standing with their professional associations. Any of these persons must:
- be certified as a restructuring and insolvency practitioner by the Registrar;
- have a professional indemnity insurance policy; and
- not fall within the disqualification criteria applicable to a person who may be appointed as a director of a company.
In addition, an insolvency practitioner who is a creditor of the company or associated company or is a person who over the last two years is a shareholder, director, auditor or receiver of the company or associated company is ineligible to be appointed as administrator of that company.
When Administration Commences
Once administration commences by the appointment of an administrator, a number of consequences follow which affect the rights of creditors and other claimants. This will be discussed in another part of the article. Suffice it to say, that there is:
- a temporary freeze on the right of creditors against the company or property of the company;
- a restraint on the rights of owners or lessors of properties that the company may be in possession of or is in use by the company;
- the board of directors is restricted from exercising its powers and functions without the prior written consent of the administrator;
- transactions or dealings entered into without the consent of the administrator are deemed void;
- share transfers or any alteration to the rights and liabilities of shareholders of the company under administration are not permitted except as expressly provided.
Conduct of Administration
The role of the administrator is to take control of the business, property and affairs of the company and manage them with the object of salvaging the business of the company in the interest of creditors, employees and shareholders. Therefore, the Act gives the administrator wide powers to exercise the powers of the company or its officers and perform any function required. One of the first tasks of the administrator is to investigate the affairs of the company and form an opinion as to whether administration will be a viable option or whether a liquidator should be appointed instead. This investigation is based on the statement of affairs presented to the administrator by the directors, and the exercise of the power of administrator to request information from persons that have information on the conduct of the business of the company. This stage is very crucial because it allows for an early determination of whether the company should enter administration or be liquidated outright.
The Act empowers the administrator to:
- continue to carry out the business of the company for the benefit of creditors, employees and shareholders;
- terminate or dispose of the whole or part of the business of the company or dispose of any of the assets of the company;
- perform any function and may exercise any power that the company or any officer of the company could perform or exercise if the company were not to be in administration;
- prepare and file financial statements and reports relating to the administration. The financial statements and reports must also be submitted to the directors of the company. The financial statements and reports must be prepared and filed every six (6) months for the duration that the administration continues with the final financial statement submitted when the administrator vacates office.
One of the primary responsibilities of the administrator is to engage with creditors. The administrator must hold meetings with creditors with the purpose of obtaining the consent of the creditors to continue with the administration process and restructuring the debt owed the creditors in such a manner that will enable the company to continue its operations and discharge its debts in a manageable manner. The engagement process and rights of creditors will be discussed in another part of the series of article. A positive end product of the engagement with creditors is the execution of a restructuring agreement between the company and the restructuring officer which ends the administration process and ushers in the post-administration stage, which is the restructuring phase.
If the creditors are amenable to the proposed terms of the restructuring agreement, the creditors may decide to appoint a restructuring officer or maintain the administrator as the restructuring officer. The restructuring agreement provides for the terms and conditions of the restructured debt and the payment of the debts to the creditors. The terms thus cover the restructured debt, conditions precedent, conditions subsequent, the nature of the moratorium period, payment plans and other terms and conditions. The restructuring agreement takes effect when it is executed between the company, on authorization of the board of directors, and the restructuring officer, upon approval by the creditors. Where the company fails to execute the restructuring agreement approved by the creditors, the administration procedure will be converted into an official liquidation.
An executed restructuring agreement is binding on all creditors of the company, the company together with its officers and shareholders, and the administrator. The effect of execution of a restructuring agreement is that it prevents the parties from taking any action to liquidate the company or any action in relation to the company’s assets except with the approval of the Court. The restructuring agreement also releases the company from its debts, but only as far as is provided for under the agreement.
A restructuring agreement may be varied or terminated by a resolution of the creditors or upon application to the court by an interested party. The grounds for termination include breach of information, injustice or undue delay in implementation of the agreement, oppression/unfair prejudice or discrimination or material breach of the terms of the restructuring agreement.
This is the first article in a series which will provide an overview of the administration era ushered into Ghana under the Corporate Insolvency & Restructuring Act, 2020 (Act 1015). The introduction of administration in Ghana is good news to businesses in Ghana. However, the implementation of this new mechanism raises some concerns for the interests of other stakeholders which must occupy the mind of corporate stakeholders. Whilst the jurisprudence is yet to develop, the awareness of the process of administration is important. In subsequent articles, we will seek to explain to readers the details of the Act and raise the necessary issues that all stakeholders should be aware of.
In conclusion, the successful implementation of the administration proceedings in Ghana will require more than a functional legislative framework. It will largely depend on adequate institutional infrastructure, the requisite professional expertise and most importantly, further engagement with regulators, judicial officers, insolvency practitioners, financial institutions and the general public.
Written by Ferdinand Adadzi & Antoinette Arko – AB & David- Ghana