- July 23, 2023
Corporate Administration – The emergence of the insolvency practitioner
A new era for the administration of financially distressed companies has been introduced in Ghana under the recently passed Corporate Insolvency & Restructuring Act, 2020 (Act 1015). In the previous article published on page 30 of the Business and Financial Times on Monday, 29th June, 2020, the basis on which a company can be put into administration were presented. This is where the company is either insolvent or likely to be insolvent, or where it has a negative net worth. Additionally, the rules of appointment and functions of administrators and restructuring officers who are mandated to develop a restructuring plan under a restructuring agreement were discussed. Administration commences with the appointment of the administrator and ends when the restructuring officer signs the restructuring agreement with the company. The administrator and restructuring officers are thus, critical individuals in the process of administration and post-administration respectively. Under the Act, administrators and restructuring officers are required to be insolvency practitioners. In this article, we set out an overview of who an insolvency practitioner is, the qualification requirements and regulation of insolvency practitioners.
It is important for businesses, particularly creditors and lenders to be aware of who can act as an insolvency practitioner in the event that the need to appoint one to act in the administration of a company arises. It is also of great importance and benefit to lawyers, bankers and chartered accountants who intend to develop a new practice area as insolvency practitioners.
Who is an Insolvency Practitioner?
Under the Corporate Insolvency & Restructuring Act, an insolvency practitioner means a receiver or manager under the Companies Act, 2019 (Act 992), an administrator or restructuring officer under Act 1015, a trustee in bankruptcy under the Insolvency Act, 2006 (Act 708) or a liquidator. This means that the Companies Act, which governs companies generally, has also made the requirement that receivers and managers, who hitherto were only required to be eligible to be appointed as directors of a company, must now be insolvency practitioners. A person cannot, therefore, act as a receiver, manager, administrator, restructuring officer, trustee in bankruptcy or a liquidator unless the person is qualified as an insolvency practitioner.
Qualification Requirement of an Insolvency Practitioner
Three (3) categories of professionals qualify to practice as insolvency practitioners. These are chartered accountants, lawyers and bankers in good standing with the Institute of Chartered Accountants, the Ghana Bar Association and Chartered Institute of Bankers. In addition, such a person must:
- be certified as a restructuring and insolvency practitioner by the Registrar of Companies (“the Registrar”);
- have a professional indemnity insurance policy that provides indemnity for any act or omission undertaken as an insolvency practitioner; and
- meet the qualification requirements of a director of a company.
Qualification Criteria Applicable To Insolvency Practitioners
As indicated above, a chartered accountant, lawyer, or banker who is not qualified to be appointed as a director of a company cannot be an insolvency practitioner. Thus, the following persons are not qualified to be appointed as insolvency practitioners:
- a minor;
- a body corporate;
- a person that has been declared bankrupt and not discharged from bankruptcy;
- a person declared by a court to be of unsound mind;
- a person disqualified for fraudulent trading or is disqualified from holding an office in a company;
- a person disqualified from acting as a liquidator, administrator, receiver, trustee or supervisor under Act 1015 or any other enactment;
- a person subject to disciplinary proceedings under any law;
- a person who has within the past five (5) years, been convicted of:
- an offense under Act 1015; or
- a crime involving dishonesty or moral turpitude.
An insolvency practitioner must be certified as a restructuring and insolvency practitioner in order to practice. Under Act 1015, the Registrar is to act as an interim regulator of insolvency practitioners and to certify practitioners. The Act mandates that within two years of the coming into force of the Act, the Ghana Association of Restructuring and Insolvency Advisors (GARIA) must be established under an Act of Parliament to regulate insolvency practitioners. Pending its establishment under the Act, GARIA is currently an association which is to assist the Registrar to train and license existing insolvency practitioners. It is, therefore, important to know, that not all chartered accountants, lawyers and bankers in good standing with their respective professional bodies qualify to practice as insolvency practitioners. They must be so certified or licensed by the Registrar to be able to act as insolvency practitioners.
An overview of the current functions of GARIA and requirements for licensing of insolvency practitioners are discussed further below.
Members in Good Standing with a Professional Association
As discussed above, an insolvency practitioner must be a lawyer, chartered accountant or banker in good standing with the Ghana Bar Association, the Institute of Chartered Accountants and the Chartered Institute of Bankers. All these associations periodically publish a list of members who are considered to be in good standing.The main criteria that qualifies one as a member in good standing for all three associations are eligibility, the absence of disciplinary proceedings for professional misconduct and the payment of dues.
Eligibility in this context refers to the various requirements to be satisfied in order to become a member of the respective associations and obtaining a qualifying certificate. Subsequently, some institutions require members to engage in mandatory continuous professional development programmes once they have become members. This may be in addition to other requirements for maintaining good standing. In respect of professional misconduct, all three professional associations require that a member in good standing must not have any pending disciplinary proceedings against him/her, or be accused of professional misconduct or suspended from practice.
Restrictions on Dual Role as Administrator
In the appointment of an administrator, a person may qualify as an insolvency practitioner but may not be eligible for appointment as an administrator of a particular company in administration if the person is:
- a creditor of the company or associated company;
- a shareholder of the company for the last two years;
- a director of the company or associated company;
- an auditor of the company or associated company; or
- a receiver of the company or associated company.
It is an offense under the law to act as an insolvency practitioner without proper qualification. The applicable punishment is the payment of a fine between five hundred penalty units and thousand penalty units, a term of imprisonment between two to five years, or both the fine and term of imprisonment. The act performed by an unqualified insolvency practitioner remains valid unless set aside by the court.
Role of the Ghana Association of Restructuring and Insolvency Advisors (GARIA)
GARIA is an association of professionals from diverse fields such as accounting and economics, law, banking, and corporate governance with an interest in restructuring and insolvency. The Association was established to play a leadership role in corporate restructuring, business recovery and insolvency advisory in Ghana. The association currently operates under the guidance of a governing council appointed under its constitution. The objective of GARIA includes to:
- promote and play a thought leadership role in connection with and in relation to business turnarounds and insolvencies;
- encourage restructuring of distressed entities including state-owned enterprises and other business establishments;
- promote mutual exchanges of opinions and information by practitioners who are engaged in research and practice in the field of insolvency or business recovery;
- provide a forum for practitioners engaged in business recovery and insolvency practice;
- promote law reforms in effective business recovery measures and insolvency; and
- promote international cooperation with respect to insolvency or business recovery and related cross border matters.
GARIA under Act 1015 is to become the regulator of insolvency practitioners. The Act provides for a two years period within which the association is re-established as a regulator under an Act of Parliament. In the interim, the Act mandates GARIA to assist the Registrar in licensing insolvency practitioners. In view of the role currently conferred on GARIA, one cannot in practice act as an insolvency practitioner without being a registered member of GARIA and in good standing. Eligibility for registration as a member of GARIA is dependent on:
- being a lawyer, banker or chartered accountant;
- the payment of the applicable fees. Members are also required to pay their dues in order to be in good standing;
- being a member of any other institution or profession approved by the governing council of GARIA; or
- being a any other person, corporate body, association or partnership firm who can in the view of the governing council, contribute to the activities of GARIA in the field of development research, practice of business recovery, insolvency or restructuring.
A person who has performed distinguished or special services to the Association for the development of research or practice of business recovery or restructuring in Ghana may also be designated as an honorary member of GARIA.
Currently, the process for licensing of insolvency practitioners involves:
- an application to GARIA either as a member or institutional member and payment of the applicable fees;
- provision of evidence of the applicant’s professional qualification;
- vetting of the applicant by GARIA. In some instances, the vetting process is followed by an interview of the applicant by the governing council;
- decision by GARIA approving the application and recommendation to the Registrar to license the applicant as an insolvency practitioner.
It must be noted, however, that the final decision to license the applicant or otherwise rests with the Registrar taking into consideration the recommendation from GARIA. Under Act 1015, the Registrar is required to issue guidelines in respect of fees to be paid by insolvency practitioners. These guidelines have, however, not been issued yet.
Regulation of Insolvency Practitioners
In order to ensure insolvency practitioners act with due care and professionalism, Act 1015 empowers the Registrar to:
- review the conduct and performance of an insolvency practitioner;
- apply to the court for a prohibition order against an insolvency practitioner from practicing for misconduct;
- maintain a register of insolvency practitioners;
- subject to giving the insolvency practitioner a hearing, take action against an insolvency practitioner who has been suspended or removed from the relevant professional body; and
- obtain information and documents on an insolvency practitioner.
In order to ensure that the Registrar obtains the needed information in reviewing the conduct of insolvency practitioners, a person who provides information on the act or conduct of an administrator is also protected from any action taken against that person. This is to encourage people to report on the misconduct of administrators. The exercise of these powers will ensure that insolvency practitioners act with due care, diligence and professionalism in the discharge of their duties as administrators of companies.
In conclusion, the Corporate Insolvency & Restructuring Act, 2020 introduces a new practice for professionals as insolvency practitioners. An administrators must qualify as an insolvency practitioner in order to be able to act. As the administrator is appointed to a place of trust at a time where the company is in distress, the administrator must act in good faith and with utmost professionalism to nurture such a financially distressed company back to good financial health. This requires that administrators have a good understanding of the business of the company, management of business, debt restructuring and a good understanding on financial statements and transactions. In order to achieve the intended results in turning around a distressed company, expertise in corporate restructuring, business recovery and insolvency is required from administrators and restructuring officers under the Act. These offer opportunities to practitioners. At the same time, it present challenges which can only be overcome by developing the necessary capacities.
In the certification of lawyers, bankers and chartered accountants who are interested in this new practice, GARIA must be guided by this requirements in order to ensure that the new era of corporate administration is not stifled by a lack of the needed expertise to conduct the administration. Corporate managers, lenders and creditors must also be cognisance of the above requirements in appointing an administrator to avoid failure of the administration process due to issues relating to the administrator, rather than the situation of the company and position of creditors. The relevant professionals bodies – Ghana Bar Association, Chartered Institute of Bankers and Institute of Chartered Accountants – are also encouraged to develop continuous professional development programmes that are tailored to equip members with the relevant skills and expertise required. In this regard, it is of relevance to note that an interrelated approach of the three professional bodies will be of great benefit. GARIA is well positioned to play the coordinating role and the hope is that such interrelated approach will guide its capacity development programmes.