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What should I do if my business is bankrupt?
The advantage of being placed under administration is that legal proceedings against the company are unacceptable. PHOTO | FILE
What you need to know:
- Whereas the insolvency regime is intended to promote business rescue, the reputation damage associated with the process discourages businesses from the process.
Beyond the Covid-19 pandemic, businesses will have to deal with financial difficulties resulting from the impact of the pandemic. Business owners are battling with salaries, rent, loan repayments, suppliers, taxation, cash flow requirements , coupled with delayed payment and limited spending as they strive to preserve cash flow.
A business that is unable to pay its debts when they fall due is, in law, deemed to be bankrupt in case of a natural person or insolvent in case of a company.
Legal indicators of inability to pay debts are;
(i)Failure to comply with a statutory demand (means a formal written demand by a creditor in respect of ascertained debt)
(ii)Failure to satisfy an execution order in respect of a judgment debt issued against the business within 20 working days
(iii)The receivership or attachment of all or substantially all business property.
What then can a business facing insolvency do? Whereas the insolvency regime is intended to promote business rescue, the stigma and reputation damage associated with the process discourages businesses from the process, in the end, the business is damned if it does and damned if it doesn’t.
Insolvency
By filing for insolvency, the business can trigger a series of events including breach of commercial terms within some contracts especially loan agreements which can then result into foreclosure of the business and enforcement of the loan securities to the detriment of the business.
On the other hand, if the business does nothing, the company directors may be held personally liable for conducting business while the company is bankrupt, the demand letters from creditors and litigation increasingly become a nuisance to the business eventually making it impossible to continue with the business.
The options available to the business may be consensual or court supervised. The business could negotiate with the creditors for (1) more time within which to settle the debts, (2) a debt to equity swap (3) a break up or sale of non -core assets (4) injection of new money (5) debt restructuring (6) debt waiver.
This consensual approach is most effective if the company proactively communicates strategically with all stakeholders especially the creditors.
In a Court supervised approach, the business can apply for Administration which commences when three quarters of the creditors by value approve the business’ proposals and execute an administration deed which is filed in Court.
The role of the Administrator is to oversee the implementation of the administration deed.
Administration has the effect of freezing liquidation proceedings, appointment of liquidators or receivers, dealings with company property, any legal proceedings against the company and execution and distress against the company’s assets.
In conclusion, Uganda Telecom Limited is an example of companies that have taken advantage of Court supervised Administration to stay afloat. But even with best efforts, some businesses end in liquidation where the assets are sold to pay the creditor, sadly not all creditors can be paid for example in the case of Uchumi, Spencon and Nakumatt.
Directors need to proactively check the financial position of the company to ensure that the company does not trade while bankrupt. Management should proactively engage stakeholders and not wait until it’s too late.
BENEFITS OF ADMINISTRATION
In a Court supervised approach, the business can apply for Administration which commences when three quarters of the creditors by value approve the business’ proposals and execute an administration deed which is filed in Court.
The role of the Administrator is to oversee the implementation of the administration deed.
The advantage of being placed under administration is that legal proceedings against the company are unacceptable.
Bridget Nambooze Musumba, the group head legal and corporate affairs at Gmach Group of counsel, Katende Ssempebwa and Company Advocates.
