Liquidation to become last resort for distressed companies

Addo Garia Boss

Liquidating a company in distress remains the first legal resort for creditors to recover their funds from bankrupt body corporates and the provision has delved deadly blows to many viable but financially challenged companies in the country’s business landscape.

Currently, a creditor only needs to serve a debit note on a corporate entity and it can, after 21 days of its inability to honour it, through the legal process, cause the liquidation of the corporate entity to recover the monies.

A body of professional insolvency practitioners sees such options as unfriendly and unfair to businesses in the country and is therefore calling for the speedy passage of the Insolvency Bill into law.

The new law is expected to close the lacuna in the legal regime and provide companies and body corporates other alternatives to restructure their business and manage them to safety, without resorting to liquidation as the first call of action, but the last resort.

The President of the Ghana Association of Restructuring and Insolvency Advisors (GARIA), Mr Felix Addo, told the GRAPHIC BUSINESS in Accra on the sidelines of a forum to sensitise the media on the draft Insolvency Bill that a legal regime that would stay the hands and actions of creditors when companies were in distress would provide much confidence in the country business environment than it was now.

“Direct investments, foreign or local, come in because there is predictability in the economy; that at the end of the day, the business owner can repatriate capital or dividend or can have judgment from the court and enforce it. And a key aspect of this friendly business environment is having a solvency regime which is business supportive and friendly,” he explained.

He said if the only options in the business life cycle under an insolvency regime was total liquidation or the appointment of a receiver to manage the company for creditors to recover their assets, “then if I run into a hiccup, then the business has its back against the wall, nowhere to turn and creditors will enforce and put the business down.”

The chartered accountant and experienced insolvency practitioner cited examples of proud national and private companies which went under not because they were not profitable, but for lack of cash flow and working capital that didn’t allow them to meet their financial obligations to creditors as they fell due.

The examples included the defunct Ghana Airways, whose assets after liquidation paid all its debts and returned some funds to its owners, the Bank of Housing and Construction, which met all its debt obligations after liquidation as well as the former Plant Pool and a host of other companies.

If there was a good insolvency regime in place, those companies would have been turned around and be serving the important purposes for which they were set up.

The Insolvency Bill, which is being passed alongside the Companies Code, 1963, Act 179 and other legal instruments, is part of efforts to overhaul the legal regime governing the corporate and business landscape of Ghana.

Importance of insolvency regime

An efficient regime to manage insolvency – a situation where a company’s liabilities exceeds its receivables or debts – is where the legal regime governing the business environment seeks to encourage the restructuring of ‘viable but financial troubled companies.’

According to the insolvency practitioners, a good system requires “a careful balance between liquidation and restructuring.”

“An insolvency regime prevents the premature dismemberment of a debtor’s assets by individual creditors seeking quick judgments, and protects the interests of all stakeholders,” Mr Addo, also the Senior Country Partner at accounting firm, pwc, which has overseen several such liquidation exercises, including Ghana Airways.

GARIA is being supported by the Business Advocacy Challenge BUSAC) Fund to promote the passage of the insolvency law, which is currently before Cabinet.

Some provisions of the bill

The bill - with four parts - makes provision for administration of the insolvency regime, official liquidations with similar provisions and replacement of the Bodies Corporate Act, 1963, (Act 180), and insolvency services.

It emphasises corporate restructuring, the process of rearranging a company’s assets back into profitability, with the aim of promoting the growth of businesses and preserving jobs.

While introducing a regime to regulate insolvency services, the bill creates a special division, the Insolvency Service Division, at the Office of the Registrar General’s Department to be responsible for the regulation of private insolvency practitioners such as lawyers, accountants and managers.

It will also restrict the Registrar of Companies’ office to registering corporate bodies and not the cocktail of registration running from marriages to copyrights and business names that it is currently engaged in.

Ronnie O’Sullivan Snookered by Management Firm company Liquidation

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The liquidation of a management firm whose clients included sports stars such Ronnie O’SullivanStephen Hendry and Olympic gold-winning cyclist Sir Chris Hoy is likely to set a lengthy court battle in motion.

According to the Daily Mail, several of 110 Sport Management (110SM)‘s former clients are preparing to launch compensation claims for outstanding payments against the company, which collapsed last month.

The sportsmen, who wish to remain anonymous, are angry the firm’s parent company, 110 Sports Group (110SG), continues to trade, but refuses to pay 110SM’s debts.

The company’s demise raises questions over the solvency of 110SG and another subsidiary,110 Sport TV, which received more than £700,000 in public funds to launch an internet service that has so far proved unsuccessful.

Under section 239 of the Insolvency Act 1986, the liquidator could pursue the parent company for antecedent transactions if they establish that 110SG received ‘preference’ payments from 110SM in the 12 months leading up to the liquidation.

Under such circumstances, the liquidator can order 110SG to return the money to the collapsed company if those payments either caused the insolvency or were made when the firm was insolvent.

But to be honest, even if the liquidator were to take this action you’d find the money would probably go towards paying their fees.

If there are outstanding monies that could be recovered from a third party for the estate of an insolvent company, a liquidator will want to recover those funds and swell his company’s coffers. Remember, of course, the liquidator is paid before creditors.

Will the sports starts benefit? Probably not; that depends how much the deficiency is and how much it costs the liquidator to recover those funds.