A year ago, the Ghana Association of Restructuring and Insolvency Advisors (GARIA) had a grand celebration to usher in the new Companies Act, 2019 (Act 992)! GARIA had been on the frontline of advocacy efforts to create a new modern, fit for purpose Companies Act reflective of our globalized, digitalized and inter-connected world. We had plans to have a repeat celebration this year in 2020. In fact, we had planned for an annual gala celebration to raise funds and possibly to celebrate the passage of another landmark legislation we had been championing, namely, the Corporate Insolvency and Restructuring Bill.
Little did we know then, there was a perfect storm brewing in the form of a global pandemic, the likes of which had never been seen in our life-time and which would usher in a new business normal. We had touted the new Companies Act, 2019 (Act 992),) as the game-changer to bring in massive foreign direct investment, given the radical changes made to the previous Act and the new investor friendly, forward looking and modernized provisions. These provisions included best and modernized practices, the ease of establishing and filing returns using electronic mediums, transparent and enhanced corporate governance measures, as well as general investor, minority and shareholder friendliness. In spite of these major milestones, Covid-19 struck.
ECONOMIC IMPACT OF COVID
This pandemic has had a massive adverse effect on the global economic ecosystem and naturally, Ghana’s has not escaped its effects. The International Monetary Fund (IMF) estimates that global gross domestic product (GDP) will contract by 4.9 percent. Similarly, the Hon. Minister of Finance projects Ghana’s GDP growth shrinking from a projected 6.8 percent to 0.9 percent for 2020. Global business icons such T.M. Lewin, Victoria’s Secret, Laura Ashley, Debenhams, Neiman Marcus, J.C. Penney, Jos A Banks, Lord & Taylor, Hertz, Flybe, Virgin Australia, Virgin Atlantic and South African Airways have either collapsed completely (in liquidation) or are now in various forms of Administration or restructuring proceedings. Clearly, this list goes on and on.
Coming closer to home, the impact of the COVID-19 pandemic has been extraordinarily harsh on the Ghanaian economy and businesses especially, on the heels of the 2017/2018 banking/financial sector clean up exercises undertaken by the Bank of Ghana and the Securities and Exchange Commission, of which recent estimates put the cost on the taxpayer at over GHS21 billion . This is in addition to declining tax revenues, especially from import duties, and the shortfalls in oil revenues which saw a barrel of oil plunging to negative territory before recovering to the current US$44/barrel. The impact has also been seen on small and medium businesses which have particularly been hit hard by the lockdown and the partial restrictions which were put in place by the Government as necessary steps to contain the pandemic. The Hon. Minister of Finance in his presentation on the mid-year budget also estimated that the total cost of the pandemic to date was GHS25 billion and counting!
There have been government interventions, chiefly through the Ministry of Finance and Bank of Ghana to give some relief to Ghanaian businesses, to assist them survive the pandemic and to restore and recover post the pandemic. The Ministry of Finance, through the National Board for Small Scale Industries, is supporting micro, small and medium sized businesses to the tune of GHS 600 million with soft loans, and has recently announced an additional GHS2 billion Guarantee Facility to support all sectors of business and job retention. Government also plans to establish an Unemployment Insurance Scheme for employees who lose their jobs.
In addition to the Ministry of Finance’s stimulus package, Bank of Ghana (BoG) has also stepped in with various measures to stabilize the economy. Among others, BoG has instituted a GHS 10 billion Asset Purchase Programme and provided various regulatory reliefs to banks to allow for banks to provide some additional capital/liquidity support to the economy, including the reduction of the capital conservation buffer from 3 percent to 1.5 percent; reduction of the primary reserve requirement from 10% to 8%; lowering of the monetary policy rates from 16% to 14.5%; and the suspension of payments of dividends by banks.
The Corporate Insolvency and Restructuring Act, 2020 (Act 1015)
Perhaps, the least known and unheralded tool available to businesses in distress (which arguably could cover most businesses in Ghana, especially with the onset of the pandemic) is the Corporate Insolvency and Restructuring Act, 2020 (Act 1015) or CIRA, for short. This Act, which repealed our erstwhile Bodies Corporate and Official Liquidation Act 1963 (Act 180), was signed into law on April 30, 2020 and has features which could go a long way to assist businesses not only to survive the pandemic, but also to recover. CIRA applies to all businesses registered under the Companies Act, 2019 (Act 992) with a few exceptions; namely, banks, insurance or any other business which is subject to special legislation, except instances where the special legislation does not provide a rescue provision such as the Security Industries Act,2016 (Act 929).
The purpose of this Act is clearly spelled out in its section 1 and I quote verbatim: “to provide a legal regime for:
(1)(a) the administration of the business, property and affairs of a distressed company in a manner that provides an opportunity for the company to as much as possible continue in existence as a going concern
(b) the temporary management of the affairs, business and property of a distressed company,
(c) the placing of a temporary freeze on the rights of creditors and other claimants against a distressed company,
(d) the development and implementation of a restructuring plan which results in a better return for the creditors and shareholders of the company that would result from the immediate winding up of a distressed company,
(e) the official liquidation of a body corporate,
(f) cross-border insolvency,
(g) the regulation of insolvency services; and
(h) netting agreements.”
Section (2) provides that a company shall be placed in administration or restructuring if: “(a) the company is unable to pay the debts or current obligations of the company as the debts or obligations fall due even if the total assets of the company exceed the total liabilities of the company or (b) the company has a negative net worth.”
ADMINISTRATION AND RESTRUCTURING
In this paper, I shall discuss Administration or Restructuring which is the principal tool the Act provides for enabling companies in distress to restructure as defined in Section 2 and turn their fortunes around; to preserve a company’s going concern value, either with the same shareholders or new shareholders; to preserve as many jobs as possible, and to continue to play their part in the economic landscape.
CIRA has a rescue feature common to insolvency legislation found in most developed economies. In the jurisdiction of England and Wales, we have Administration under the Insolvency Rules as amended for Covid Relief by the Corporate Insolvency and Governance Act, 2020; In the United States, we have Chapter 11 of the Bankruptcy Code and the Small Businesses Reorganization Act (SBRA) again as amended for Covid relief under the CARES Act (2020); In South Africa, we have Chapter 6 Business Rescue of the Companies Act 71 (2008) and in Mauritius, the Administration provisions of the Insolvency Act 2009 as amended by the Covid-19 (Miscellaneous Provisions) Act of 2020.
The Corporate Insolvency and Restructuring Act, 2020(Act 1015) has borrowed from these various laws and best practices, and adapted same to our Ghanaian economic environment. In fact, the first 78 sections of this new law are dedicated to Administration and Restructuring provisions. This feature was not in the previous Bodies Corporate Official Liquidations Act, 1963 (Act 180) and this essentially meant that companies which had cash flow challenges or balance sheets (statement of financial position) that were over-leveraged essentially were faced with involuntary liquidations (official liquidations).
Under CIRA, a company which is faced with liquidity problems can appoint an “Administrator” who must be a natural person and be a qualified Insolvency Practitioner (IP), where the directors resolve that the company is insolvent or is likely to become one and that an Administrator should be appointed. Other appointing authorities of an administrator could be the liquidator, where the company is in liquidation, a substantial secured creditor (or his Receiver) or the Court.
Unlike what obtains under US Bankruptcy Code Chapter 11, CIRA is more in tune with the UK Administration provisions and does not allow a “Debtor-in-Possession” which would allow the company to continue operating under more or less the same management once it files for Administration. A Debtor in Possession is a person or corporation who has filed a bankruptcy petition but remains in possession of property upon which a creditor has a lien or similar security interest. The Ghana Act, however, requires an independent “Administrator” to be appointed to execute the Administration and the eventual restructuring in order to protect the creditors. In other words, the law does not allow the same management team under whose watch the company became distressed, in the first place, to carry on under cover of the protection of the law. The opportunity for abuse would be too great.
An IP must be a chartered accountant, a lawyer or a banker in good standing with their professional association, certified as a restructuring and insolvency practitioner (IP) and has security or professional indemnity for the proper performance of the duties of the IP. A person who acts or purports to act as an IP and who is not qualified under the Act commits an offence, and is liable on summary conviction to a fine of not less than five hundred penalty units and not more than one thousand penalty units, or to a term of imprisonment of not less than two years and not more than five years, or to both.
Once the Administrator is appointed, the company enjoys a temporary freeze on the enforcement of rights of creditors and other claimants in order to enable the company come up and execute a restructuring or reorganization plan within a defined period. Secured creditors, however, may apply to the court within a limited period to enforce their security.
The Administator convenes a creditors committee where the company’s decision to go into administration is confirmed or not and a Restructuring Agreement is approved or not. Given the distressed status of the company and the need to make urgent decisions, no special resolutions are required. The creditors decisions are carried by the votes of creditors or class of creditors holding at least fifty-one percent of the value of the debt owed to the creditors, or class of creditors, voting in person or by proxy vote or by postal vote.
Once the decision to restructure is agreed upon by the Creditors, the company executes a restructuring agreement with the Administrator, now designated as Restructuring Officer (RO). The RO has the responsibility for implementing the RA with appropriate notifications to the creditors of record and the Registrar of Companies for publication in the Companies Bulletin. The RO must also publish a notice of the execution of the agreement in a daily newspaper of national circulation. A copy of the RA is filed with the Registrar. It should be noted that on the initial appointment of the Administrator, the Registrar is also notified and this appointment is also published in the Companies Bulletin.
First, the RO shall have control of the business, property and affairs of the company in the course of the administration. Secondly, the RO is required to investigate the affairs of the company and consider possible ways of salvaging the business of the company in the interests of creditors, employees and shareholders Thirdly, the RO carries on the business of the company to achieve the turnaround; including terminating or disposing of parts or whole of the business;. Fourthly, the RO may perform any function or exercise powers of the company or any of the officers of the company as necessary as if the company were not in administration.
The RO in the course of the execution of the Restructuring Agreement (RA) shall file financial statements and reports with the Registrar and submit copies to the directors of the company at, generally, six-month intervals.
Key Features of the Restructuring Agreement
The Restructuring Agreement (RA) is in effect the Business Plan for the period the distressed company is in restructuring. The Act provides that the RA must have specific funding arrangements; must identify company properties which will be available to pay creditors; should stipulate the nature and duration of any moratorium; must identify the extent to which the company will be released from the liabilities of the company; should stipulate the conditions precedent for the RA to come into force; and the order in which proceeds of realisation will be distributed among the creditors bound by the agreement.
In addition to the stipulated creditor related activities which the RA must cover, best practice dictates that the business model, cash projections, re-branding or marketing activities, non-core asset disposals and projected financial statements must be also included in the RA to support the achievement of the primary objective of the Administration of restructuring a distressed company.
The Act (Section 44 (4)) indicates that the RA should include post-commencement financing which is defined as unpaid remuneration or reimbursement for expenses relating to employment and financing obtained by the company including trade financing and venture capital during the Administration or restructuring period. In other words, the Act recognises that there would be a need for fresh injection of financing to be able to turn the company around and these could come from conventional sources such as commercial banks and suppliers, or non-conventional sources including venture capital which could include hedge funds, private equity and other like investors.
The Act does not preclude shareholder injection of fresh capital and this could be part of the RA with appropriate debt or equity arrangements. Finally, another likely source of financing may come in from asset disposals.
One very attractive consideration of post-commencement investment in a company undergoing restructuring is that in the event of the company going into official liquidation, the post- commencement financing takes a super priority position of a Class A debt (Section 107 (3)(a)) which is a debt which takes priority over all other creditor claims including secured and preferential class. Class A debt is required to be paid in full, thus allowing for extra protection and mitigation or reduction of risk in attendant to such distressed company financing and makes it generally a more risk balanced investment vehicle.
Employees are given a special consideration under RAs. Unlike the “automatic” termination of all employee contracts during a liquidation, the appointment of an Administrator does not automatically terminate an employment agreement, unless the Administrator gives notice to staff to be terminated within twenty-one days of the Administrator’s appointment or unless extended by the Court. One of the goals of the Administration is to preserve jobs to the extent possible. Consequently, the Administrator would seek to work with the “optimal” number of employees as would be stipulated in the RA for an efficient turn around.
Company Officers continue to hold office during the RA. The appointment of an Administrator does not result in the removal of directors from office; however, a director of a company in Administration shall not exercise any power or perform a function and shall not be responsible for managing the affairs of the company without the prior written approval of the Administrator or as permitted in the Act such as execution of the RA with the Restructuring Officer.
Protections Against Abuse
During the sensitization workshops leading to the Bill, a recurring theme expressed by many stakeholders was the potential of abuse of this feature which essentially gives a standstill to prevent creditors from enforcing their legitimate legal rights This concern was expressed by several stakeholders who felt that given our prevailing culture of weak corporate governance, defaults on loans (as evidenced by one of the major causes of the financial meltdown) coupled with the weak enforcement by our institutions, such a provision is virtually giving rogue company directors and officers a “get out of jail card!”
To cure this potential abuse, the two companion laws (that is, the Companies Act, 2019 and the Corporate Insolvency and Restructuring Act, 2020) together are resplendent with enhanced corporate governance requirements and enhanced institutional structures which together would mitigate and protect members, and creditors from such abuses. I will mention a few of such protections here:
First, the CIRA opted for the use of qualified independent third parties, i.e. the Insolvency Practitioner to act as the Administrator or Restructuring Officer as against the prominent American insolvency feature of having a “Debtor in Possession”, as it is argued there that the company’s officers know the business best and would be able to preserve and optimize value to pay creditors if they are allowed to continue with operations with minimal supervision from the courts and a temporary stay of enforcement of creditor rights. The Administrator, as demonstrated above, has to be a professional in good standing, with experience in restructuring and insolvency practice and must have professional indemnity. An unqualified IP runs the risk of significant fines and up to five years of jail time.
Secondly, the law provides for the creation of an Insolvency Division under the new financially autonomous Office of Registrar of Companies. This Insolvency Division will be maintaining a register of IPs, regulating the conduct and performance of IPs and where the Registrar thinks appropriate, the Registrar may apply to the Court for a prohibition order for up to five years against an IP.
Thirdly, the sanctions against company directors and senior officers who have been involved in offences involving fraud, dishonesty, formation, promotion or management of a company, insider dealings, a debarred professional, or involved in an ongoing investigation by a criminal investigation body, etc, are automatically disqualified for appointment as a director for a period of five years; ten years on second conviction and on conviction for a third time, permanently.
Fourthly, there is also the CIRA Section 19 Report by the Administrator which requires the Administrator to lodge a report with the Registrar, shortly after appointment, regarding any past or present officer or shareholder of the company who may have committed an offence involving dishonesty or an offence in contravention of the Companies Act 2019 (Act 992) for forwarding to the Court. In addition, the Administrator has to file a report on any person who has been involved with the formation, promotion, administration, management, liquidation of the company who may have misapplied funds or properties or has been guilty of negligence, default or breach of duty or trust in relation to the company.
The fifth protection can be found in Section 119 of CIRA which expressly imposes a duty on a director to prevent insolvent trading. This duty specifies that a director who engages in any form of business or trade and causes a company to incur a debt or liability where the director has reasonable grounds to believe that the company is insolvent, or will become insolvent, or ought to have known that the company would be insolvent, or entering into the transaction commits an offence, on summary conviction, and is liable to a fine of up to one thousand penalty units or to a term of imprisonment of up to five years or to both.
In recognition of the extraordinary nature of the Covid-19 pandemic, many countries including Australia, the UK, Switzerland and Spain have temporarily relaxed this duty of directors trading when companies are within this “zone of insolvency.” Other countries are also enacting emergency legislation to allow for easier and fast tracking of companies to get into “restructuring” mode, all in a bid to preserve value and save jobs.
The impact of the Covid-19 pandemic has surely affected businesses in varying degrees, some positively, such as information and communication technology, and pharmaceutical manufacturers while the hospitality, travel, trading and recreation sectors have suffered quite substantially. Overall though, with the contraction of the global economy and the disruption in practically all supply and value chains, most businesses are facing liquidity challenges directly or indirectly and the new normal would take some time to adjust to in reorganizing business models to stay as going concerns.
In some countries, recognising the importance of the role of small and medium scale enterprises (SMEs) and their special needs, Government has put in place special financial structures targeted at providing financing for SMEs. Of particular interest is the USA Business Development Corporations (BDCs), which are a hybrid venture capital fund and private equity with the primary focus of supporting SMEs (both as start-ups and as distressed entities). As a Regulated Investment Company (RICs), BDCs behave similarly to Real Estate Investment Trusts (REITs) and must distribute 90% of profits to shareholders. As RICs, they do not pay Corporation Income Taxes and consequentially pay above-average dividends, which help with the mobilisation of private investment. Perhaps the Government may want to look at this financing model in its efforts to design a financial infrastructure framework for a sustainable recovery (using some of the GHS100 billion fund).
Secondly, to facilitate the ease of doing business, many countries have dedicated Bankruptcy and Financial Courts to assist develop the required competencies and also expedite proceedings, given the time bound and highly technical nature of these services. Again, looking forward, our High Courts could have dedicated specialized divisions to assist with dispute resolution in our Company and Insolvency laws, given the integral role the courts play in our business landscape.
Lastly, the Companies Act, 2019 makes provision for the Minister, on the advice of the Board, by legislative instrument to make Regulations for classifying companies as large, medium or small and grant waivers and exemptions under the Act. It is my hope that this authority will be exercised judiciously to enhance the ability of the small and medium enterprises, which arguably are the largest segment of our businesses, to facilitate a quick and lasting recovery from this unprecedented Covid-19 and possible future crisis.
In conclusion, despite the perfect storm we find ourselves in, the timing of this law which enables restructuring of distressed companies could not have been more perfect. Let us take advantage of the possibilities this new law offers, especially for our previously stressed companies (even before Covid-19), to make the necessary structural adjustments before they end up on the chopping block.
Let us focus on educating our diverse stakeholders and encourage businesses to take advantage of its many features to preserve jobs, preserve economic value, preserve creditor interests, and other stakeholder interests in a balanced, fair and equitable manner and emerging “fit for purpose” for the long haul.