As business failures mount due to the pandemic, a new law in Ghana offers hope to companies looking for alternatives to insolvency. Audrey Naa Dei Kotey ACCA reports
This article was first published in the June 2020 Africa edition of Accounting and Business magazine.
The Covid-19 pandemic will surely result in many businesses struggling or defaulting on their financial and business-related obligations. Given the urgent need to protect businesses, Ghana’s Corporate Restructuring and Insolvency Act 2020 (Act 1015), which passed into law in May, could not have come at a better time.
The act gives all companies registered in Ghana the option to restructure, go into receivership or seek administration – until now the option of restructuring and administration has been open only to banking and insurance companies. This article gives an overview of some of the act’s key provisions and improvements to Ghana’s business rescue landscape.
There are five main parts to the act:
- official liquidation
- insolvency services
- crossborder insolvency
- agreements and other miscellaneous matters.
To appreciate the improvements under this legislation, it is worth remembering that for decades official liquidation was the only legal option for many companies.
Perhaps the principal improvement the act makes to Ghana’s insolvency and business rescue provisions is the introduction of private insolvency practitioners and an insolvency division at the Office of the Registrar of Companies, which was set up by the Companies Act 2019 (Act 992). Insolvency practitioners are privately licensed individuals who may be lawyers, qualified accountants or bankers. They need to be members of the Ghana Association of Restructuring and Insolvency Advisors (Garia), licensed by the Registrar of Companies, and have the necessary professional indemnities to enable them to work as insolvency practitioners.
Chance to survive
The 2020 legislation introduces administration and restructuring as a means of corporate rescue. This gives a distressed company the opportunity to continue in existence by placing a temporary freeze on the rights of its creditors and allowing the business to develop a restructuring plan in agreement with its creditors. The act also allows greater creditor involvement in the receivership or administration process through the formation of a creditor committee with three to five members to protect the interest of a company’s creditors through the administration process.
Among other tasks, the creditor committee advises the administrator on matters concerning the administration process. It also monitors and receives reports from the administrator, and aids communication between the insolvency practitioner and the company’s creditors. The committee does not have the power to direct insolvency practitioners in how to perform their duty. The creditors also have the duty of deciding whether the company should continue in administration or proceed into liquidation based on the initial findings of the administrator delivered at a ‘watershed meeting’ of the creditors, to be held 28 days after the administrator takes over the business of the company.
Because directors and senior management of companies have been known to continue trading despite being aware that the company is in fact insolvent, innocent third parties have accrued liabilities through trading with an insolvent company. The new act introduces personal liability as well as criminal sanctions for officers of companies who knowingly trade while the company is insolvent and for directors who knew or ought to have known that the company was trading while insolvent. These individuals will now be held personally liable for creditor obligations incurred during this period and also risk criminal sanctions in the form of fines, a prison term of up to five years, and disqualification from acting as directors (also for up to five years). These penalties are intended to dissuade directors and officers of companies from engaging in fraudulent trade.
The act also recognises netting agreements and other qualified financial instruments such as swaps, allowing them to be ringfenced and basically protected from the insolvency or restructuring proceedings. The terms under which these contracts were entered into would prevail in spite of the insolvency of the company, ensuring the protection of both local and international financial market transactions.
Access to finance
Another innovation is the introduction of post-commencement financing. Companies that are in distress generally do not have adequate financing or cashflow to aid the restructuring process. Post-commencement financing permits companies restructuring or in administration to receive financing from banks and other financial institutions to enable the insolvency practitioner to carry out the process effectively and earn better returns for the company. Post-commencement finance is ranked as class A debt in the country’s improved creditor ranking and is superior to all other creditor claims, including preferential claims. Post-commencement financing must be paid in full before the settlement of all other creditor claims.
The introduction of crossborder insolvency provisions allows for cooperation with foreign courts on insolvency issues. The act recognises foreign insolvency proceedings and provides for a foreign representative to make an application directly to a court in Ghana. This substantially eases the complexities that previously existed in the case of insolvency of multinational organisations operating in Ghana.
This legislation could not have come at a better time. It ushers Ghana into a new era of corporate rescue and recovery that could be crucial in these challenging times.
Audrey Naa Dei Kotey ACCA is managing partner of professional services firm AudreyGrey and was involved in drafting the new act.
"The 2020 legislation introduces administration and restructuring as a means of corporate rescue"