Insolvency law-Draft Coursework

MAKERERE UNIVERSITY
FACULTY OF LAW

Name: NTEGYEREIZE ALAUTERIO
Reg/no: 05/U/1129

Student number: 205000106

Course Unit: INSOLVENCY LAW

Lecturer: Mr. Robert Kirunda and Mr. Faisal Mukasa

Question:
“The present laws have many strengths and benefits but fail in terms of responsiveness to the shape of modern business both personal and corporate and in the accessibility of the language which they are expressed-relevant provisions overlaid with complex exemptions, to which are attached a further layer of conditions and safeguards-among other several shortcomings. The purpose may be reasonably clear in theory but bear little relationship to modern commercial reality particularly in the context of the wide range of purposes to which the law is put.”

Uganda Law Reform Commission (2004): A Study Report on Insolvency Law, Law Com Pub No. 13 of 2004

Discuss the above statement with specific reference to the relevancy and adequacy of the Insolvency Bill.
Background
In Uganda the principal insolvency law is contained in the bankruptcy Act, companies Act and the deeds of arrangements Act.[1] These are almost a replica of the English law that was adopted from Britain by virtue of s.15 of the 1902 order in council.

Ever since Uganda acquired her independence, these laws have not been changed to fit the circumstances prevailing in Uganda. More so, with the trend of modern business and trade, our insolvency law has been rendered obsolete. For instance, the current law does not cater for cross-boarder insolvency, yet with globalization it’s not uncommon to find the company incorporated abroad but doing business in Uganda. The question remains “how are the interests of creditors going to be protected if this company ceased operations in Uganda and evacuated the jurisdiction? Can the creditors in Uganda proceed against it in its country of incorporation and recover their money? Obviously, without an insolvency law dedicated to foreign insolvency matters their plight is doomed.

It should be noted that the purpose of insolvency law is to provide a fair and easy process of getting individuals and companies in financial hurdles settle their financial obligations without necessarily winding them up. This way, they will be enabled to continue participating and contributing to economic development.

Unfortunately, the current law involves a hectic procedure, is compounded with delay and is hard to administer to the effect that the insolvent firms and bankrupts are made to spend a lot of money in protracted litigation. This exacerbates their financial problems. Ultimately, they are wound up and this may have negative consequences on the economy. Firstly, once the firm is wound up, there will be unemployment; the government will loose revenue and ultimately the entire economy slowed down.

Thus, following various studies,[2] it was realized that there is need to have a single insolvency law in Uganda tailored to addressing these problems.

The Uganda Law Reform Commission released a report in 2004[3] and came up with an insolvency bill that it believes will assist in remedying the situation.

Whether this bill is relevant and adequate is a subject of this discussion.

Insolvency defined
It has bee simply defined as the inability to pay debts in full.[4]
Relevance of the insolvency bill
The relevance of the bill can better be understood when one identifies the weaknesses within the current law and compares the same with changes proposed in the bill. On the whole, the bill is relevant in as far it seeks to consolidate the scattered law on insolvency and streamline this law to the standard of modern business, for instance it provides for creation of insolvency practitioners and then cross-boarder insolvency. The latter is vital for insulating the economy from the negative effects of globalization and free trade.[5]

a) Consolidation of insolvency law
As already note above, Uganda’s current insolvency is scattered in different legislations, notably, the companies Act,[6] The Bankruptcy Act and the Deeds of Arrangement Act. This makes it hard to research, reference and to administer. In this respect, the insolvency bill is relevant in a sense that it seeks to consolidate this law into a single code.[7] With a single code, time spent perusing different Acts will be saved. It will equally ease reference and policy control as well as reduce administrative costs.

b) Protection of unsecured creditors
The bill is also relevant for the reason that it upholds the interests of unsecured creditors. The current ranking of secured creditors and the state as the priority creditors at distribution of assets of the insolvent firm is unfair to unsecured creditors.[8] This means that where the property available for distribution is insufficient to meet the claims, the unsecured creditors will loose their money. Unfortunately, more often these are small scale enterprises with limited financial capacity and stand to collapse if their money is not recovered. It should be noted that government is in position to abate its costs or loss as compared to small scale enterprises.
Contrary to this position, clause 11 of the bill allows unsecured creditors to make claims in writing and under clause 13(5) (c) of the same bill any person who petitioned court for liquidation or bankruptcy is among the first creditors to be paid. This includes unsecured creditors. This helps small scale businesses to survive and continue participating in economic development.

The only notable inadequacy in the bill as regards protection of creditors is that the topmost priority is given to settlement of remuneration and expenses of trustees, receivers, liquidators and administrators instead of preferring creditors.

c) Bringing insolvency law at par with globalization
As aforesaid, our current bankruptcy laws are archaic, having been adopted from Britain without much modification to suit the circumstances prevailing in Uganda,[9] Britain has continuously repealed her insolvency laws and brought them in line with the demands of modern business. According to the report, with globalization and opening up of the economy to free trade, Uganda’s bankruptcy laws have come under criticism as failing to address modern business problems.[10] The bill is therefore relevant and necessary in order to bring this law in conformity with modern business demands and in particular to protect Uganda’s economy against the dangers of globalization while at the same time attracting foreign investment.[11] Accordingly, this will boost the confidence of financial institutions since they will be assured of the means of proceeding against defaulters to recover their money.

The bill is equally relevant in as far as it provides for the regulation of overseas business undertakings operating within, yet not incorporated in Uganda. Without provision for this, it would be hard for creditors to proceed against the insolvent firm or individual to recover their monies. The law will go along to protect the debtors, creditors and their property in Uganda as stronger economic entities are capable of triggering off the insolvency of weaker firms, thereby dispossessing them of their resources consequently driving them out of business especially given the fact that Uganda is a perfectly competitive market.

Thus, the insolvency bill provides for regulation of cross-boarder insolvency[12] which is fundamental in the current global economies. There is need to revive part IX of the bankruptcy Act which has been in disuse and create reciprocal arrangements whereby countries will be able to cooperate in handling insolvency matters involving multinational corporations or foreigners. The weakness with the Bankruptcy Act is that it provided reciprocity with only Kenya and Tanzania (ss.148-161). Since trade is currently not confined to East Africa, there is need to harmonize[13] the law to envisage reciprocity with the rest of the nations with which Uganda partners in trade.[14]
d) Insider dealings-clause 19
The relevancy of the insolvency bill is also seen in its attempts to address issues of insider dealings thereby making them avoidable under clause 19 thereof. Currently, the companies Act is silent on this matter, yet in modern businesses it is not uncommon to find businesses being ran and managed by family members or other close associates. In such circumstances, it becomes easy for the bankrupt or insolvent firm to transfer his or her or its assets to the insider with the view of putting them away from the reach of creditors. Such a transaction is treated as a preference transaction and therefore void (clause 19(2).
On this issue, the bill is inadequate in as far as it makes such transaction voidable. This means that actually, the transaction may be endorsed as valid. In effect, it allows insider dealings. It is my considered view that as businesses can honestly be ran by close associates like family members, branding every transaction entered into with such insiders as a preference is to be unrealistic.

e) Appointment and regulation of insolvency practitioners (clauses208-216)
Currently there are not professionals to efficiently handle insolvency matters. As a result, insolvencies are handled by unqualified individuals who, instead of saving the insolvents and bankrupts, they have worsened their financial problems. It is reported that some of them have ill-advised their clients or even cheated them of huge sums of money.[15] Ignorance of insolvent matters is even apparent among the business community and most of the businesses and individuals endure debt burdens with out knowing that they can apply to court to be discharged and give them a new lease of life.[16] In light of this, the insolvency bill becomes relevant in so far as it seeks to introduce insolvency practitioners and the manner of their regulation[17] under part VIII. The regulation of this field is necessary to promote transparency on matters of insolvency. With cross-boarder insolvencies-a phenomenon incident to globalization, there is still need to have experts to ably handle matters of insolvency. On the whole, these experts will help advise embattled individuals and firms on how best to handle their debt obligations without necessarily having to litigate.

f) Abolition of acts of bankruptcy
This makes the bill relevant in current commercial transactions which require expediency.[18] Accordingly, it eliminates the complex procedure that is expensive and would delay justice for the creditors as acts of bankruptcy are hard to prove in view of modern cross-boarder business which would involve moving to the foreign country and get evidence on commission of an act of bankruptcy for instance if the creditor is to ably prove that the debtor is keeping house. This would mean incurring heavily. Instead the money that would be lost in lengthy litigation is ploughed back into business thereby ensuring business growth and consequently the economy through revenue collections, uninterrupted employment for workers, among others.
g) Voluntary arrangements
Under the Deeds of Arrangement Act (ss.17,18 and 22) , voluntary arrangements with creditors constitute an act of bankruptcy under s.2 (1) of the Bankruptcy Act, upon which creditors can base their petition for bankruptcy. In modern business setting, this is unfair as it does not give the bankrupt or insolvency firm to arrange and settle his or its financial obligations outside court thereby avoiding costs of litigation at the same time saving his business from being wound up. In this case the bill becomes relevant when it purports to address this issue under clause 126. the debtor is only required to apply to court for interim protective order upon payment of a moratorium. This interim protective protects him or it from the petitions for bankruptcy during the process of negotiations with creditors. I applaud this provision because it will give the debtor an opportunity to amicably settle his financial obligations without. At the same time, it promotes the rationale for insolvency law-that of rehabilitating rather than punishing the insolvent.

h) Property available for distribution- clause 30(2), s.41 (b) B.A-relevance-updates the B.A to protect the family, provide means of survival, B.A provides for 800/= but circumstances have changed.


Inadequacy of the bill
Crown immunities-
S.15 of the Civil Procedure (Government Proceedings) Rules[19] protects the government from execution proceedings. This has posed a hindrance in the recovery of judgment debts made against the government. Even then, experience has shown that the government is one of the major defaulters. This cripples the operations of business entities which fail to secure payment at worst putting them at the risk of declaring them insolvent, yet it is the government holding on their money. The insolvency bill does not remedy this situation either. Clause 235 thereof empowers Court to refuse to take any action which is manifestly contrary to public policy of Uganda. This way it is justifying the injustices already witnessed in the cases like Reste Corner Hotel Ltd v. Attorney General[20] where the company failed to meet its loan repayment obligations and consequently lost its hotel which was its major asset, yet the government owed it money that could have sufficiently disposed off the loan. Despite the government having been notified of the impending calamity to the company, the request to directly remit the money to the loan account was ignored by the government.


Automatic discharge
In modern business environment, automatic discharge of the bankrupt is recommended. This is premised on the fact that bankruptcy should not be seen as retribution rather than rehabilitation. This would give the insolvent or bankrupt a new lease in life and continue to contribute to economic development. Unfortunately, under the Bankruptcy Act the bankrupt cannot easily be discharged, for he has to apply to court to be discharged[21], his application has to be heard in court where the public examines him (s.28(2)). The bill does not make the situation any better as under clause 46 the bankrupt still needs to apply for his discharge. Thus, in this respect, it remains in adequate on this issue.

Residual powers of Directors and promoters to sue receivers, liquidators and managers-vexatious defenses with a view of delaying creditors, yet justice delayed is justice denied. G.M Combined (U) Ltd vs. A.K Detergents (U) Ltd. & Ors[22] the case took five years to be concluded before being heard several times on substantive and procedural technicalities. The Receivership of Uganda Polybags Ltd took almost four years largely because of HCCS No.105 of 1999 instituted by directors of Uganda Polybags Ltd.(see p.16 0f the report). Suffice to note that the bill is inadequate in addressing this issue. Whereas it provides for the duties of directors, secretaries and employees, it does not elaborate on whether they are entitled to challenge insolvency proceedings. This situation is likely to continue the practice of directors fumbling with bringing vexatious defends against insolvency proceedings even where they know that they are responsible for poor financial of the insolvent firm.

Conclusion
The archaic nature of our insolvency law requires that the law be repealed to fit with modern business more so with globalization and openness of our economy. This is vital to encourage foreign investment at same time protect the economy from the evils of globalization. The current law is more of punitive rather than being rehabilitative, yet modern insolvency law aims at rehabilitating the insolvent and reset him or it to reparticipate in economic development. Thus, the insolvency bill is relevant since it tries to address pertinent issues despite shortcomings.





[1] Business law and development: The way forward for Uganda, a paper presented at the conference organized by Uganda Law Reform Commission on Uganda’s experience on insolvency law held at Nile Hotel International Conference Centre from 19th-21st July 2004
[2] See the reports made by Reid and Clare Manuel.
[3] Uganda Law Reform Commission: A study Report on Insolvency Law (2004), Kampala, Uganda.
[4] Osborn’s Concise Law Dictionary (7th ed.) by Roger Bird at p.182
[5] P….of the Report (2004)
[6] Cap. 110 which provides for corporate insolvency
[7] As is read from its long title, the insolvency bill, 2004 is inter alia meant to consolidate the law relating to receiverships, administration, liquidation, arrangements and bankruptcy. See also the paper presented at the conference on business law and Uganda’s experience on insolvency law held from 19th-21st July 2004 at Nile Hotel international Conference Centre.
[8] Under ss.36 and 315 of the bankruptcy and Companies Acts respectively are to the effect that tax authorities and secured creditors are to be paid first disregarding the interests of unsecured creditors.
[9] The Companies Act for example has never been repealed.
[10] Para.1.1.1(a) of the Report at p.2.
[11] P.47 of the Report under para.4.1
[12] The bill proposes to address the issue of cross-boarder insolvency under part IX and section A thereof lays out provisions for reciprocity. In particular, under clause 218 a receiving order, adjudication order made or a special manager or interim receiver appointed in the reciprocating territory bankruptcy proceedings against the debtor, shall have the same effect as if the proceedings have been instituted in Uganda. Under clause 219 the property of the bankrupt in Uganda vests in the trustee in the reciprocating country.P.47 of the Report.
[13] The bill should incorporate and harmonize sections 362 and 363 of the Companies which provide for powers for Ugandan courts to wind up a foreign company which has ceased to do business in Uganda among others by its failure to pay its debts. (s.362(b) and 362(4).
[14] The First International Bank of Grenada (in Liquidation) Vs Theoderous Ten Brink & 9 others HCCS 298 of 2003. The court in Uganda have offered some assistance to the Receiver of the First Bank of Grenada to preserve some assets bought from funds defrauded from creditors in Grenada and the United States.

[15] Business law and development: The way forward for Uganda, a paper presented at the conference organized by Uganda Law Reform Commission on Uganda’s experience on insolvency law held at Nile Hotel International Conference Centre from 19th-21st July 2004, at p.
[16] Ibid.
[17] Under clause 209, only members of professional bodies are permitted to act as insolvency practitioners, the contravention of which amounts to an offence and will be punished for illegally acting in that capacity (clause 210). Even then, under clause 209 (1) (b), an insolvency practitioner must give security or professional indemnity as sort of insurance to the client against his professional negligence. All this is will go along way to ensure that these professionals act transparently and diligently while dealing with insolvency matters, and for those unqualified, they will be technically eliminated.
[18] Under clause 4 the bill a debtor is deemed unable to pay his debts if he fails to comply with the statutory demand under clause 5, or where he fails to partly or wholly satisfy a Judgement debt or where his property is substantially or wholly within the possession of the receiver. This is in pari materia with s.233 of the Companies Act cap. 110 and is considerably simple to prove as compared to acts of bankruptcy under s.2 (1) of the Bankruptcy Act cap. 67.
[19] Civil Procedure (Government Proceedings) Rules S.I 69-1
[20] H.C.C.S No. 1087 of 1999
[21] S.28 of the Bankruptcy Act, Cap. 67.
[22] H.C.C.S No.348 of 1994