Insolvency Law

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,[i] Companies Act[ii] and the Deeds of arrangements Act.[iii]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.[iv]
Unfortunately, these laws have not been changed to match the requirements of modern business and trade.[v] 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 then is “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 monies? Obviously, without an insolvency law dedicated to foreign insolvency matters their plight is doomed.

Following studies by Reid and Clare Manuel,[vi] it was realized that there is need to have a single insolvency law in Uganda tailored to addressing these problems. Consequently, the Uganda Law Reform Commission conducted a study[vii] and came up with a draft insolvency bill that it believes will assist in remedying the situation. However, this bill has not yet received presidential assent. As to whether this bill is relevant and adequate is a subject of this discussion.

Insolvency defined
Simply defined, it is the inability to pay debts in full.[viii] It applies to both natural and artificial persons, namely, individual and corporate insolvencies.[ix] Thus, if all assets of the debtor are insufficient to pay his debts then he or she is technically insolvent. He or she is deemed insolvent if he or she fails to settle his debts as they fall due.

Relevance of the insolvency bill
The relevance of the bill can better be understood when one looks at the weaknesses within the current law and compares the same with changes proposed in the bill.

I. Consolidation of insolvency law
As already note above, Uganda’s current insolvency is scattered in different legislations, notably, the companies Act,[x] 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.[xi] 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.

II. 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,[xii] yet with globalization and trade liberalization, these laws have come under criticism as failing to address modern business problems.[xiii] The bill is thus important in order to bring this law in conformity with modern business demands, particularly to protect Uganda’s economy against the dangers of globalization while at the same time attracting foreign investment.[xiv] This will boost the confidence of financial institutions since they will be assured of the means of proceeding against defaulters to recover their money.

Thus, the insolvency bill provides for regulation of cross-boarder insolvency[xv] 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[xvi] the law to envisage reciprocity with the rest of the nations with which Uganda partners in trade.[xvii]
III. 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.[xviii] 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; yet, the government is in a better position to mitigate its loss as compared to small scale enterprises. By virtue of clause 13(2) (b) the bill secured creditors are given priority over secured creditors in so far the property of the debtor is insufficient to meet all the claims. The inadequacy however is that the topmost priority is given to settlement of remuneration and expenses of trustees, receivers, liquidators and administrators instead of preferring creditors.

IV. Insider dealings
The relevancy of the insolvency bill is also evident in its attempts to address problems associated with insider dealings thereby making such transactions 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 their 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 and therefore voidable (clause 19(2). This relieves the creditors of the burden to prove fraudulent intention on them as mere transfer of the property at the time when the insolvent or bankrupt is unable to pay his debts or within a year preceding the commencement of liquidation or bankruptcy is sufficient under clause 16 of the bill.

V. Appointment and regulation of insolvency practitioners (clauses208-216)
Currently there are no 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.[xix] Ignorance of insolvency 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.[xx] 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[xxi] 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.


VI. Abolition of acts of bankruptcy
This makes the bill relevant in current commercial transactions which require expediency.[xxii] 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 to collect 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.

VII. Voluntary arrangements
In modern business setting, it is prudent for the bankrupt or insolvency firm to arrange with creditors and settle his or its financial obligations outside court thereby avoiding costs of litigation and at the same time saving his business from being wound up. The bankruptcy Act under ss.17, 18 and 22 incorporates this development and makes it binding upon all creditors. However, the debtor must seek approval of court and under s.22 it retains the discretion to adjudge him bankrupt and annul the scheme of arrangement on grounds of fraud. In this case the bill becomes relevant when it purports to address this issue as under clause 126 the debtor is only required to apply to court for an interim protective order upon payment of a moratorium. This protects him or her 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 his or her business being liquidated. At the same time, it promotes the rationale for insolvency law-that of rehabilitating rather than punishing the insolvent.



VIII. An update on the minimum claimed amount
Under s.5 (1) (a) of the bankruptcy Act a creditor is not allowed to petition for bankruptcy unless the amount of the debt owing amounts to one thousand shillings. Clearly, this shows that the Act has been overtaken by current business developments and calls for an update of this area. It would be unfair to petition for bankruptcy on account of a mere one thousand shillings without regard to the fact that the expenses of litigation would even be much higher than the amount sought to be recovered. It would equally unjustly disorganize the debtor since that paltry amount can be settled out of court. The insolvency bill thus becomes of essence in filling this gap. In fact under clauses 2 and 5(2) (a) coupled with the fourth schedule to the bill, a petition is only admissible when the debt owing is one million or three million shillings for individuals and corporations respectively. This however does not cater for future economic changes. It is my considered view that setting the amount should be left to the discretion of Court to determine depending on the circumstances at the time.

IX. Property available for distribution
Under s.41 (1) (b) of the Bankruptcy Act, the bankrupt is left in worse situation after distribution of his or her assets to the creditors. A mere 300 shillings left to cater for his and the survival of his family is unfair in the eyes of equity because it seeks to punish him or her and does not take into account the plight of his family. Moreover, it does not take into account the fact that the bankruptcy may have come about out of the circumstances beyond the control of the bankrupt. The insolvency bill under clause 30(2) seeks to correct this problem by providing basic means of survival. The bottom-line is that with changing circumstances, restricting the amount to 300 or 800 shillings would be unfair as with current inflation such an amount cannot afford the bankrupt and his family basic means of survival.

X. Saving the bankrupt from Interest burden
Under s.10 of Prudential Guidelines issued by Bank of Uganda and pursuant to s.52 (a) of the Financial Institutions Act, interest on non-performing assets continues to accrue and this is consistent with banking practice in Uganda’s economy. This is unfair to the insolvent firms and bankrupts given the fact during insolvency proceedings their operations may be suspended and they are not able to profitably use such borrowed money. The bill is thus relevant as it seeks to protect the bankrupt or insolvent from further burdens of paying exorbitant interest. Accordingly, clause 7(2) is clear that interest shall not exceed court rate (currently 8%).


XI. Reconciling the RTA with the Insolvency law
Our current insolvency law is inferior to the Registration of Titles Act.[xxiii] S.197 thereof is to the effect that the bankruptcy of the proprietor of land does not affect the bankrupt’s dealings in the land until the official receiver, receiver, liquidator or trustee in bankruptcy as the case may be, registers his or her interest in the land. This is because as the bankrupt holds the certificate of title, he or she is protected by s.59[xxiv] as the true owner of the land with unfettered rights to deal with it in whatever manner he or she wishes. These provisions give the insolvent an opportunity to dispose of his land and allow bona fide purchaser without notice to obtain good title, yet he or she might have concealed it from the receiver or the receiver may be absolutely ignorant about its existence. There is therefore need to harmonize these laws and get a single insolvency law devoid of such exemptions.

Conclusion
The archaic nature of our insolvency law requires that the law be repealed to fit with modern business trends more so with globalization and openness of our economy. This is vital to encourage foreign investment and 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 reintegrating him in economic development. Thus, the insolvency bill is relevant since it tries to address pertinent issues despite shortcomings.







ENDNOTES:
[i] Cap.67, Laws of Uganda
[ii] Cap 110 Laws of Uganda
[iii] Cap 75, Laws of Uganda
[iv] 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
[v] Part IX of the Bankruptcy Act, Cap.67 is good on reciprocity. Although it has been in disuse following the recession of the economy, with regional cooperation and openness to world markets, it is vital to revitalize this practice.
[vi] A picture of initial proposals got from para.13 of the Study Report on Insolvency Law by Uganda Law Reform Commission (2004)
[vii] Uganda Law Reform Commission: A study Report on Insolvency Law (2004), Kampala, Uganda.
[viii] Osborn’s Concise Law Dictionary, (7th ed.) by Roger Bird at p.182. On the other hand Black’s Law Dictionary (Abridged 5th Ed) defines insolvency as the one’s inability to pay his or her debts, or, a lack of means to pay debts.
[ix] Supra note 4
[x] Cap. 110, which provides for corporate insolvency.
[xi] 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.
[xii] The Companies Act for example has never been repealed.
[xiii] Para.1.1.1 (a), Study Report on Insolvency Law (2004), ULRC Publication No.13, at p.2.
[xiv] P.47 of the Report under para.4.1. 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.
[xv] 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.
[xvi] 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).
[xvii] 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.
[xviii] 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.
[xix] 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.
[xx] Ibid.
[xxi] 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.
[xxii] Under clause 4 of 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.
[xxiii] Cap.230, Laws of Uganda
[xxiv] According to s.59 of the Registration of Titles Act, a certificate of title is conclusive evidence of title. As already noted, this gives the bankrupt an opportunity to sell off the land to the prejudice of his or her creditors.