Professional Documents
Culture Documents
Ursb Insolvency Journal 2023 1680090818
Ursb Insolvency Journal 2023 1680090818
OF UGANDA
VOL 1 ISSUE1 (2023)
ISSN 2959-3484
ICE OF THE
OFF
REVIVE YOUR
BUSINESS
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FIC R
IA L R E C EIV E
Part of the aims of this journal is the examination of whether the current Law reforms potentially
raise the cost of insolvency proceedings and are (more) less effective at curbing insolvency rates than
regulators hope and to debate on the efficacy of corporate rescue by providing evidence and guidance
that it is very effective at preventing insolvency. Studies on insolvency proceedings relating to banks
have shown that introducing bail-in, for example, reduces the safety net for banks and should, through
increased insolvency costs, result in lower insolvency rates and a reduced cost to governments and
taxpayers, thus resulting in a positive social outcome. The other goal of the Journal is to examine the
effect of insolvency law incentives on the involved parties before the entities go into bankruptcy,
even before any clue of financial distress is on the horizon. The two main effects of the incentives are
potentially relevant. First, while insolvency proceedings are not debt collection tools, they deter
entrepreneurs from making decisions that culminate in financial distress for their businesses for
example, by undertaking too many risks. Secondly, insolvency proceedings by protecting the
creditors’ and public interests when the company is in financial distress increases social outcomes
The Editors of this Journal make a crucial assumption that with the analysis and understanding of
insolvency, the value of a company when reorganised, rather than liquidated, for example, is not
uniquely defined. Many reorganisation plans may be available, and each plan may imply a different
value of the company, depending on who takes the decisions within the new firm and what projects
(s)he has in mind.
Contemporaneously, the struggle to inculcate entrepreneurial behaviour and therefore address the
need for investors to avoid insolvency has elevated the need for information and research on
insolvency matters. This publication responds to this imperative and will welcome articles related to
insolvency including but not limited to:
1) Individual and corporate insolvency; 2) Receiverships; 3) International strategies of
multinationals and their challenges relating to insolvency; 4) The nature of emerging market
multinationals and insolvency; 5) Social, environmental, and political risk; 6) Company
ownership and governance and their potential to catalyse or thwart insolvency; 7) The role of
multigenerational institutions in insolvency; 8) The potential for innovation and
entrepreneurship in a BUBU context to negate the ills vitiating company quality; 9)
Corruption and Ethics in insolvency matters; 10) Company performance enhancing
management practices required to circumvent insolvency; 11) Company solvency and
performance persistence; 12) Company management, leadership, and sustainability during
threatened solvency; 13) The role of company reorganisations, amalgamations, and
restructuring; 14) Any other matters relating to insolvency.
The other paper addressing the theme of corporate rescue is by Sallam, entitled “Corporate rescue: a
worthwhile legal option for financially distressed companies”. The paper discusses corporate
recovery and examines why it is increasingly becoming the focus of modern insolvency law.
Borrowing from secondary sources, the paper shows that distressed businesses can be assisted to
recover from financial distress, which is frequently characterised by persistent loss-making,
profitability, and sustainable operation through early diagnosis and the implementation of corporate
rescue measures. His review results call for all stakeholders to embrace corporate rescue and to utilise
it to safeguard businesses from preventable deaths. This particular paper is potentially valuable to the
extent it discusses the benefits of corporate rescue over liquidation, such as helping in preserving
jobs, promoting diagnosis and treatment of corporate failure, and assisting in maintaining business
value.
The last paper in this cohort is provided by Konde on “Corporate rescue of businesses in Uganda:
lessons from the corona virus pandemic.” The author aims to identify the lessons from the COVID-
19 pandemic especially as they relate to insolvency and corporate rescue. This paper is particularly
important to the extent it identifies the need for codification of informal corporate rescue measures, the
establishment of a specialized insolvency court, the adoption of e-commerce, and looking for alternative sources
of capital in case of need. This is probably the first documented suggestion that the government bail outs have
been very selective and that there should be an across-the-board government bailout effort of businesses in
Uganda through a post-Corona Virus Pandemic recovery plan.
The next set of papers is generally educative and offers plausible lessons for policy and practice. The
paper by Salam is “Benchmarking on the south African corporate rescue regime to improve Uganda’s
framework: key research findings and recommendations.” The author provides an overview of the
main research results from a study on the strengths and weaknesses of the South African corporate
rescue regime and suggests actions that Ugandan parties might take to strengthen the country's
corporate rescue laws. The value of this particular paper lies in the understanding that the South
African experience gives the most useful guidance for improving pro-business rescue judicial systems
in Uganda.
The other paper in this ilk examines the challenges that the Uganda courts, insolvency practitioners,
and scholars will encounter in identifying the Centre of Main Interests of a business enterprise and
reviewing the effectiveness of the Insolvency Act 14 of 2011 in dealing with these challenges. Here,
Munanura’s paper highlights the need for change in the law to provide for communication,
cooperation, and coordinate instead of to recognition of proceedings so that an entity or group of
companies conducting business across several jurisdictions can be better dissolved or rescued.
Nabalende and Tusingwire, examine cross-border insolvency within East African Community and
the challenges faced in implementing the relevant laws across the region. Their paper reveals that
recognising foreign insolvency proceedings creates a degree of legal certainty in EAC. The article
offers the perspective that has hitherto been insufficiently addressed and provides recommendations
such as that coordinated EAC cross-border insolvency practice is only effective where there is a
reciprocal legal regime in each State.
The last, but by no means least, category consists of a paper by Idoot and a paper by Wanyina. The
paper by Idoot is an examination of the potential for cryptocurrency exposure of companies
undergoing insolvency proceedings. The paper shows that despite the incoherent perception and
treatment of cryptocurrencies, the cautious management of this nascent asset category can go a long
way in helping advance some of the key objectives of Insolvency law. The paper implies that while
Insolvency law has at its core the need to protect and advance the interests of various stakeholders
such as creditors, the need to secure as many assets as possible becomes one of the most principal
goals and that insolvency courts potentially serve as a testing (‘battle’) ground, both in terms of
defining cryptocurrencies’ legal status and finding practical ways of recovering and handling their
value for the general benefit of creditors. The paper illuminates the view that the Courts have and
retain the power to lend insolvency practitioners the power and capacity to tap into the value that
cryptocurrencies have regardless of the seemingly grey space they occupy in terms of the prevailing
regulatory regime – essentially helping them advance the core objectives of insolvency proceedings.
Thus, advice is lent to insolvency practitioners to be steadfast in the pursuit of assets held in the
cryptocurrency ecosystem, the legal issues notwithstanding.
Wanyina’s paper is a view point and is purposed to share the experience of an insolvency practitioner.
The insolvency practitioner account shows that insolvency practitioners involved in voluntary
liquidation must ensure that before taking on instructions to undertake the process confirmation is
made that annual returns have been filed. This account also shows that companies close because
among others: they fail to commence business and hence have no prospect of doing any business in
the future; they for some time have done business but which goes down and the shareholders wish to
have the Company closed; the Company is an associated Company of another and there is need to
streamline through a merger of operations to properly manage costs; and the purpose for which the
Company was established is overtaken by events. The paper provides practitioners in voluntary
liquidation to; 1) do a thorough assessment of the Company to be liquidated to confirm full
compliance with all Company law legal requirements 2) keep it professional by reading and
understanding the law very clearly, taking into consideration that there is dual regulation of the
3. Concluding remarks
Most of the papers selected for this issue have touched on different aspects of insolvency connecting
it with the need for corporate rescue and necessary imperatives to avert corporate failure. Such a
focus on insolvency is also evident in prior work that has discussed this important area, such as ex-
ante and ex-post efficiency of bankruptcy procedures (Cornelli and Felli, 1997). Looking ahead,
what is known about insolvency in Uganda and Africa, in general, is patchy. Thus, in general, the
African terrain and particularly Uganda offers writers and indeed scholars, a minefield of untapped
writing opportunities concerning the nature and character of business insolvency and restructuring.
You are all welcome to consider The Insolvency Journal as your publications’ outlet!
The insolvency Journal – a journal on insolvency and restructuring – is, of course, the official journal
of the Uganda Registration Services Bureau (URSB). Producing it is one of the main activities that
the URSB undertakes. All the papers in this Journal will have in common that they investigate or talk
about an aspect of insolvency and restructuring – and one feature of insolvency and restructuring is
that it is a very wide and very interdisciplinary field. With that we leave you to read the Journal,
hoping that the information that we publish herein will inspire you to read and act and apply and to
contribute to future editions of the Journal.
Professor Stephen K. Nkundabanyanga PhD.
Editor
Editorial Assistant
Editorial Assistant
Emmanuel Kashaija
School of Law,
Uganda Christian University.
Email: emmanuelkashaija@gmail.com
Abstract
Purpose - The purpose of this article is to consider, from a Ugandan perspective, whether corporate rescue of
insolvent companies offers sufficient stakeholder protection.
Design/methodology/approach - I conducted a desk review of the insolvency regimes broadly and included
corporate rescue mechanisms - to highlight the subject of corporate rescue rather than to suggest technical
definitive answers.
Findings - The developments in Uganda show a shift to risk management rather than the prior
approach of debt collection on corporate failure. The new approach speaks to remedial action at the
pre-insolvency stage that focuses on risk management and managerial accountability to avert
corporate disaster before it even begins. Despite offering numerous advantages such as the
moratorium period, formal rescue mechanisms are normally shunned by distressed companies due to
the lengthy and costly process and publicity that impacts the corporate and business image. Informal
rescue mechanisms are largely swifter and affordable to ailing businesses. The rationale of rescue
contrasts with liquidation with a successful rescue benefitting a wide range of stakeholders in the long
run.
Implications– While a new era of insolvency regime was ushered in by the Insolvency Act, 2011, and
the Companies Act, 2012 to provide for formal rescue mechanisms, it is silent on informal rescue.
Companies facing corporate troubles may well prefer the use of informal mechanisms to keep their
public image which results in fewer data on the topic.
Originality/Value – This paper highlights the fundamental importance attached to rescue and considers the
policy issues underpinning corporate rescue and restructuring culture both in Uganda and overseas
1. Introduction
The purpose of this article is to consider, from a Ugandan perspective, whether corporate rescue of
insolvent companies offers sufficient stakeholder protection.
The state is charged with providing avenues for business regulation, protection, and promotion of the
right to carry on any lawful occupation, trade, or business. The Uganda Registration Services Bureau
(URSB) is charged with providing business registration services. However, the regime does not
charge the government with the rescue of ailing businesses which is rather a moral obligation of the
government for economic prosperity. Corporate disasters are caused by either internal deficiencies or
pressures exerted by external factors. Internally, Financial mismanagement and poor financial
controls, poor corporate governance practices, lack of basic business skills, and managerial
incapability lead to a loss of confidence in the firm by both creditors and investors ultimately resulting
in corporate failure. Externally, in competitive and changing markets and economic conditions,
government interference through regulation of businesses that impinge on corporate activities has
been described as particularly common and harmful for businesses. These factors coupled with
unexpected calamities such as the covid-19 pandemic lead to devastating losses that threaten the very
existence of companies and the business community at large.
C. Nyombi states that “corporate rescue acts as a major intervention necessary to avert the eventual
failure of the company.” On failure to pay their substantive debts, insolvent companies often undergo
liquidation and are wound up where the property of the company in distress vests in the liquidator
In particular, the preservation of business is the major aim of corporate rescue. In the longer term, it
is worth saving for the protection of jobs of a workforce, avoidance of harm to suppliers, customers,
and state tax collectors, and prevention of damage to the general economy or the business confidence
in the sector. Corporate rescue envisages any one or two outcomes; the primary objective is that the
company will return to continue in existence as a going concern, whilst the alternative, the secondary
objective is a better return for creditors or shareholders than would have if the company is liquidated.
Unlike judicial management, which requires a company to be returned to solvency, either one of the
two outcomes would be considered a successful rescue.
The Cork committee laid the foundation for the rescue culture in the United Kingdom. Where it stated;
“We believe that a concern for the livelihood and well-being of those dependent upon an
enterprise which may well be the lifeblood of a whole town or even a region is a legitimate
factor to which a modern law of insolvency must have regard. The chain reaction
consequences upon any given failure can potentially be so disastrous to creditors, employees,
and the community that it must not be overlooked.”
In her text, - Corporate and Personal Insolvency Law, Fiona Tolmie states;
“the rescue culture is particularly used in relation to companies, where it is usually
understood to mean that there should be an attempt to enable businesses to continue as going
concerns in preference to selling assets on a break-up basis. The rescue culture serves social
objectives in that it will usually be in the interests of everyone, particularly employees,
involved with a business that the business should survive; it will also usually benefit creditors
since the liquidation process is likely to diminish the value of the assets, whereas creditors
will often receive a better return over time where the company survives as a going concern.
…. The priority is to rescue where possible but, where this is not possible, to ensure that the
consequences of failure are not so dire that they deter responsible risk-taking.”
The Cork committee recommendations and Fiona Tolmie’s observation that corporate rescue aims at
the preservation of the business for broader benefits were approved, in apparently unqualified terms,
by Justice Stephen Mubiru in Uganda Telecom Limited v Ondoma who opined that corporate rescue
“is a rescue mechanism for insolvent companies which allows them to carry on business to stabilize
the company’s position and maximize its chances of continuing in business as an alternative to
liquidation or as a precursor to it.”
Vanessa Finch opines that complete success might be thought to involve a restoration of the company
to its former healthy state but in practice this scenario is unlikely. The drastic actions in rescue entail
changes in the management, financing, staffing, or modus operandi of the company and there are
likely to be winners and losers in this process. A rescue may be ‘successful’ from the point of view
of some parties (e.g. shareholders or employees) but not from the perspective of others (e.g. the
managers or creditors). Assessments of rescues may accordingly have to be qualified to reflect these
different points of view.
The mere fact of a state of insolvency does not trigger any legal consequences; it is only with the
commencement of legal action such as liquidation or rescue that the status of the insolvent and the
rights of the insolvent’s creditors change. In the context of Uganda corporate rescue is not a unique
subject, achievable in several ways that entail both formal and informal mechanisms aimed at keeping
businesses as a going concern.
Informal mechanisms do not demand a resort to statutory insolvency procedures. While informal
corporate rescue mechanisms may be pursued for better returns to the stakeholders, the purpose of
On the other hand, Formal Rescue Mechanisms involve a court-led or supervised procedure that
ultimately leads to the rescuing of a company. Mechanisms such as provisional Administration are
transitory as the company and its creditors agree on a rescue settlement that will be implemented
during administration. Just like informal rescue mechanisms, formal rescue mechanisms aim to keep
the firm in business.
Whereas creditors present and voting at the meeting may depart from a scheme of an arrangement
arrived at, courts have recognised the right of majority creditors to bind these dissenting minority
creditors to the scheme under Section 83 of the Insolvency Act as buttressed by the persuasive
judgment of Honourable Mr. Justice David Richards in the UK High Court case of Cape Plc and
Others, Re Companies Act 1985 which sanctioned the scheme reasoning that the dissenting creditors
present and voting at the meeting omitted to vote yet did not oppose the application to the court to
sanction the scheme and were bound as such when court sanctioned the scheme. The provisions of
the Insolvency Act settle the debate on the position of dissenting creditors who desire the company
to be liquidated on the company entering the scheme.
The rescue culture in Uganda has been endorsed by the parliament, judiciary as well as financial
institutions, and politicians. While encouraging the rescue culture, the Principal Judge, Flavian Zeija
J, at a stakeholder meeting stated that;
“the only solution under the repealed law was liquidation but the Insolvency Act, 2011
provides a cover for stressed businesses through which they can seek continuity as they
mobilise money to pay creditors; judicial officers should, before condemning a financially
stressed business, explore ways through which businesses are saved especially in situations
of calamities and pandemics such as Covid-19…”
Amalgamation/Merger
It is open to companies to amalgamate/merge as a rescue mechanism and continue with one of the
amalgamating companies or even form a new company. Directors of the amalgamating company
resolve that in their opinion the amalgamation is in the best interests of the shareholders and that the
amalgamated company will be solvent immediately after the amalgamation becomes effective. A
certificate to that effect must be signed. There must be an amalgamation proposal and incorporation
document for authorisation of the amalgamated company. The amalgamation proposal specifies the
date on which the amalgamation is intended to become effective and sets out the terms of the
amalgamation.
The amalgamation must be authorised by the shareholders of each amalgamating company by special
resolution and be registered with the registrar of companies. Where it is not practicable to effect an
amalgamation following the procedures set out under the Companies Act, those companies apply to
the court for approval of amalgamation. The registrar of companies must be notified of the court
order approving the amalgamation.
In our jurisprudence, several heavily indebted companies have gone through mergers and acquisitions
to be able to solve their debt burden as was in the case of Total S.A which merged with Gulf Africa
Petroleum Corporation, Nakumatt supermarkets offered a merger agreement of a 25 percent stake to
Tuskys to mitigate its $ 75 million debt to creditors, 8 miles Equity merged and acquired a 42 percent
stake in Orient Bank Uganda and Manji Holdings and Yo Kuku merged with PCL foods that resulted
in a new brand HMW Rainbow. It is important to note that mergers take different forms i.e., through
the capital markets shares, bonds, and long-term investments as guided by the provisions of the
Companies Act.
The company passes a special resolution that it needs to make a settlement with its creditors and
comes up with a proposed provisional administrator for the arrangement. After passing the special
resolution, the company petitions the High Court for an interim protective order, which when granted
lasts for not more than thirty days pending approval of the proposed settlement with its creditors. The
arrangement takes effect when the protective order is granted. The provisional administrator comes
up with proposals for the scheme of arrangement that are considered by the creditors’ meeting that
resolves that the company executes the administration deed with the proposed administrator.
Administration commences on the execution of the administration deed.
The deed is an agreement between the company and its creditors that intends to keep the company as
a going concern and ensure distribution to creditors. The concept of the scheme of arrangement was
buttressed by Justice Musa Ssekaana in Re Sunshine Agro Products Limited (In Administration)
where the learned judge noted that “a deed of company arrangement is a binding agreement between
the company and its creditors governing how the company affairs will be dealt with, which may be
agreed to as a result of the company entering into voluntary administration. It maximizes chances of
the company, provides a better return for the creditors than immediate winding up.”
According to Vanessa Finch, a formal procedure such as administration involves a moratorium and
so creates a more sustainable space within which a rescue can be organised. Administration comes
to an end when the purpose of the administration has been achieved. The administrator gives a notice
of the end of administration accompanied by the final report of the administration to the registrar of
companies, court, and all creditors.
Under Operational restructuring, the departments, processes, and ownership may change and the size
can be reduced through the sale of assets, cutting costs, and changing administration. This is evident
in the case of Sudhir Raperelia & Anor v Crane Bank Limited [In Receivership] where the Central
Bank of Uganda restructured the administration through restructuring and replacement with new top
management to help in redeeming it from the financial constraint. The creditors and the debtor
company may enter into a restructuring, plan, or workout. It is binding only on creditors who are
parties to the agreement. The plan seeks to restore the company to profitability. In International credit
Bank (in liquidation) v Happy James Tumwebaze Kwerija (in Liquidation) and in Uganda
Commercial Bank Ltd v Nabudere and Anor a restructuring programme was made to retire the
workers’ consideration and some retirement packages since the bank was having several debts and
unable to afford to employ all the employees.
Under the financial restructuring, an indebted company may consolidate and adjust the terms of the
debt in a debt restructuring, create a way to pay off bondholders, change maturity dates for debt
instruments, conversion of the currency in which debts are denominated e.g. from US Dollars to
shillings, alliterate interest rates, etc. Rescheduling may appeal to banks/creditors because such
informality avoids the adverse publicity involved in precipitating the liquidation of a company. If the
company’s main problems are related to cash flows, short-term difficulties, or underinvestment, steps
can be taken to inject new funds into the company. Creditors in such circumstances will usually
demand additional levels of security and may act to improve the overall security of their positions:
for example, by using floating charges over the corporate assets.
Bail Out.
A bailout is the act of a business, an individual, or a government providing money and resources (also
known as a capital injection) to a failing company to help prevent the consequences of that business’
potential downfall which may include liquidation and winding up.
At times government avoids rushing to aid insolvent companies until it first investigates to ascertain
the effect it would have on the economy. President Yoweri Museveni in 2004 directed the Central
Bank to bail out Mr. Hassan Basajjabalaba with 21 billion shillings of taxpayer’s money. In 2005, the
President ordered a 13.4 billion shillings tax waiver for Mr. Hassan Basajjabalaba. Similarly, Kisoro
Potato Processing Industries (KPPI) was bailed out and the government took over its management.
Crane Bank Limited was bailed out by the Bank of Uganda with 478.8 billion shillings of liquid cash
support in 2018 evidenced in the case of Sudhir Ruparelia & Anor vs Crane Bank Limited [in
Receivership].
The COVID-19 pandemic has brought notable changes to insolvency legislation in many countries
including the United Kingdom, yet Uganda is one of the countries that did not make changes to
insolvency-related laws but rather introduced measures to mitigate the risks of corporate failure. The
Central Bank of Uganda introduced “temporary” Credit Relief Measures for the protection of small
businesses to ensure their financial stability. Financial institutions restructured loans and eligible
The informal rescue process may be inconsiderate of minority creditors and the stakeholders risk not
finding out what caused the corporate disaster. The process is binding on the willing creditors and as
such the non-bound creditors may well proceed with a petition for liquidation of the company leading
to winding up contrary to the intent and object of the ongoing rescue mechanisms. Vanessa Finch in
her textbook deliberated on the disadvantages of informal rescue;
“A disadvantage of informal rescue, however, is its potential to prejudice the interests of less-
well-placed creditors… from the point of view of certain creditors, a deficiency of informality
may be the absence of investigative powers and the lack of an inquiry into the role of directors
in bringing a company to the brink of disaster. A fundamental weakness of informal rescue is,
furthermore, that the agreement of all parties whose rights are affected will generally be
required if the rescue is to succeed. Informal rescues demand that parties with contractual
rights agree to compromise, waive or defer debts, or alter priorities. Dissenting creditors,
accordingly, have the power to halt informal rescues by triggering formal insolvency
procedures, including liquidation. This renders the informal rescue a fragile device that is
dependent on a high degree of co-operation from a range of parties.”
A person is disqualified from acting as a director for three years if he or she fails to keep proper
accounting records; prepare and file accounts; send returns to the registrar; file tax returns and pay
tax; or allow a company to trade while insolvent. A disqualified director is prohibited from being a
director of any company; acting as a director before the expiry of the disqualification period;
influencing the running of a company through the directors; involvement in the formation of a new
company; acting in a way that promotes a company. A disqualified director is personally and
criminally liable if he acts as a director in this period. This is a more rigorous control of managerial
diligence that the increasing scrutiny of pre-insolvency management can principally be seen.
Further, a private company has the option of adopting and incorporating into its articles the provisions
of the code of corporate governance contained in Table F, at the time of registration of its articles or
subsequently. Table F, the code of corporate governance provides for accountability of the board in
its functions, the responsibility of risk management, internal audit, and external audit where auditors’
independence is prioritized as well as board reports on significant and relevant matters, in a balanced
and understandable manner.
1. Introduction
In this Article, the meaning, nature, and purpose of corporate rescue are examined. The discussion
seeks to introduce the reader to an understanding of the concept of corporate rescue and why it is
increasingly becoming the focus of modern insolvency law. 1 The key benefits of corporate rescue
over liquidation and winding up are also explored, with specific examples drawn from Uganda, South
Africa, the UK, and the US legal system, specifically Chapter 11 of the US Bankruptcy Code, 2 which
is widely acknowledged as the first legislative attempt towards nurturing the rescue culture. 3
Many jurisdictions have now embraced the belief that just as all effort is taken to avert the death of
humans through medical diagnosis, treatment, and palliative care, even sick companies with
symptoms of financial distress deserve to be assisted using diagnostic examination and treatment.
There has been a change in basic assumptions from the hitherto sacrosanct ‘pay what you owe’
attitude to the benevolent promotion of the continuity of companies in distress. 13
It is now understood that, just as people never discuss and prepare mortuary and burial arrangements
for their sick relatives until their final death point, it is inimical to arrange for the burial of a company
through liquidation procedures merely because it has shown signs and symptoms of the financial
ailment. Sick companies deserve treatment, not burial. Although understood differently by different
people depending on their position and interest in the rescue cycle, 14 corporate rescue is generally
understood as a deliberate process through which sick companies are diagnosed, treated, and given
palliative care to overcome distress and avoid the risk of death through liquidation.
Corporate rescue encompasses any major intervention necessary to avert the eventual failure of a
company. 15 The intervention may be informal or formal 16 but must have the potential to salvage a
company from the jaws of an imminent risk of failure or collapse to constitute a corporate rescue
intervention.
Corporate rescue may also be defined as the collective strategic proceedings under a legal framework
designed to facilitate either the preservation of a distressed company itself or the sale of its underlying
business by transferring it to a new owner 19 or its pre-distress stakeholders. 20 The difference between
corporate rescue and business rescue is discussed later in the Article, 21but suffice to note here that
whether the strategy adopted results in the rescue of the company or the business, the intervention
could amount to the corporate rescue. Central to the notion of corporate rescue is the idea that drastic
remedial action is taken at a time of corporate crisis 22 to save a distressed company from liquidation
by its pre-distress stakeholders. 23 Because most company failures are occasioned by financial distress,
some scholars also describe corporate rescue as the process through which companies in financial
difficulty may be returned to a state of viability and avoid sliding into insolvency. 24
From the different definitions above, it can be deduced that ‘corporate rescue’ encompasses the
processes, formal or informal, through which certain drastic measures are taken with the deliberate
objective of either saving the company or the business from collapsing. The action taken may entail
changes in the management, financing, staffing, or modus operandi in the running of the business of
the company, 28 provided that the action taken provides an alternative to the immediate liquidation of
the ailing company. 29
17
Frisby, Report to the Insolvency Service: Insolvency Outcomes (Insolvency Service, London, June
2006) 74.
19
Bo (n 1) 5.
20 Jackson TH The Logic and Limits of Bankruptcy Law (Harvard University Press, Cambridge, Mass
1986) Ch 1-2, 211.
21
See discussion in 1.3.
22
Finch and Milman (n 16)197.
23 Adebola Bolanle Adenike, ‘Corporate Rescue and the Nigerian Insolvency system’ (PhD thesis
University College London 2012) 74.
24
Dignam Allan and Lowry John, Company Law 9ed (Oxford University Press, Oxford, 2016) 425.
25
Bo (n 1)5.
26
Armour, Hsu A and Walters, ‘The impact of the Enterprise Act 2002 on realisations and costs in
Corporate Rescue Proceedings’ 2006 Report prepared for the Insolvency Service 1.
27
Parry Rebecca, Corporate Rescue (Sweet and Maxwell London 2008) 2.
28
Finch and Milman (n 16)197.
29
Bo (n 1) 3.
30
Finch and Milman (n 16)199.
31
Finch and Milman (n 16)198; Belcher A, Corporate Rescue (Sweet and Maxwell London 1997)24–
However, later reforms of the Insolvency regime in England, expressed mainly through the Enterprise
Act 40 of 2002, show that the focus of the British Government on rescue extended to the preservation
of not only the distressed businesses but also the companies through which the businesses are
conducted. 36 It was argued that companies in financial distress must not be allowed to go to the wall
unnecessarily, 37 stressing that the scope of corporate rescue ought to encompass all measures that
result in the preservation of the company rather than its business. 38 On the other hand, in the US, the
situation appears fairly settled that rescue refers to a hypothetical sale of a company to its pre-distress
stakeholders to preserve the distressed entity from the risk of liquidation. 39 The US notion of rescue
focuses largely on the financial rehabilitation of the distressed company 40 instead of the business.
This has resulted in the creation of two interrelated concepts in rescue procedures: ‘corporate rescue’
and ‘business rescue’.
The distinction between business rescue and corporate rescue is, however, not clear-cut. It entails
drawing a hypothetical distinction between the company and the business. 41 Attempts have however
been made by scholars 42 to conceptually distinguish corporate rescue from business rescue.
Corporate rescue is generally described as the process of enabling a company in financial difficulties
to return to a state of viability and to prevent it from sliding into insolvency. 43 It is a form of rescue
procedure whose objective is to provide alternatives to the immediate liquidation of a company. The
strategic aim of corporate rescue is the preservation of the company as opposed to the business. It is
argued that the natural connotation of corporate rescue is that the subject corporate entity survives
the intervention and leaves its stakeholders with a residual stake in it. 44
34.
32
Finch and Milman (n 16)199.
33 Adebola (n 23) 75; Frisby S, ‘Of Rights and Rescue: A Curious Confluence?’ (2019) Journal of
Corporate Law Studies 39-72.
34
Insolvency Law and practice: Report of the Review Committee (Cork Report) (Cmnd 8558,1982)
Chapter 4 53 para 193.
35
Adebola (n 23) 78.
36
Adebola (n 23) 75; The Insolvency Service, Productivity and Enterprise: Insolvency-A second chance
(Cmnd 5234, 2001).
37
Per Hewitt RH, Secretary of State for Trade and industry, forward to the Insolvency Service,
Productivity and Enterprise: Insolvency-A second chance (Cmnd 5234, 2001).
38
ibid
39 Jackson (n 20) 211; Baird DG and Rasmussen R, ‘Control Rights, Priority Rights and the
Conceptual foundations of corporate reorganisations’ (2001) Vol. 87 Virginia Law Review 921-959, at
921.
40
Adebola (n 23) 84.
41
Finch and Milman (n 16)198.
42
ibid.
43
Nwafor O Anthony, ‘The goals of corporate rescue in company law: A comparative analysis’ (2017)
13(2) 20–31, at 21.
44
Frisby Sandra, ‘Of Rights and Rescue: A Curious Confluence?’ (2019) Journal of Corporate Law
Studies 39-72.
Typically, corporate rescue involves changes in the company’s management and may be achieved
through reorganisation, refinancing, debt composition, debt rescheduling, or even downsizing the
operations by laying off staff. 47 Rescue of a company occurs when the company emerges from the
rehabilitation intact and continues with the same operation often including the same workforce and
owners. 48 The key objective of corporate rescue is the restoring a company in difficulty to normal
function and preserving the legal personality. 49
On the other hand, business rescue focuses on preserving the business and not the company. The
rescue interventions focus on severing the business from the troubled company, so that the sick
company may be liquidated or wound up, depending on the circumstances, but its business and
undertakings maintained as a cohesive, productive unit under new ownership. 50 Business rescue
focuses on the continuance of the business. 51
Business rescue usually happens when a company is insolvent but successfully manages to institute
timely measures to retain the business as an operational enterprise, to save jobs, and to ensure the
survival of some kvitaleconomic activities. 52 As was observed in the Cork Report, society has no
interest in the preservation or rehabilitation of the company. However it may have a legitimate
concern in the preservation of the commercial enterprise. 53
Rescue of a business occurs when the company is liquidated, but successful steps are taken to retain
the economic or organisational aspects of the business. 54 This is mainly achieved through the sale of
the company’s assets and business as a going concern, which usually fetches more value than assets
sold in a piecemeal fashion, as it happens during liquidation sales. 55
Whilst the differences enumerated above between corporate rescue and business rescue are
acknowledged, in practice, the two terms are used interchangeably to mean the same thing: the
process through which a troubled company and/or its business may be saved from sliding into
liquidation. Even in countries like South Africa where Chapter 6 of the Companies Act 2008 is titled
‘business rescue and compromises with creditors’, and Parliament chose to consistently use the phrase
‘business rescue’ as opposed to ‘corporate rescue’ in the Companies Act 2008, the way ‘business
45
Bo (n 1) 4.
46
ibid.
47
Armour and Walters, ‘The Impact of the Enterprise Act 2002 on Realisations and Costs in Corporate
Rescue Proceedings 2006 Report to the UK Insolvency Service 2. Available at:
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.96.6853andrep=rep1andtype=pdf. (Date of
Use: 24 July 2020); Bo, Comparative Insolvency Law: The Pre–pack Approach in Corporate Rescue 4.
48
Frisby Sandra, ‘In Search of a Rescue Regime: The Enterprise Act 2002’ (2004) 67 Modern Law Review
247–272, at 248.
49
Frisby (n 44) 14.
50
Bo (n 1) 4.
51
Verdoes and Verweij (n 10) 400.
52
Finch Vanessa, Corporate Insolvency law 2ed (Cambridge University Press Cambridge 2009)188.
53
Insolvency Law and Practice, Report of the Review Committee (Cmnd 8558)1982 (the Cork
Report) para 193.
54
Finch (n 52) 244.
55
Bo (n 1) 5.
The same position is seen in Uganda. Whereas Chapter VI of the Insolvency Act 14 of 2011 (the
Insolvency Act) provides for administration as a rescue procedure available to financially distressed
companies, the Insolvency Act clearly states that one of the fundamental duties of an administrator is
to exercise his or her powers in a manner that he or she believes to be reasonably likely to facilitate
the survival of the company and the whole or any part of its undertaking as a going concern. 56
This underscores the fact that both in law and fact, no practical difference exists between corporate
rescue and business rescue, save that the outcome of the process may lead one to conclude that a
particular rescue intervention has resulted in a corporate rescue or a business rescue.
The proponents of the creditor wealth maximisation (economic value) philosophy of insolvency law
fervently contend that corporate rescue contradicts the goals of insolvency law. They are highly
unsympathetic to the whole notion of corporate rescue. 59 They are opposed to the idea that keeping
companies in operation and protecting interests beyond those of creditors should ever be an
independent goal of insolvency law. 60 They argue that whatever rights and privileges may be
conferred in other areas of law, insolvency law has one primary goal: to allocate the common pool of
assets in such a way as to maximise benefits for creditors as a whole. 61
The arguments by the exponents of the creditor wealth maximisation theory notwithstanding, it is
apparent that the insolvency of any company often crashes the hopes of many stakeholders who may
neither be creditors nor have any formal legal rights to the assets of the business. 62 For instance,
business closure affects employees who will lose jobs, tax authorities who will lose a taxpayer,
suppliers who will lose a customer, nearby property owners who will lose beneficial neighbors, and
customers who may be forced to look for another supplier. 63 The failure of a corporate enterprise
could potentially affect a wide range of parties, most notably creditors, management, employees, and
shareholders. 64 Therefore, it is utopic to argue that the focus of insolvency law ought to be limited to
only the promotion of creditors’ interests.
56
Insolvency Act 14 of 2011 s140(1)(b)(i).
57
Goode R, Principles of Corporate Insolvency Law (4th edn London, Sweet and Maxwell 2011) 58.
58
ibid.
59
Finch and Milman (n 16) 201.
60
Jackson (n 20) 9; Baird DG, ‘The Uneasy case for Corporate Reorganisations’ (1986) Journal of Legal
Studies 127-148 at 127.
61
Goode (n 57) 70.
62
Warren E, ‘Bankruptcy policymaking in an imperfect world’ (1993) Vol. 92 Michigan Law Review 337-
387 at 351.
63
Warren (n 62) 355.
64
Goode (n 57) 68.
Corporate rescue interventions seek to treat, manage and potentially cure the early signs and
symptoms of financial distress before an ailing company progresses into actual insolvency and its
concomitant effects. 70 This directly places corporate rescue at the heart of any meaningful discussion
of modern insolvency law.
The foregoing notwithstanding, it is important to note that despite its name, the conceptual purpose
of ‘corporate rescue’ is not necessarily to prevent companies from being wound up or liquidated. 71
Corporate rescue procedures are not meant to be a substitute for the liquidation or winding up of
economically unviable companies. 72 The purpose of corporate rescue is not to resurrect the dead, but
to cure the ailing company. 73
Modern corporate rescue and reorganisation processes seek to take advantage of the reality that in
many cases, an enterprise not only has substantial value as a going concern, but the going concern
value usually exceeds the company’s liquidation value. 74 Even if the business or the company is not
eventually restored to a solvent or profitable status, corporate rescue measures often improve the
value of the enterprise and result into creditors gaining better returns in the long run. 75 It is believed
that where an enterprise is viable, its assets are often more valuable if retained in a rehabilitated
business than if sold in liquidation. The rescue of business preserves jobs, provides creditors with
greater returns based on higher going concern values of the enterprise, potentially produces a return
for owners, and obtains for the country the fruits of the rehabilitated enterprise. 76 This ideology is
what is sometimes referred to as the rescue culture. 77
65
ibid.
66
Goode (n 57) 75; Finch and Milman (n 16) 201–206.
67
Insolvency Law and Practice, Report of the Review Committee (Cmnd 8558) 1982 (the Cork Report)
para 198.
68
ibid.
69
Insolvency Law and Practice, Report of the Review Committee (Cmnd 8558)1982 (the Cork
Report) para 198.
70 Bo (n 1) 5.
71 Burdette David, ‘Some Initial Thoughts on the Development of a Modern and Effective Business
Rescue Model for South Africa (Part 1)’ (2004) 16 South African Mercantile Law Journal 241–263 at
243.
72 McCormack Gerard, ‘Control and Corporate Rescue: An Anglo–American evaluation’ (2007) 56 The
International and Corporate Law Quarterly 515–551.
73
Nwafor (n 43) 22.
74
Smits JA, ‘Corporate Administration: A proposed model’ (1999) 32 De Jure 80–107 at 86.
75
Burdette (n 71) 244.
76
World Bank ‘Principles for effective insolvency and creditor/debtor rights system’ 2015, 6
77
Hunter Muir, ‘The Nature and Function of a Rescue Culture’ (1999) Journal of Business Law 491–
520.
Corporate rescue procedures provide a mechanism through which the financially sick, but not dead
companies are diagnosed and treated with the primary objective of seeing them healed and returned
to a state of normalcy. Rescue efforts provide breathing space to companies suffering from financial
distress to recover from liquidity complications, by providing them with an opportunity to restructure
and remodel their business operations. 81 It is widely acknowledged that corporate rescue offers a very
useful alternative to the liquidation or winding up of a financially distressed company. 82
Corporate rescue is generally described as the process of enabling companies that are experiencing
financial difficulties to return to a state of viability and to prevent them from sliding into insolvency. 83
Corporate rescue involves pulling a company from the jaws of death with the hope of giving it a new
lease of life. 84 It is meant to be a flexible, effective process through which the lifespan of a financially
distressed company is extended in a manner that balances the interests and rights of all relevant
stakeholders. 85
The basic and central philosophy of corporate rescue processes is that a company in financial distress
is worth more as a going concern than if it is liquidated with its assets realised on a piecemeal basis.86
However, the underpinning belief is that although a company may be sick, if it still has the potential
to survive, it is better to rescue it than to liquidate it, or to wind it up because the going concern value
of a business is generally greater than its liquidation or break-up value. 87
This means that for a company to be eligible for corporate rescue, it must be suffering from financial
distress, but it must not be in a state of factual insolvency. Unlike liquidation, which is triggered by
insolvency, corporate rescue is triggered by financial distress. 88
78
Per the Supreme Court of Appeal of South Africa in Dawid Jacques Richter v ABSA Bank
Limited (20181/2014) ZASCA 100 para 9.
79
Akingbolahan A, ‘A mediation-based approach to corporate reorganization in Nigeria’ (2003) Vol. 29
Northern Carolina Journal of International Law and Commercial Regulation 320.
80
Nwafor (n 43)22; Dignam and Lowry (n 24) 425.
81
Rabilall, ‘Business Rescue as opposed to Liquidation’ March 2018. Available at
http://www.cipc.co.za/files/3515/2688/8915/Business_Rescue_vs_Liquidation_Article_March_2018.pdf
(Date of use: 21 January 2023).
82
Cassim and others (n 11) 861; Finch and Milman (n 16) 201.
83
Nwafor (n 43)22; Dignam and Lowry (n 24) 425.
84
Akingbdahan (n 79) 299.
85
Per the Supreme Court of Appeal of South Africa in Dawid Jacques Richter v ABSA Bank
Limited (20181/2014) ZASCA 100 para 9.
86
Bo (n 1) 5.
87
Cassim and others (n 11) 863.
88
Kastrinou and Jacobs L ‘Pre–. –insolvency procedures: a United Kingdom and South African
Financial distress normally arises when a company defaults in meeting its statutory or commercial
obligations due to internal or external factors that may bedevil a company and cripple its ability to
meet its financial obligations when they fall due, although the company may not be factually or
commercially insolvent at the time of initiating the rescue procedures. 92
Financial distress points to a probable failure shortly of the business of the company, but the company
must not at the time of commencing rescue proceedings be either cash flow (commercially) insolvent
or balance sheet (factually) insolvent. 93
In the South African case of Francis Edward Gomley v West City Precinct Properties (Pty) Ltd and
others, 94 Traverso J stated that the provisions of the Companies Act make it clear that the concept of
business rescue only applies to companies that are ‘financially distressed’ as defined in the
Companies Act. 95 If a company is not financially distressed, the provisions of Chapter 6 of the
Companies Act will not apply to it. It must be either unlikely that the debts can be repaid in six months
or that there is a likelihood that the company will become insolvent. 96
In Welman v Marcelle Props, 97 it was held that business rescue proceedings are not for the terminally
ill close corporations; they are for the ailing corporations, which given time, can be rescued, and
become solvent.
Courts in countries such as South Africa, the UK, and the US have in many cases denied applications
for entry into corporate rescue where the company seeking rescue is insolvent as opposed to just being
financially distressed. 98 This is precise because rescue should never be seen as the magical panacea
to revive an already hopeless company.
It is evident that, whereas it is common for insolvent companies to attempt to seek refuge in corporate
rescue, rescue measures are not designed for companies that are already insolvent. Corporate rescue
is only applicable to companies with signs of financial distress, probably on the verge of sliding into
insolvency but which have not yet crossed the line into actual insolvency. 99 This is precisely because
an insolvent company is generally deemed to be terminally ill, with no reasonable prospect of
On the flip side, liquidation is one of the traditional insolvency procedures primarily meant to
facilitate the disposal of the assets of the company and pay whatever proceeds might become available
to the creditors in their order of preference as prescribed by law. It seeks to achieve orderly and
collective disposal of the assets of an insolvent company for the benefit of creditors.
From a conceptual perspective, therefore, it is apparent that whereas the primary target beneficiary of
liquidation processes are creditors, corporate rescue seeks to benefit a wide range of stakeholders,
including creditors, the debtor, employees, and the community as a whole. Corporate rescue
developed out of the realisation that the economic benefits of the preservation of a company were an
equally important consideration to the maximisation of returns to creditors. 103
The purpose of the rescue procedure is to revive companies that are on the brink of economic collapse
and salvage those that could be viably saved to promote the restoration of production, safeguard
employment, and continue the reward of capital and profit to the benefit of the economy at large. 104
In the UK, the Cork Committee recommended the introduction of administration as an alternative to
liquidation and other creditor-centric procedures like receiverships, because it was believed that
administration will facilitate reorganisation of distressed companies to restore them to profitability,
maintain employment, develop proposals for realising assets for creditors and stockholders as well as
continue carrying on the business. 105
As a result, corporate rescue is now widely understood as a process through which companies are
facilitated to withstand their financial difficulties, return to a state of viability and prevent from sliding
into insolvency. 106 It is widely accepted that corporate rescue offers a very useful alternative to the
liquidation or winding up of companies. 107The following are some of the notable benefits of corporate
rescue over liquidation:
Preservation of jobs
By prolonging the life of a company and its business, corporate rescue helps in preserving jobs for
the people employed in the financially distressed company. Unlike liquidation and winding up
proceedings, which seek to primarily protect the interests of creditors, corporate rescue is intended to
100
Part VI of the Insolvency Act 14 of 2011.
101
Chapter 6 of the Companies Act.
102
Cassim and others (n 11) 861.
103 Omar Paul, ‘Thoughts on the purpose of corporate rescue’ (1997) Vol.12(4) Journal of International
Banking Law 127–142 at 127.
104 Gant Judith, ‘Social Policy and Insolvency: Struggles Towards Convergence’ (2014) 2(4)
Nottingham Insolvency and Business Law e-Journal 49-79 at 51.
105
Insolvency Law and Practice, Report of the Review Committee (Cmnd 8558)1982 (the Cork
Report) paras 496–498; cf Goode (n 57)302.
106
Digman and Lowry (n 24) 425; Nwafor (n 43) 21.
107
Cassim and others (n 11) 861.
The purpose of a business reorganization or rescue procedure, unlike liquidation, is to restructure the
finances of a business so that it continues to operate, provide its employees with jobs, pay its creditors,
and produce returns to its shareholders. It is more economically efficient to reorganise than to
liquidate a company because it preserves jobs and business assets. 109
Although employment protection and business rescue are seen by some commentators 110 as
extraneous to corporate insolvency law, preserving employment is now widely acknowledged as a
very important policy objective behind efforts to engender corporate rescue. 111 More often than not,
the people who immediately suffer when companies collapse are employees, yet the preservation of
employees’ rights has never been a priority for liquidators. Maximisation of returns to creditors is the
primary driver for the actions and decisions taken by liquidators, and since the attainment of this
objective may not always require the company to continue operating, in most cases, the
commencement of liquidation proceedings results in the closure of all business operations. Indeed, in
many jurisdictions, the commencement of liquidation or winding up proceedings automatically
suspends the employment contracts of all company employees.
It is arguable that issuance of a liquidation order almost always results in the loss of jobs by
employees; thus, many jurisdictions are now looking at corporate rescue as a better alternative, since
corporate rescue seeks to facilitate the preservation of the business by ensuring that all or part of the
business is purchased or run as a going concern which helps to maintain the jobs of employees.
Unlike liquidation and winding up, which automatically render employees’ contracts terminated and
leave the employees with only the right to claim for any unpaid wages just like any other unsecured
creditors of the company, the commencement of business rescue proceedings does not automatically
affect the rights of employees.
For a long time, there has been limited appreciation that just like human beings, companies may also
fall sick, with financial distress being one of the common symptoms of corporate sickness. Milman 114
summarised this perception thus:
Early companies’ legislation paid little attention to the rehabilitation of distressed
companies. The assumption was that if a company fell into difficulties, the problem
would be terminal, and the best solution would be liquidation. Companies were
108
Section 7(k) of the South African Companies Act 2008.
109
McCormack (n 72)31.
110
Goode (n 57) 645.
111
Cassim and others (n 11) 899; Gant (n 104) 51.
112
[1896] UKHL 1, [1897] AC 22.
113
Cassim and others (n 11) 34–35.
114 Milman David “Reforming Corporate Rescue Mechanisms 416 in De Lacy J, The Reform of United
Kingdom Company Law (Cavendish Publishing Ltd London 2002) 416.
This is further reflected by the fact that whereas there are many hospitals and specialised medical
doctors to treat sick human beings, in the corporate world, the traditional approach has been to assume
that every time a company shows signs of financial sickness, it does not deserve any diagnosis or
palliative care. It should just be subjected to liquidation procedure, which as has already been argued
herein before, is intended to have an orderly burial for a company and to ensure that its assets are
collected and sold and the proceeds distributed amongst its creditors and the balance to its
descendants, the shareholders. 116 Liquidation is just but a means of ending the legal life of a
company. 117
The advent of the concept of corporate rescue was a recognition that companies are like humans and
can be treated. Rescue involves pulling a company from the jaws of death to give it a new lease of
life. 118It provides a mechanism through which sick companies can be diagnosed, treated, and possibly
healed, depending on the nature and severity of the sickness.
Section 141 of the South African Companies Act 2008, provides that as soon as practicable after
being appointed, a practitioner must investigate the company’s affairs, business, property, and
financial situation, evaluate how severe the company’s financial woes are, and thereafter consider
whether there is any reasonable prospect for the company to be rescued. 119 A similar provision
appears in section 140(1)(a) of Uganda’s insolvency Act 2011.
Through the exercise of this investigative power, a rescue expert undertakes a full financial and
structural diagnosis of the company affairs and goes beyond the normal management of the company
to look deeper into the business operations of the company, its financial reporting lines, expenditure
patterns, and business potential. 120
This is further augmented by the imposition of duty on the directors of the company to cooperate with
and assist the practitioner to understand the depth of the company’s troubles. 121 The business rescue
practitioner or administrator in the Ugandan context is further expected to continue monitoring the
companies’ financial situation regularly and to timeously inform the key stakeholders as soon as he
or she forms the opinion that there is no reasonable prospect of a successful business rescue and
accordingly seek approval to discontinue the rescue process. 122 Where this happens, the rescue
practitioner will recommend that the company’s financial situation is irretrievably critical and hence
recommend that it enters liquidation, which in this case would be like moving a patient from the
normal ward to the intensive care unit.
Similarly, where the rescue practitioner’s investigations show that there are no more reasonable
grounds to believe that the company is in financial distress, he or she must inform the stakeholders
and move to terminate the rescue procedure. 123 Again, this would be comparable to discharging a
patient from a hospital.
115
Milman (n 116); Akingbolahan (n 79) 294.
116
Per Supreme Court of Appeal of South Africa in Dawid Jacques Richter v ABSA Bank Limited
(20181/2014) ZASCA 100 para 9.
117
Akingbolahan (n 79) 320.
118
ibid.
119
Section 141 of the South African Companies Act 2008; Cassim and others (n 11)895.
120
Finch (n 52) 243
121
Section 153(2) of the Insolvency Act 2011; Section 142 of the South African Companies Act 2008;
Cassim and others (n 11) 896-897.
122
Section141(2)(a) of the South African Companies Act 2008; Cassim and others (n 11)896.
123
Section141(2)(b) of the South African Companies Act 2008; section 147(3) of Uganda’s Insolvency
The going concern value of a company can be realised where the company assets are preserved and
sold in the form of a complete takeover or a bulk sale, which involves the sale of the entire business,
including goodwill and other intangibles. 129
By their very nature, corporate rescue proceedings, unlike liquidation, are designed to capture the
going concern surplus in corporate restructurings and insolvency. 130The going concern surplus is
realised where the company’s business and assets are preserved as an operating unit, surviving either
through a successful turnaround or reorganisation, or through a going concern sale, where the whole
or substantial part of the business and assets of the ailing company are preserved and kept as one
complete whole. 131
Act 2011.
124
Section 141(2)(c) of the Companies Act 2008; Cassim and others (n 11) 896.
125
UNCITRAL ‘Legislative Guide on Insolvency Law’ (New York United States of America 2015) 11.
126
Goode (n 57)130; Lord Walker in BNY Corporate Trustee Services v Eurosail–UK [2011] EWCA Civil
227 paras 48–49.
127
Section 128(1)(b)(iii) of the South African Companies Act 2008; McCormack (n 72) 3.
128
Cassim and others, (n 11) 862; McCormack (n 72) 4.
129
Armour John ‘The Law and Economics of Corporate Insolvency: A Review’ 2001 ESRC Centre
for Business Research, University of Cambridge, Working Paper No. 197 4. Available at
https://www.cbr.cam.ac.uk/fileadmin/user_upload/centre––for–.–business
research/downloads/working– .–papers/wp197.pdf (Date of use: 15 May 2020).
130
Bo (n 1) 5.
131
ibid.
Corporate rescue laws present several measures through which the going concern value of companies
can be maintained during the business rescue. For instance, once a company enters a corporate rescue
procedure, there is a general moratorium on all enforcement and execution proceedings against the
company and its assets. 139 The business rescue also provides a general shield over the company
property against unauthorised disposal during rescue proceedings. 140
This helps the company to remain a going concern, and if its assets have a going concern value, it
increases its chances of obtaining the going concern surplus which can end up benefiting creditors
and shareholders. On the other hand, the ‘fire sales’ of assets and the negative publicity that often
characterise terminal procedures such as liquidation, inevitably erode any residual value of the
company and its business. 141 This translates into fewer returns, if any, to creditors and shareholders.
7. Conclusion
In this Article, the meaning and nature of corporate rescue have been examined from both a doctrinal
and comparative perspective, noting that the rescue culture developed out of the strategic desire to
mitigate the pain and loss that corporate demise causes to shareholders, creditors, employees, and the
community.
132 Baird DG and Rasmussen RK, ‘The End of Bankruptcy’ (2002) Vol 55 Stan Law Review 751-789 at
758.
133
Bo (n 1) 7.
134
Baird Douglas G and Jackson Thomas H, ‘Corporate reorganisation and the treatment of diverse
ownership interests: A comment of adequate protection of secured creditors in Bankruptcy’ (1984)
51 University of Chicago Law Review 97-130 at 109; cf Bo (n 1) 6.
135
McCormack (n 72) 7.
136 Butler VR and Gilpatric SM, ‘A Re-examination of the Purpose and Goals of Bankruptcy’ (1984)
Vol. 2 American Bankruptcy Institute Law Review 269-285 at 282; McCormack (n 72) 7.
137 LoPucki M Lynn, ‘The Nature of the Bankruptcy Firm: A Reply to Baird and Rasmussen’s The End
of Bankruptcy’ (2003) Vol. 56 Stanford Law Review 645-670, at 645.
138
McCormack (n 72); Bo (n 1) 7.
139
Section 143 of Uganda’s insolvency Act 2011; Section 133 of the South African Companies Act
2008.
140
ibid: Section 134 of the South African Companies Act 2008.
141
McCormack (n 72) 4.
It is therefore argued that although Uganda’s corporate rescue framework still needs to be improved
by making deliberate changes to the Insolvency Act to provide sufficient measures to facilitate the
rescue of distressed companies, even with the current framework, it is important for all stakeholders
to embrace corporate rescue and utilise it to safeguard businesses from preventable deaths.
Nasser Konde
Bar course student,
Law Development Centre, Kampala
Abstract
Purpose - The purpose of this paper is to identify the lessons from the COVID-19 pandemic especially as they
relate to insolvency and corporate rescue.
Design/methodology/approach – Data from secondary sources is used for analysis
Findings – The need for codification of informal corporate rescue measures, the establishment of a specialized
insolvency court, the adoption of e-commerce, and looking for alternative sources of capital is identified.
Implications – There is a need for the codification of informal corporate rescue measures to offer protection to
debtors who in most cases have low bargaining power as opposed to creditors. Moreover, the establishment of a
specialized insolvency court, adoption of e-commerce, and looking for alternative sources of capital; are
especially useful in the immediate aftermath of the coronavirus pandemic.
Originality - This is probably the first documented arguement that the government bailouts offered to certain
companies and not others have been very selective and that there should be an across-the-board government
bailout effort of businesses in Uganda through a post-Corona Virus Pandemic recovery plan.
1. Introduction
The Corona Virus Pandemic led to a disruption of businesses in Uganda due to the need to curb its
spread and this prevented them from acquiring income which is normally obtained from day-to-day
transactions from customers. With the closure of businesses, customers were unable to transact with
businesses and thus provide the much-needed income. Businesses across the country were closed
down except for those that were deemed essential due to the fear that the daily traffic that transacts
with businesses would lead to a devastating outbreak. The closure of businesses had a bearing on
them most especially those with debt obligations given that income from daily transactions is the
biggest source of liquidity for businesses. With the businesses closed and customers not transacting
with them, many were not able to meet debt obligations with their creditors.
As such, many are on the verge or have become insolvent if we are to go by the cash flow test of
insolvency. 142 Corporate Rescue is a major intervention necessary to avert eventual failure of a
company. 143 This intervention can either be formal (formal corporate rescue) which is provided for
by law 144 or informal (informal corporate rescue) which depends on arrangements between the
creditors and debtors. According to Vinch, 145 examples of informal corporate rescue measures
include cost reduction, debt restructuring, and debt and equity swaps. Corporate rescue is a
component of insolvency law that seeks to provide distressed companies with alternatives to keep
afloat 146 Insolvency law is not only there to serve the interests of creditors during insolvency, but
part of its role is also to enable the rescue of an ailing company. This involves the unpacking and
reassembling of a corporate entity by using a formal corporate rescue procedure. 147
2. Insolvency of Businesses in Uganda
Tests of Insolvency
142
Julie E. Margaret (2002) Insolvency and Tests of Insolvency: An Analysis of the Balance Sheet and Cash flow Tests ,
Australian Accounting Review Volume 12 Issue Number 2 at Page 60.
143
A. Belcher (1997) Corporate Rescue , Sweet and Maxwell , London at Page 12.
144
Section 234 of the Companies Act 2012 provides for an Arrangement and Section 162 of the Insolvency Act provides
for Administration.
145
V. Finch (2009) Corporate Insolvency Law: Perspectives and Principles, Cambridge University Press , Second Edition
at Pages 319 to 325.
146
C. Nyombi , A. Kibandama and D.J. Bakibinga (2014) Motivations Behind the Uganda Insolvency Act 2011 , Journal
of Business Law , Issue 8 at Page 653.
147
C. Nyombi , A. Kibandama , D. J. Bakibinga (2014) Journal of Business Law , Issue 8 at Page 653.
The capital adequacy test of insolvency essentially considers that a company is insolvent due to its
capital inadequacy or better put, due to having no capital. 157 This test is not directly provided for in
our Insolvency Act. 158
148
J.B. Heaton , Solvency Tests (2007) The Business Lawyer , Volume 62 at Page 983.
149
JA Margret , ‘Insolvency and Tests of Insolvency : An Analysis of the “balance sheet “ and “cashflow” tests (2002)
Australian Accounting Review at Page 60.
150
Ibid.
151
Ibid.
152
[2020] UGHCCD 25.
153
Sections 3(1)(a) and (b) , 20(1) , 92(2) and 139 (2).
154
Supra.
155
[2013] UKSC 28.
156
It is embedded in Section 3 (1) (c).
157
Supra at Page 995.
158
It is embedded in Section 3(3).
Businesses in Uganda do not have alternative sources of capital. This leads them to heavily rely on
credit from financial institutions. With the closure of businesses by the government and the inability
to receive income from the public, some businesses were unable and others are still unable to service
their loans with financial institutions.
Some businesses in Uganda at the height of the coronavirus pandemic failed to adapt to electronic
commerce due to resource constraints, lack of technical capacity, and bias towards electronic
commerce. This hindered their ability to continue doing business and earning hence leading to cash
flow or liquidity inadequacy and inability to pay debts.
Closure of businesses
In a bid to curb the spread of the Corona Virus Pandemic, the Government of Uganda closed non-
essential businesses in March 2020, partially opened up in October 2020, and later imposed another
lockdown in June 2021. The closure of businesses during the coronavirus pandemic has greatly
affected their ability to fulfill debt obligations to date. Lack of income and existing debt obligations
on businesses like loan payments, suppliers’ costs, and bills have left many businesses struggling to
remain financially viable.
Some businesses have been put up for sale by owners due to failure to meet debt obligations. 159
Other businesses have been foreclosed by banks due to failure to meet debt obligations. 160
Arrangements
Schemes of arrangements
Schemes of arrangement are provided for by the Companies Act 2012. 161 A scheme of arrangement
allows a compromise or arrangement to be agreed upon between a company and its creditors. 162 An
arrangement here may include a reorganization of share capital by the consolidation of shares of
different classes or by the division of shares into different classes. 163
The procedure for a scheme of arrangement involves an initial approach to the court by the company
or any creditor, member, liquidator, or administrator of the company, or else the summoning (with
court approval) of meetings of the company’s members and creditors. 164 The scheme of arrangement
must be approved by the court, which will consider issues of procedural fairness, hear objections from
159
Damali Mukhaye , Owners Put 600 Schools Up for Sale , Daily Monitor , 11 June 2021. Accessed via
https://www.monitor.co.ug/uganda/news/national/owners-put-600-schools-up-for-sale-over-covid-19-3433748 on 2nd
November 2021 at 00:30 hours.
160
Anthony Wesaka , Equity Bank in fight with school owners over loan gone bad , Daily Monitor , Wednesday 17th
February 2021. Accessed via https://www.monitor.co.ug/uganda/news/national/equity-bank-in-fight-with-school-
owners-over-loan-gone-bad-3294690 on 2nd November 2021 at 00:40 hours.
161
Section 236.
162
Finch , op-cit., p.479.
163
Finch , op-cit., p.480.
164
Ibid.
Schemes of arrangement equally have several disadvantages that include the following:
Schemes of arrangement oftentimes tend to be overly protective of minority interests that, in practice,
these schemes have not been approved unless they have dully satisfied the interests of all parties
affected by them. 172 The complexity of the approval arrangements of schemes of arrangement equally
complicates such schemes. These require that separate meetings are held for different classes of
members or creditors affected by the proposed scheme. 173
There are elaborate provisions relating to schemes of arrangement designed to ensure that all
members and creditors are notified of the meetings and fully informed of the issues. 174
A company voluntary arrangement aims at rescuing companies before the onset of insolvency with
ease and less formality than schemes of arrangement. 179 A company voluntary arrangement is meant
to help facilitate the recovery of a company by reaching a composition of debts, formulating an
arrangement, trading the company to realize assets, and distribute profits. 180
In Commissioners of Inland Revenue v The Wimbledon Football Club Ltd and others,
181
Neuberger LJ observed that;
165
Finch , op-cit., pp.480-481.
166
Re Anglo-Continental Supply Co. Ltd [1922] 2 Ch723 , 726 ; Re Dorman Long [1934] 1 Ch 635 ; Re NFU
Development Trust Ltd [1972] 1 WLR 1548.
167
Re Abbey National plc [2005] 2 BCLC 15.
168
Finch , op-cit., p.481.
169
Sections 83 and 127 of the Insolvency Act 2011.
170
Finch , op-cit ., .
171
Finch , op-cit., p.482.
172
Finch , op-cit., p.483.
173
Ibid.
174
Finch , op-cit., p.485.
175
Finch ,op-cit., p.488.
176
Section 234 of the Companies Act 2012.
177
Section 234 of the Companies Act 2012.
178
Section 14
179
ChrispusNyombi and Alexander Kibandama , Principles of Company Law in Uganda (Kampala : LawAfrica , 2014)
, p.295.
180
Ibid.
181
[2004] EWCA Civ 655.
Directors of a company can take the initiative in setting up a voluntary arrangement. 183 The company
does not need to be insolvent or unable to pay its debts for the procedure to be used. 184 Directors may
nominate an Insolvency Practitioner to act concerning the Company's Voluntary Arrangement and
may propose for consideration by a meeting of the company’s members and creditors. 185
The person nominated to act in the Company's Voluntary Arrangement must report to the court stating
whether, in his or her opinion, meetings of the company and creditors should be summoned to
consider the proposal. The proposal needs to be approved by 75 percent of creditors by reference to
the value of their claims. It also requires the approval of 50 percent in value of the members/
shareholders present at a shareholders’ meeting. 186
If approved, the company's voluntary arrangement becomes operative and binding upon the company
and all of its creditors who were entitled to vote at the meeting or would have been so entitled if they
had had notice of it. Such an arrangement also binds those creditors who did not approve the
proposal. 187 A company's voluntary arrangement operates under the auspices of a court but without
the need for court involvement unless there is a disagreement requiring judicial resolution. 188
Compromises
The Companies Act 2012 189 provides for compromises between companies and creditors. A
compromise can equally be between a company and its members. 190 Any compromise proposed or
agreed upon is subject to the sanction of the Court. 191 The compromise if agreed upon by the majority
of creditors or members representing three-fourths is binding on all the creditors or members, the
company, liquidators in the case of being wound up, and contributors of the company. 192
Receivership
Receivership commences when the appointment of a receiver is made by the court or when the
receiver accepts the appointment in writing. 193
A receiver is a person appointed to take possession of property that is the subject of a charge and he
or she is authorized to deal with it primarily for the benefit of the holder of a charge. 194
In G M Combined Ltd v A K Detergents (U) Ltd, 195 the court observed that;
“The Appellant’s precarious financial condition cannot be blamed on the respondents. What
happened was that the appellants as debtors failed to pay under the debentures securing
payment of such debts and the debenture holders called for payment which the appellants
182
Nyombi and Kibandama , op-cit., p.296.
183
Finch , op-cit., p.488.
184
Finch , op-cit., p.488.
185
Finch , op-cit., p.488.
186
Finch , op-cit., p. 489.
187
Ibid and Sections 83 and 127 of the Insolvency Act 2011.
188
Ibid.
189
Section 234(1).
190
Ibid.
191
Ibid.
192
Section 234 (2) of the Companies Act 2012 and Section 83 of the Insolvency Act 2011.
193
Section 176
194
Finch , op-cit., p.329.
195
[1996] UGSC 11.
5. Administration
Provisional Administration
Provisional administration is a corporate rescue measure that enables a company to postpone its
receivership or liquidation. 199
In the Matter of Sunshine Agro Products Limited (In Administration) 200 , Ssekaana J noted;
“Provisional administration provides breathing space to achieve a turnaround or structured
exit and is designed to hold a business together while plans are formed either to put in place
a financial restructuring to rescue the company, or to sell the business and assets to produce
a better result for the creditors than liquidation.”
A provisional administrator can be appointed by a special resolution of the board and a notice in
writing on the date of the interim protective order. 201 Before a provisional administrator is appointed,
the company must by special resolution agree that the company needs to make a settlement with its
creditors. 202 Provisional administration has several effects which offer safeguards to a debtor. These
are laid out in the Insolvency Act 2011 203 and include the following:
1. An application for the liquidation of the company by the court shall not be commenced. 204
2. An order for the liquidation of the company may be made if the court is satisfied that it’s in
the interests of the company’s creditors for the company to continue or to terminate
provisional administration. 205
3. The powers of any liquidator are suspended. 206
4. A resolution for the liquidation of the company shall not be made, except following this
section. 207
5. A receiver of any property of the company shall not be appointed. 208
6. Steps shall not be taken to enforce any charge over any of the company’s property except with
the provisional administrator’s written consent or with the leave of the court and per such
terms as the courts may impose. 209
7. Proceedings, execution, or other legal process shall not be commenced or continued and
distress shall not be levied against the company or its property except with the provisional
196
Section 176 (1) of the Insolvency Act 2011.
197
GM Combined Ltd v AK Detergents (U) Ltd[1996] UGSC 11, General Parts (U) Limited v Non Performing Assets
Recovery Trust [2006] UGSC 3 , Re: Winding Up MudduAwulira Enterprises Limited [2004] UGCommC 19.
198
Finch , op-cit., p.329.
199
Nelson Nerima , Uganda Insolvency Law Handbook , (Kampala : Uncle Books , 2018 ) ,p.60.
200
[2019] UGHCCD 136.
201
Section 139 (1) of the Insolvency Act 2011.
202
Section 139(3) of the Insolvency Act 2011.
203
Section 143.
204
Section 143 (1) (a) of the Insolvency Act 2011.
205
Section 143 (1) (b) of the Insolvency Act 2011.
206
Section 143 (1) (c ) of the Insolvency Act 2011.
207
Section 143 (1) (d) of the Insolvency Act 2011.
208
Section 143 (1) (e) of the Insolvency Act 2011.
209
Section 143 (1) (f) (i) of the Insolvency Act 2011.
Administrative receivership
Administrative receivership is where an administrative receiver is appointed by a floating charge
holder. 213 Administrative receivership aims not only at settling the claims of the floating charge
holder but also at restoring the company to profitability. 214
Section 57 of the Insolvency Act 2011 provides that a creditor who lends the company money secured
by a floating charge over the whole or substantially the whole of the company’s assets can appoint an
administrative receiver.
The appointed administrative receiver effectively controls the company since all the assets subject to
the security instrument will be under his or her control. 215 The administrative receiver’s primary duty
is to realize the security, first by paying higher ranked creditors and deducting his or her remuneration
and expenses, then settling the appointer’s secured debt in full. 216
The Insolvency Act 2011 217 confers wide powers on an administrative receiver, which include the
power to dispose off assets and manage the company’s business. 218
Administration
Administration commences with the execution of an administration deed. 219 An administration deed
is executed between the company and the proposed administrator. 220 The purpose of administration
is to manage the affairs of the company in distress and take account of the interests of all shareholders
including all creditors, with the view of turning the affairs of the company back to normal and
profitability.
Although troubled companies and their directors, creditors, or shareholders can undertake informal
and formal corporate rescue, most corporate rescue is achieved through informal corporate rescue. 222
From the company management and shareholders’ point of view, a general advantage of informal
210
Section 143 (1) (f) (ii) of the Insolvency Act 2011.
211
Section 143 (1) (f) (iii) of the Insolvency Act 2011.
212
Section 143 (3) of the Insolvency Act 2011.
213
Nyombi ,Kibandama and Bakibinga , op-cit., p.661.
214
Nyombi ,Kibandama and Bakibinga , op-cit., p.662.
215
Ibid.
216
Nyombi ,Kibandama and Bakibinga , op-cit., p.662.
217
Section 181.
218
Nyombi ,Kibandama and Bakibinga , op-cit., p.662.
219
Section 162 of the Insolvency Act 2011.
220
Section 150 (1) of the Insolvency Act 2011.
221
Mbale Resort Hotel Limited v Babcon (U) Limited [2019] UGHCCD 216.
222
Finch , op-cit., p.251.
The cost of informal corporate rescue is also likely to be lower than where court proceedings are
involved. Delays and attendant costs may, furthermore, be reduced where rescues are managed
without hostile litigation. 224
The informal corporate rescue also ensures flexibility so that terms can be adjusted and renegotiated
in a way that formal procedures (such as approval processes) do not allow. 225
Informal corporate rescue not only offers creditors the prospect of repayment in full, if ultimately
successful but also provides an opportunity to acquire a fresh injection of funds from other sources
and equally allows well-positioned creditors enhanced or new security. 226
Some of the informal corporate rescue measures that can be utilized by businesses to address their
debt crisis include the following:
a) cost reduction
Under cost reduction, businesses can reduce costs by foregoing many non-essential expenses to
realize funds that can be used to pay up creditors. Some of the non-essential expenses that can be
foregone include lunch allowances, transport allowances, airtime allowances, medical insurance,
meeting allowances, travel allowances, and many others. Cost reduction has been one of the key
recommendations for Uganda Telecom Limited for it to be revived and to be able to pay its
creditors. 227
b) debt restructuring
Under debt restructuring, businesses can restructure their debt with creditors. This involves a
renegotiation of the debt obligation and payment plan to enable the debtor to pay up the creditors. 228
Creditors can opt to reduce the interest rate, cancel the debt, cancel part of the debt, or cancel the
penalties that accrue from failure to pay the debt on time. 229The Government of Uganda and the
Government of Libya for example entered into a debt restructuring arrangement where the
government of Libya cancelled part of the debt owed by the Government of Uganda. 230
c) debt-equity swap
Under a debt-equity swap, a business can trade its shareholding in exchange for fulfilment of its debt
obligation with a creditor. This is mostly applicable in situations where the indebted business is
viable. A good case in point would be the private schools that are currently having liquidity challenges
due to the closure of schools and lack of revenue that was previously acquired from school fees
payments but are guaranteed to fully recover once schools are reopened. The Government of Uganda
through the National Housing and Construction Company effected a debt-equity swap with the
223
Ibid.
224
Finch , op-cit., p.252.
225
Ibid.
226
Ibid.
227
Vunia Carolyn Driciru , “Evaluating Cost Reduction Strategies in Uganda Telecom Limited” Makerere University ,
http://makir.mak.ac.ug/handle/10570/6575 (accessed December 15 , 2021).
228
Dentons, “ Debt Reorganisation : Business Survival Post COVID-19 in Uganda” ,
https://www.dentons.com/en/insights/articles/2020/april/3/debt-reorganisation(accessed December 7 , 2021).
229
Ibid.
230
Government of the National Accord of Libya and Libyan African Investment Company v Attorney General and
National Housing and Construction Company Limited Miscellaneous Application Number 356 of 2020.
d) recapitalization
Under recapitalization, businesses can acquire funding from various sources which funding can be
used to pay up creditors. For example, subsidiary businesses can acquire funding from holding
businesses to pay up creditors. In the aftermath of the 2008 financial crisis, Lehman Brothers Group
which was a holding company with several subsidiaries recapitalized many of its subsidiaries to
enable them to pay up their creditors. 232
6. Recommendations
Codification of informal corporate rescue measures: There is a need to codify the informal
corporate rescue measures to offer protection to debtors who in most cases have low bargaining
power as opposed to creditors.
Establishment of a specialized insolvency court: Alongside the codification of informal corporate
rescue measures is the need to establish a specialized Insolvency Court to go a long way in facilitating
formal corporate rescue. This can be done by creating a specialized Insolvency Law tribunal akin to
the Tax Appeal Tribunal and Industrial Court.
Adoption of e-commerce: Businesses in Uganda should embrace electronic commerce to enable them
to transact with their customers electronically and earn income, especially during situations where
physical transactions are restricted or impossible.
Looking for alternative sources of capital: Businesses should opt for alternative sources of capital to
prevent them from over-relying on credit from financial institutions. These alternative sources include
venture capital and public funds as a result of listing on the stock exchange.
7. Conclusion
In all, businesses bore the brunt of the Corona Virus Pandemic, especially those that were classified
as non-essential. There have been little efforts by both government and private sector players to
intervene and relieve businesses of the plight that they are in.
Some have argued that the government bailouts offered to certain companies and not others have been
very selective and that there should be an across-the-board government bailout effort of businesses
in Uganda through a post-Corona Virus Pandemic recovery plan. Whether that is possible or not is
something that we can debate until the cows come home.
Bibliography
231
Ibid.
232
Belmont Park Investments PTY Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special
Financing Inc [2011] UKSC 38.
233
Alexander Roberts , William Wallace and Peter Meles , “Mergers and Acquisitions” , Edinburgh Business School ,
Herriot – Watt University , www.ebs.online.hw.ac.uk/EBS/PDFs (Accessed December 19, 2021).
Abstract
Purpose - The purpose of this paper is to provide an overview of the main research results from a
study on the Strengths and weaknesses of the South African corporate rescue regime and suggest
actions that Ugandan parties might take to strengthen the country's corporate rescue laws.
Methodology - I chose to participate in the University of South Africa's LLD program when I
determined I wanted to become a "business doctor". My goal was to conduct a comparative analysis
of how I could help Uganda.
Results - One of the nations in Africa and the entire globe with the most pro-business rescue judicial
systems, is South Africa. Over the years, the South African government has made a conscious effort
to safeguard its sectors from avoidable early failure. South African lawmakers have demonstrated
their dedication to fostering business rescue through processes like judicial management, which was
first implemented in South Africa in 1926, and most recently, the business rescue procedure in
Chapter 6 of the Companies Act 2008.
Originality/Value - What I have learned from the South African experience gives the most useful
guidance for improving pro-business rescue judicial systems in Uganda.
1. Introduction
This article seeks to present a summary of the findings and recommendations I made in my thesis for
the award of a Doctorate in Mercantile Law at the University of South Africa. I had the privilege to
undertake a comparative study on the strengths and weaknesses of the South African corporate rescue
framework as a potential benchmark for Uganda. The study centered on a thematic comparative
analysis of the legal framework of corporate rescue in South Africa, Uganda, the UK, and the US.
The research revealed that it is apparent that improving the legal framework on corporate rescue is
now high on many jurisdictions’ legislative agendas, and there is increasing common understanding
that improving the corporate rescue framework is no longer just a private law matter, but a necessary
economic policy measure which every country ought to prioritize, especially at this time when
virtually all economies are on their knees struggling to deal with the socio-economic ramifications of
the COVID-19 global pandemic.
The study confirmed that whereas the South African corporate rescue framework largely reflects the
ideals of a modern rescue framework, the Ugandan legal system lags far behind the global
benchmarks.
In this article, therefore, I present a summary of the key research findings and the recommendations
that stakeholders in Uganda could consider undertaking to improve Uganda’s legal framework on
corporate rescue.
___________________________________
This conclusion cannot, unfortunately, be made about Uganda’s legal regime. The study revealed that
save for introducing provisional administration as a novel entry procedure into administration, the
framers of the Insolvency Act of 2011 and the recent amendment thereto in 2022, mostly transplanted
to Uganda the English position of law that was enacted in the Insolvency Act 1986. 237 There is a
dearth of literature about the origin and rationale for the introduction of provisional administration in
Uganda. 238 Moreover, little effort has been made by Ugandan policymakers to copy the improvements
that were introduced in the English rescue procedure through the Enterprise Act 2002 and the other
subsequent legislative measures that have kept the UK and other developed countries’ rescue
framework supportive of their businesses. As a result, the Insolvency Act has remained deficient in
the critical features of a modern corporate rescue system, which partly accounts for the low uptake of
rescue procedures in Uganda and the consequential high rate of business mortality in the country. 239
The study confirmed that Uganda’s legal system on corporate rescue must be ‘rescued’ by instituting
deliberate structural reforms that seek to align and beef up the Insolvency Act with the widely
recognised international principles of an effective corporate rescue framework. In the same vein, it is
argued that considering the many positives in the South African business rescue framework, coupled
with the fact that the macro-economic fundamentals in South Africa, unlike the UK, the US, and other
developed economies, are more reflective of Uganda’s socio-economic circumstances, there are
compelling grounds to consider the South African regime as a suitable benchmark for improving
Uganda’s system.
The strengths of the South African legal framework on corporate insolvency are summarised here
below.
Commencement procedure
South Africa’s rescue system provides a dual commencement procedure, which allows a financially
distressed company to voluntarily 240 enter into a business rescue procedure. At the same time, it
creates a window for the affected parties to petition the court to compulsorily place the company into
business rescue. 241 This is in line with the international best practice and recommendations by leading
234
Waiswa Abudu Sallam, ‘An evaluation of the South African corporate rescue framework as a potential
benchmark for Uganda’ (LLD thesis, University of South Africa 2022) 391; Levenstein Eric, ‘An Appraisal
of the New South African Business Rescue Procedure’ (LLD thesis, University of Pretoria, 2015) 281.
235
ibid; Bradstreet Richard, ‘The Leak in the Chapter 6 Lifeboat: inadequate regulation of business
rescue practitioners may adversely affect lenders’ willingness and the growth of the economy’ (2010)
22 South African Mercantile Law Journal 195–213, at 195.
237
Waiswa (n 1)255-256.
238
ibid
239
The Guardian, ‘Uganda is a land of entrepreneurs, but how many start-ups survive?’ (16/02 2021).
Available at https://www.theguardian.com/global-development-
professionalsnetwork/2016/feb/16/uganda-is-a-landofentrepreneursbuthowmanystartupssurvive (Date of
use: 30 Jan 2023).
240
Section 129 of the Companies Act 2008.
241
Section 131 of the Companies Act 2008.
Scope of moratorium
Studies have shown that having a strong moratorium on actions against companies undergoing rescue
procedures is one of the critical ingredients of a good rescue system. 249 The framers of Chapter 6 of
the South African Companies Act 2008 were alive to this position, when they broadly drafted section
133 of the Companies Act 2008 to ensure adequate protection of companies undergoing business
rescue proceedings against all legal and other forms of enforcement actions by both the company
creditors and other persons who may otherwise undertake disruptive proceedings against the
company. This allows the business rescue practitioner to concentrate on measures to resuscitate the
ailing company with less pressure from uncooperative parties. This partly accounts for the success of
South Africa’s rescue procedure. 250
Unfortunately, the moratorium provided to companies in provisional administration and
administration in Uganda is inadequate in many ways. 251 First, the moratorium accorded to companies
in administration only binds the parties to the administration deed, namely the company, the company
directors, shareholders, and creditors. 252 However, in practice, disruptive proceedings may come from
parties who may not have signed the administration deed, such as customers, employees, regulators,
242
UNCITRAL, Legislative Guide on Insolvency 2005, 64 recommendation 14.
243
The IMF ‘Orderly and Effective Insolvency Procedures: Key Issues 1999’ 56.
244
ibid.
245 Finch Vanessa and Milman David, Corporate Insolvency Law: Perspectives and Principles (3rd edn,
Cambridge University Press 2011) 312–314.
246
Sections 301 and 303 of the US Bankruptcy Code 11 of 1978. Also see Broude Reorganisations under
Chapter 11 of the Bankruptcy Code 2-2.
247
Waiswa (n 1) 267-288.
248
Section.139 of the Insolvency Act 14 of 2011.
249
Westbrook Lawrence, and Others, ‘A Global View of Business Insolvency Systems.’, (, Washington, DC:
World Bank and Brill 2010) 69; Cassim FHI and others, ‘Contemporary Company Law’ (2nd edn, Juta
and Co 2012) 878.
250
Waiswa (n 1) 159-249.
251
ibid 314-317
252
Section 164(1) of the Insolvency Act 14 of 2011.
253
Waiswa (n 1) 314-316.
254
ibid.
255
Waiswa (n 1) 131-134.
256
Waiswa (n 1) 272-275; Regulations 138–142 of the Insolvency Regulations SI 36 of 2013.
257
Section 142 of the Insolvency Act 14 of 2011.
258
Regulations 138 and 141 of the Insolvency Regulations SI. 36 of 2013.
Rescue finance
Rescue finance is the lifeblood of corporate rescue. 261 Where the insolvency system allows the
insolvent business to continue trading during reorganisation or other rescue proceedings, the
applicable law needs to address the issue of funding. 262 Any corporate rehabilitation procedure that
does not provide alternatives for rescue finance is bound to fail. 263
This study has confirmed that the framers of the Companies Act 2008 were resolute about the
importance of rescue financing in building a modern rescue framework in South Africa. This
commitment was exemplified through the inclusion of section 135 in the Companies Act 2008, which
is conspicuously subtitled ‘post-commencement finance’. This legislative provision is worded in
general terms to authorise the business rescue practitioner to obtain rescue funding, with the
possibility to even pledge any unencumbered assets of the company as security for such financing. 264
The same provision goes on to expressly characterise unpaid remuneration and other payments to
employees during the business rescue as part of the post-commencement financing to the company. 265
The policymakers went on to provide that all payments that fall within the broad category of post-
commencement finance as specified in section 135 of the Companies Act 2008 rank equally and enjoy
priority over all other unsecured creditors. 266
It has been argued 267 that this provision fails to adequately promote the provision of rescue financing
in South Africa insofar as it is silent on alternative mechanisms for raising financing, particularly in
situations where the company does not have any unencumbered assets that can be pledged to secure
the rescue finance. 268 This study has however confirmed that even with this limitation, the South
African policymakers ought to be commended for the firm step they took to provide a window for
the business rescue practitioner to obtain rescue financing. 269 The US, which is often praised for
facilitating post-commencement financing, does not make rescue financing an absolute right for every
company in Chapter 11 proceedings. Several procedural requirements must be satisfied by the debtor
259
Waiswa (n 1) 318-319.
260
Section 44 of the UK Enterprise Act 40 of 2002; Section 362(a) of the US Bankruptcy Code 11 of 1978.
261
Waiswa (n 1) 134-139; Cassim FHI and others, ‘Contemporary Company Law’ (2nd edn, Juta and Co
2012) 882.
262
UNCITRAL Legislative Guide on Insolvency Law (2004) 114 para 97.
263
Westbrook and others (n 16)144.
264
Section 135(2) of the Companies Act 2008.
265
Section 135(1) of the Companies Act 2008.
266
Section 135(3) of the Companies Act 2008.
267 Stoop Helena and Hutchison Andrew, ‘Post-commencement finance–Domiciled resident or uneasy
foreign transplant? (2017) 20 Potchefstroom Electronic Law Journal. 1-40 at 16.
268
Waiswa (n 1) 227-230.
269
ibid
270
World Bank Report on the Treatment of MSME Insolvency 2017, 14.
271
ibid.
272
Cassim FHI and others, ‘Contemporary Company Law’ (2nd edn, Juta and Co 2012) 882.
273
Westbrook and others (n 16) 184.
274
ibid 187.
275 Conradie Shaneen and Lamprecht Christiaan, ‘What are the indicators of a successful business
rescue in South Africa? Ask the business rescue practitioners’ 2018 South African Journal of
Economic and Management Sciences vol. 21(1) 22.
276
ibid 22.
277
Section 128(1)(a) of the Companies Act 2008.
278
Section 128(1)(a)(ii) and (iii) of the Companies Act 2008.
279
Section 136(1) of the Companies Act 2008.
280
Section 144(3) of the Companies Act 2008.
281
Conradie and Lamprecht (n 42).
282
ibid.
283
Westbrook and others (n 42)70.
284
ibid.
285
Article 6 of the EU Directive European Union Directive on corporate rescue 2019/1023.
286
UNCITRAL Legislative Guide on Insolvency 2005 93 para 56.
287
See the discussion under 5.5.4.1.
288
Cassim and others (n 39) 879.
289
Section 133(1)(a) and (b) of the Companies Act 2008.
290
Cassim and others (n 39) 879.
291
Section 169 of the Insolvency Act of 2011.
292
Waiswa (n 1) 291-302.
293
ibid 362-364.
Remove the requirement for the Provisional administrator to obtain consent of secured creditors.
294
Sections 140–141 of the Insolvency Act 14 of 2011.
As Uganda works towards engendering corporate rescue and stands the chance to harness its benefits,
section 142(2)(c) of the Insolvency Act should be repealed.
Abolish receiverships.
In the UK where Uganda copied the bulk of its laws, including the Insolvency Act, 297 the existence
of administrative receiverships as one of the procedures through which secured creditors could force
a defaulting borrower to pay debts, was one of the main reasons why the period between 1986 and
2002, the uptake of administration as a rescue procedure in the UK was dismal. 298 Floating charge
holders had a right to veto the appointment of administrators in the UK, almost the same way secured
creditors can frustrate the appointment of a provisional administrator in Uganda today.
The UK government resolved this practical legal conundrum by abolishing administrative
receiverships through the Enterprise Act 2002, which, together with other reforms, created the
necessary attraction for the market to embrace administration as a rescue procedure. 299 Similarly,
Uganda should consider deleting Part VII of the Insolvency Act on corporate and individual
receiverships, and instead encourage creditors to utilise provisional administration and
administration. This will minimise individualism in favour of collectivism in dealing with corporate
distress. This measure will go a long way in protecting businesses against the risks associated with
individual creditors, mostly financial institutions, unilaterally rushing to invoke their contractual
powers to place financially viable but distressed companies under receivership, without first exploring
rescue procedure, as was the case in a recent court matter involving Mogas Uganda Limited v Stanbic
Bank Uganda Limited & Kabiito Karamagi. 300
The brief facts of that case are that Mogas Uganda Limited, a company engaged in the business of
operating fuel stations across Uganda, owed Stanbic Bank about UGX 43,181,259,828 arising out of
12 loan agreements that were executed by the parties between December 2018 and March 2021. The
Bank alleged that Mogas defaulted on its loan obligations and per the loan agreements, the bank was
expressly authorised to appoint a receiver to take over the management of the borrower’s business
295
Section 169 of the Insolvency Act 14 of 2011.
296
Section 143 of the Insolvency Act 14 of 2011.
297
Waiswa (n 1) 63-66
298
Finch and Milman (n 12) 312.
299
Goode Roy, Principles of Corporate Insolvency Law (4th edn London, Sweet and Maxwell 2011) 385–
390.
300
High Court Misc. Application No. 1358 of 2021.
On appointment, Mogas alleged that the receiver closed all the borrower’s petrol stations and
advertised them (petrol stations) and other assets for sale, without according to the borrower sufficient
time to rescue its business. The borrowers argued that the continued exercise of powers by the receiver
was eroding the value of the company, with the risk that it would end up being wound up and its
assets sold under distress.
Mogas accordingly applied for an order of a temporary injunction from the court to suspend the
Bank’s decision to prematurely appoint a receiver in respect of the company and to order his
immediate removal. Mogas further pleaded that if given time, it would be able to conclude a
transaction with a potential investor and be able to pay off the Bank’s loan, and ultimately save its
business. On the other hand, the bank justified its decision and insisted that it was entitled to place
the company under receivership to recover its overdue loan arrears.
After a lot of legal arguments, the trial judge, Justice Jeanne Rwakakooko, granted the application
for a temporary injunction and suspended the appointment of the receiver for six months to allow the
management of Mogas to resume operating its business and possibly pay off the loan.
Without prejudging the parties in this matter, many lessons can be drawn from the case, but of
relevance to this discussion is the fact that receiverships are by their nature, an individualistic
procedure that may not often focus on the rescue of the defaulter, but the collection of what is due to
the lender. If not properly used, receiverships can destroy businesses to the detriment of all parties,
including the creditor who invoked it. The individualistic nature of receiverships renders them
inappropriate for a business with many creditors, whose interest may only be fairly taken care of by
a more neutral party, answerable to all creditors and not just the creditor who appointed the receiver.
This is what the administration seeks to achieve.
Uganda should consider amending the Insolvency Act to abolish the use of receiverships and instead
permit creditors who would otherwise be entitled to place their defaulting borrowers under
receivership, to instead place them (the defaulting borrowers) under administration. This will
potentially benefit, not just the secured creditors, but the entire body of creditors, the company, and
the economy.
301
Waiswa (n 1) 314-317
First, exempt all legal instruments upon which lenders advance money to companies in provisional
administration or administration from stamp duty. This will reduce the costs incurred by the already
sick companies in having their loan instruments such as debentures, mortgages and other similar
instruments registered.
Secondly, create an incentive for lenders to assume the risk to lend to companies in provisional
administration and administration by making it clear that if they (lenders) fail to recover the money
lent to companies during the rescue procedure, the value of those bad loans is directly recognized as
allowable business expenses in determining their liability for corporation tax under section 22 of the
Income Tax Act.
Thirdly, exempt interest earned from loans advanced to companies during provisional administration
and administration from income tax.
Fourthly, create longer credit classification timelines for loans advanced to companies in provisional
administration and administration. The Financial Institutions (Credit Classification)
Regulations 303should be amended to allow banks and other financial institutions longer periods before
they are required to provision for non-performing loans advanced to companies undergoing
provisional administration and administration.
The provision of rescue funding to provisional administrators and administrators of companies in the
selected strategic sectors could be a more viable avenue for resuscitating financially distressed
companies than directly advancing discounted loans to such businesses. It is easier to subject
administrators of companies in administration to external scrutiny since an administrator is an
independent professional, answerable to his or her professional body 304 , and already bound by the
terms of the administration deed, and continuously answerable to more stakeholders, including the
creditors, the licensing authority 305 and court. 306 This means that it is both structurally and practically
easier to hold an administrator account for the rescue funds borrowed than the company directors
302
ibid.
303
Financial Institutions (Credit Classification) Regulations SI 43 of 2005.
304
Section 204 of the Insolvency Act 14 of 2011.
305
Section 209 of the Insolvency Act 14 of 2011.
306
Sections 173 and 174 of the Insolvency Act 14 of 2011.
It is recommended that Uganda should consider amending the Insolvency Act by introducing a
provision similar to section 365(e)(1) of the US Bankruptcy Code of 1978, which expressly prevents
counterparties from terminating or modifying the terms of any executory contract or unexpired lease
held by companies that enter into reorganisation procedure merely based on their entry into Chapter
11 proceedings. 308 If well crafted, introducing this kind of restriction in the law will render clauses in
executory contracts which entitle counterparties to terminate or modify the terms of the contract on
account of the debtor’s entry into business rescue procedure unenforceable, at least during the period
when the company is still undergoing provisional administration or administration. It is proposed that
the import of the law should be to suspend, and not to completely avoid the rights of the counterparties
to enjoy their contractual rights.
The suspension should only be available during the period when the company is undergoing rescue
proceedings, and the law should allow room for the counterparty to apply to the court for leave to
exercise his or her rights, where it can be proved that the exercise of the right by the counterparty will
not affect the rescue efforts.
Restrict withdrawal of essential goods and services to companies in provisional administration and
administration.
Discontinuation of the supply of essential services is one of the common challenges that companies
often face when they enter into an insolvency procedure, including a corporate rescue procedure.
Providers of essential services, such as utilities, IT, and Telecom services, are often not patient with
customers who may not be able to make timely or upfront payments for services consumed. Although
there are no documented records on the magnitude of this problem in Uganda, reports from countries
such as the UK indicate that on average, IT suppliers withdrew their supply in 46 percent of trading
insolvencies, while telecoms and utility suppliers withdrew their supply in 26 percent and fourteen
percent of such cases respectively. 309 A 2013 survey of 249 insolvency practitioners in the UK found
that in 41 percent of cases, key suppliers withdrew their supply and in 49 percent of cases, key
suppliers asked for the ransom payment. 310 A similar trend is probably happening in Uganda, and this
307
Waiswa (n 1) 139-142.
308
Rosenthal, Bouslog and Cassidy, ‘Bankruptcy Court upholds the enforcement of the ipso facto clause
against a foreign debtor’ 2018 American Bankruptcy Institute Journal 2.
309
Insolvency Service Impact Assessment Report on Continuity of essential supplies to insolvent
businesses 2015,3.
310
R3 and ComRes: Association of Business Recovery Professionals Membership Survey, August
The UK government deemed it necessary to preserve the supply of essential services to companies
undergoing formal rescue procedures 311 by promulgating the Insolvency (Protection of Essential
Supplies) Order 2015 to protect companies against the risk of unilateral withdrawal of essential
supplies because of the customer’s insolvency. 312 Uganda should consider applying a similar stance.
The Insolvency (Protection of Essential Supplies) Order 2015 313 amended the Insolvency Act 1986
by making explicit provisions to restrain providers of essential goods and services to companies
undergoing corporate rescue proceedings from withdrawing supply to such companies because of
their insolvency state, without first obtaining a court order. 314
Section 2 of the UK insolvency (protection of essential supplies) Order 2015 defines essential
supplies to include the supply of gas, electricity, water, communication services, and the supply of
IT-related goods like terminals, computer hardware and software, information technology, data
storage processing, and website hosting. The law further provides that any insolvency-related term of
the contract for the supply of essential goods or services to a company ceases to have effect when the
company enters administration or voluntary arrangement. 315 The same law creates several avenues
through which suppliers of such essential services are protected against loss as a result of the
obligation to continue supply to companies in rescue. The scope of the protection provided to
companies during a corporate rescue in the UK was further improved in 2020 when the UK
government enacted the Corporate Insolvency and Corporate Governance Act 2020. Similar
protection is also enjoyed by companies during reorganisation procedures in the US.
It is recommended that Uganda should consider amending the Insolvency Act by introducing clear
provisions that guarantee the supply of essential goods and services to companies during provisional
administration and administration.
Remove unpaid taxes and social security contributions from the list of preferential debts and make
statutory debts payable after all other creditors.
One of the strategic interventions which the UK government instituted in 2002 to further engender
the rescue culture in the UK was the abolition of crown preferences. 316 This resulted in the removal
of taxes and unpaid social security contributions from the list of claims to be paid in priority to other
debts. This was in line with the original thinking of the Cork Committee, which had rejected the
argument that debts owed to the community ought to be paid in priority to debts owed to private
creditors. 317 It was argued that a bad debt owed to the government is likely to be insignificant in terms
2013, Termination Clauses; Insolvency Service Report on Corporate Insolvency and Governance Bill
2020 6.
311
Waiswa (n 1) 370-379.
312
The Insolvency Service ‘The Insolvency (Protection of Essential Supplies) Order 2015 Guidance for
Insolvency Practitioners and Suppliers’ (October 2015) 3.
313
Statutory Instrument no.989/2015.
314
See the discussion under 7.3.2; The Insolvency Service ‘A review of the corporate insolvency
framework; A consultation on options for Reform’ May 2016, 19.
315
Section 4 of the Insolvency (Protection of essential supplies) order 2015.
316
Waiswa (n 377-378)
317
Cork Insolvency Law and Practice: Report of the Review Committee (the Cork Committee)
(Cmnd.8558) (1982) 1410 para 320; Goode (n 66)248; White Paper, Productivity and Enterprise:
Insolvency-A second Chance (CM 5234, July 2001). Available
at:https://www.iiiglobal.org/sites/default/files/26-2nd-chance.pdf (Date of use: 09 Jan 2023) 12 para 2.19.
The reasoning of the members of the Cork Committee is still valid in Uganda today. By the time most
companies become unable to pay their debts and hence consider resorting to insolvency proceedings,
they will often owe a lot of money to the Uganda Revenue Authority (URA) and the National Social
Security Fund (NSSF), and debts owed to both of these agencies enjoy preferential treatment during
insolvency. 319
Section 12 of the Insolvency Act is worded along the same lines as schedule 6 of the UK Insolvency
Act and makes payment to URA for any tax withheld by the debtor for twelve months before the
commencement of insolvency and contribution to NSSF to have preference overpayments to other
unsecured creditors, which the UK experts confirmed to have been a big legal impediment to the
realisation of corporate rescue in the UK. 320
Just like the UK government took a bold step in 2002 and relegated all payments to the crown behind
other creditors, as a necessary measure to preserve money for distribution to unsecured creditors and
hence minimize their misery, Uganda should copy this thinking by removing subsection 12(6)(a) and
(b) of the Insolvency Act.
Furthermore, the government of Uganda should consider reforming the Insolvency Act to provide
that upon entry into provisional administration or administration, debts payable to government bodies,
including URA, NSSF, and other statutory bodies should rank behind other unsecured creditors. This
will certainly give provisional administrators and administrators sufficient reprieve against pressure
from government agencies, who, in most cases, enjoy dominant power over the debtor as regulators,
landlords, or licensing authorities, and can, in the absence of clear legal protection, exert a lot of
unhealthy pressure on the administrator.
If this proposal is adopted, we are likely to see more financially distressed companies entering
corporate rescue, as opposed to just vanishing without following any formal procedure. This will
create more opportunities for insolvency practitioners to help in resuscitating struggling businesses,
which might ultimately improve the country’s overall business survival index, thereby preserving
more jobs and supporting economic development.
318
Cork Insolvency Law and Practice: Report of the Review Committee (the Cork Committee)
(Cmnd.8558) (1982) 1410 para 320.
319
Section 12 of the Insolvency Act 14 of 2011.
320
White Paper, Productivity and Enterprise: Insolvency-A second Chance (CM 5234, July 2001). Available
at:https://www.iiiglobal.org/sites/default/files/26-2nd-chance.pdf (Date of use: 09 Nov 2021) 12 para 2.19.
It is recommended that Uganda should consider copying the South African approach which imposes
restrictions on persons who can be appointed to practice as business rescue practitioners 322 and creates
different levels of management experience requirements for persons who can be appointed as
practitioners in respect of big and small companies. 323
Extend the eligibility criteria for insolvency practitioners to persons appointed by BOU and IRA to
manage distressed financial and insurance companies.
It is recommended that section 204 of the Insolvency Act and the additional improvements that have
been proposed in the preceding recommendation should be extended to also apply to the individuals
that are appointed by sector regulators such as the Bank of Uganda (BoU) and the Insurance
Regulatory Authority (IRA) to manage and oversee insolvencies in their respective sectors. This is
because the application of the Insolvency Act was excluded from matters involving banks and other
financial institutions regulated by BoU and some licensed providers of insurance services regulated
by IRA. 324
Considering however that neither the Financial Institutions Act 2 of 2004 nor the Insurance Act 6 of
2017, prescribe any clear eligibility criteria or qualification for the individuals that may be appointed
to perform the duties of a statutory manager, 325receiver 326 , or liquidator 327 in respect of distressed
financial institutions or insurance companies, it is recommended that the same qualifications we have
proposed for insolvency practitioners should also apply to these office bearers.
This is because financial institutions and insurance companies are big companies and effective
management of their affairs, especially when faced with financial distress, requires extra skill and
management experience, and any mistake in managing such companies can cause serious damage to
the economy and result in the loss of many jobs.
The said provision will improve transparency, professionalism, and accountability amongst all
persons charged to manage financially distressed companies in Uganda.
Creditors should not petition for liquidation without first exploring administration.
Sections 92(1) of the Insolvency Act currently provides that the court may appoint a liquidator on the
application of the company, a director of the company, a shareholder of the company, a creditor of
the company, a contributory, or the official receiver. The law goes on to expressly provide that court
may proceed to appoint a liquidator and place the company into liquidation for as long as the
petitioner can satisfy the court that the company is unable to pay its debts. 328 However, this open
provision exposes virtually all trading companies to the risk of being subjected to liquidation
proceedings by their creditors. This is especially so because in terms of section 3 of the Insolvency
Act, any company that fails to pay a debt of Uganda Shillings Two Million is deemed to be unable to
pay its debts and hence liable to liquidation. 329 Moreover, for companies, the debt need not be a
judgment debt. 330
This partly explains why some creditors use liquidation proceedings as a debt collection tool, without
minding its effects on the survival of the company 331, and accounts for the decimal use of
administration in Uganda. 332 This continues to expose viable companies with otherwise treatable
short-term liquidity challenges to the risk of being buried alive through the often embarrassing and
value-eroding liquidation proceeding. 333 To cure this problem, section 92(2) of the Insolvency Act
should be amended. Before the court makes an order to appoint a liquidator on a petition by a creditor,
the court must be satisfied that in addition to proving that the company is unable to pay its debts,
there is evidence that the petitioner or another eligible person has in the last six months before the
date of the petition attempted to place the company under provisional administration, but the
provisional administrator failed to achieve any of the outcomes in section 140(1)(b).
In addition, section 92(3) should also be amended to specifically empower the court to order the
placement of a company under provisional administration, where in the opinion of the court, this
might better serve the collective interests of the parties.
Specifically, the government of Uganda should consider benchmarking on countries such as the UK
and South Africa, which have tried to deal with this problem by encouraging businesses to adopt
328
Section 92(2) of the Insolvency Act 14 of 2011.
329
Waiswa (n 1) 86-94.
330
Section 4(2)(a)(ii) of the Insolvency Act 14 of 2011.
331
Waiswa (n 1) 86-94; Waiswa ‘A comparative analysis of the legitimacy of the use of insolvency
proceedings as a debt collection tool in the United Kingdom and Uganda’ 82.
332
ibid
333
Waiswa (n 1) 313-24.
334
Intrum Justitia 2016 European Payment Report 9–46; Ladu IM ‘Domestic arrears: Trouble of local
suppliers owed by Government’ Daily Monitor New paper 2019–07–09.
In South Africa, similar approaches have been employed in some sectors, with the National Small
Business Chamber championing the signing of the prompt payment code, which seeks to commit big
businesses and the government to pay SME suppliers within thirty days. 337 Although these initiatives
have not fully solved the problem of late payment in the UK and South Africa, they are worth trying
out in Uganda.
It is recommended that stakeholders in the various business sectors in Uganda, including the
government of Uganda, should consider working with the relevant trade associations, banks, and
public procurement specialists to come up with practical measures through which delayed payments
can be minimised.
4. Conclusion
Based on the above discussion, there is need to strengthen the legal framework to aid the rescue of
financially distressed companies in Uganda. It is important to improve the legal framework to make
it more facilitative to rescue efforts and hence guarantee all eligible businesses a chance to survive.
Policymakers in Uganda should take serious note of the findings and recommendations contained
herein above and ensure that the requisite reform processes are started sooner than later to give
financially distressed companies in Uganda an equal chance to be healed of their financial sickness,
without necessarily dying because of treatable symptoms of financial distress.
It is argued that since Uganda is a resident of the global village, it is imperative that the reform process
should not be closed but rather open to a consultative process that will seek to localise the already
tested international best practices on corporate rescue and incorporate them in Uganda’s corporate
rescue framework. The reform process should be comprised of Ugandan experts with hands-on
academic and practical experience in business rescue as opposed to hiring experts from other
countries. This will facilitate the development of a framework that speaks to the local realities in
Uganda as opposed to copying and pasting models from other countries.
https://www.gov.uk/government/news/government-tackles-late-payments-to-small-firms-to- protect-
Jobs (Date of use: 29 May 2022).
336
https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/audit/deloitte-uk-gib-prompt-
payment-may-2019.pdf (Date of use: 29 May 2022).
337
https://www.nsbc.africa/prompt_payment_code (Date of use: 29 May 2022).
Joel. F. Osekenye
joelosekeny@gmail.com / joel.osekeny@abdavid.com
Abstract
Purpose: In this article, I review the contemporary changes in insolvency practice while bringing to
light some of the issues that insolvency practitioners and companies should be aware of while
conducting their business.
Design/methodology/approach - Desk review methodology
Findings - The procedures for insolvency that will be employed by Insolvency Practitioners can either make or
break a business depending on what approach has been taken to try and pay creditors or depending on how the
IPs conduct the affairs of the company.
Implications - In the execution of their duties, it is expected that Insolvency Practitioners keep abreast with the
recent developments regulating their practice to be able to take an approach that, in the words of Justice Ocaya
Thomas “benefits the greatest number of stakeholders”. An Insolvency Practitioner must also be able to apply
means that are best applicable at the moment, especially in light of their regulations by the courts, and Uganda
Registration Services Bureau.
Originality - This article, therefore, offers insights to business leaders and Insolvency Practitioners on the
contemporary changes in Uganda’s insolvency practice.
1. Introduction
As the world moves past the covid lockdown era, the trajectory of business uneasiness across several
economies continues to unfold. The continuous effect of global disruptions on businesses has created
vast opportunities for mergers and acquisitions and numerous winding down activities, especially for
businesses across sub-Saharan Africa.
In 2022, the World Bank338 report slashed the global growth forecast for the year 2023 by nearly half
to just 1.7% from its previous prediction of 3%. If this forecast proves accurate, it would be one of
the weakest annual expansions in several decades. This prediction follows a gloomy forecast released
earlier by Kristina Georgina Head of the International Monetary Fund indicating that one-third of the
world will fall into recession this year. Insolvency practitioners must acclimatize themselves to
contemporary changes that should support winding up or corporate rescue processes for businesses,
especially in sub-Saharan Africa.
Requiring that a business is shut down or that the eventualities of closure are delayed demands skill
whose mandate is only exercisable by a group of persons known as “Insolvency Practitioner (s)” (IP).
Accordingly, IPs come into play after it has been established that a person has failed to comply with
a statutory demand; execution has been issued in respect of a judgment debt and has been returned
unsatisfied in whole or in part; and that all or substantially all the property of the person is in the
possession or control of a receiver or some other person enforcing a charge over that property 339. IPs
may also take charge of a company that is solvent. This article, therefore, offers insights to business
leaders and IPs on the contemporary changes in Uganda’s insolvency practice.
338
World Bank, “Annual Report 2022”, available at h�ps://www.worldbank.org/en/about/annual-report. Accessed on
the 30th January 2023.
339
The Insolvency Act no. 14 of 2011, s 3.
Legislative developments.
The Insolvency (Amendment) Act, 2022 – General provisions
The Amendment is impactful to insolvency practice as it has repealed several provisions of the Act
while introducing some novel ones.
Under the new law, creditors now have a right to set off a debt that is subjected to preferential debts347.
The amendment repeals section 12 (2) which provided an order of priority in how an IP satisfied
claims of secured creditors where the assets of the insolvent company at the time were insufficient to
meet all the preferential debts 348. That notwithstanding, the amendment however still recognizes that
there is a “sovereignty or privilege position of the secured creditor over and above the unsecured
creditor”349.
The law now empowers an administrator and a supervisor to avoid transactions under section 15
(preferences to avoid transactions involving the transfer of the company), section 16 (transactions at
undervalue), section 17 (voidable charges), and section 18 (insider dealings). It is now an offense to
unlawfully deal with assets of an insolvent company, that occurs when a person “conceals, disposes
of or creates a charge” 350 over the property of the company or removes part of it or to execute any
such transactions 351 both to deprive or delay the claims of creditors. This offense is created where the
sale has occurred within two years before insolvency proceedings have commenced.
The Amendment further empowers members, contributors, administrator and a supervisor to
challenge and set aside a voidable transaction. Formerly, this was left to a creditor, receiver,
340
Ibid s 203 (1).
341
The Insolvency Prac��oners Regula�ons, SI 2017 – 55, Regula�on 2.
342
Kevin Mcleod, ‘What’s an Insolvency Prac��oner’, available at h�ps://www.aarbrs.com/services/advice/difference-
between-insolvency-prac��oner-and-liquidator/. Accessed on the 24th January 2023.
343
Associa�on of Business Recovery Professionals, ‘The Role and Value of Insolvency Prac��oners in the UK Economy’,
available at
h�ps://www.r3.org.uk/stream.asp?stream=true&eid=22125&node=195&checksum=4815BBB27796E96400CE0E7B4B
D9D89. Accessed on the 24th January 2023.
344
The Insolvency Act no. 14 of 2011, s 204 (1).
345
Ibid s 204 (2).
346
The Insolvency (Amendment) Act, 2022, s 23, which introduces a new subsec�on 204 (1a).
347
Ibid s 1.
348
Ibid, s 2.
349
Ndugga v. Kabito and Anor (Receivers of Spencon Services Limited in Receivership) (Miscellaneous Cause no. 219 of
2020).
350
Ibid s 8.
351
Supra.
The Insolvency (Amendment) Act, 2022 – Provisions in respect to cross border insolvency.
The Insolvency (Amendment) Act, 2022 has radicalized insolvency practice in respect to cross-border
insolvency (CBI). Particularly, the amendment repeals all provisions 363 relating to reciprocity in
favour of “…international standards” following the World Bank Ease of Doing Business Index and
352
Ibid s 10.
353
The Insolvency Act, 2011, s 114 (1) and The Insolvency (Amendment) Act, s 12 (3).
354
Ibid (n 11) s 12, which introduces Section 114 (4). The form of the certificate is yet to be prescribed by statutory
instrument as required under Section 12 (6) of the Amendment.
355
Ibid s 13.
356
Ibid s 15 which introduces Section 137A into the Act.
357
Ibid s 20.
358
Ibid s 21.
359
Ibid s 27.
360
Ibid s 22 (da).
361
Ibid s 22 (db).
362
Ibid s 21.
363
Ibid s 24.
The Companies (Amendment) Act, 2022, and the Companies (Beneficial Owners) Regulations, 2023
364
The Insolvency (Amendment) Bill, no. 20 of 2022, Bills Supplement No. 17, 12th August 2022, Paragraph 2 of
Memorandum.
365
Supra.
366
Supra.
367
ALP East Africa, ‘Amendments to Companies and Insolvency Laws in Uganda’, Available at https://alp-
ea.com/amendments-to-companies-and-insolvency-laws-in-uganda/. Accessed on the 25th January 2023.
368
UNICTRAL Model Law on Cross – Border Insolvency: The Judicial Perspective, New York, 2012, page 5.
369
According to the UNICTRAL Model Law on Cross – Border Insolvency with Guide to Enactment, Part one, Article 2,
paragraph b, a foreign main proceeding is defined to mean a foreign proceeding that takes place in the state where the
debtor has the center of its main interests.
370
The same guide defines a foreign non proceeding to mean a foreign proceeding, that is not a foreign main proceeding
that takes place in a place where the debtor has an establishment.
371
The last statement is highlighted because it relates to the decision of the court in Joselyn Kalembe and BuildNet
Construction Materials and Hardware (supra) where Justice Ocaya Thomas O.R who expresses concern with measures
that are intended to maximize creditor benefit, calling them “extremely narrow”.
372
Supra.
373
MMAKS, ‘Cross Border Insolvency: Is East Africa Ready’, Available at
https://www.mmaks.co.ug/sites/mmaks.co.ug/files/article-attachments/2017/07/cross-border-insolvency-article-
final-draft.pdf. Accessed on the 25th January 2023.
374
The Companies (Amendment) Act, 2022, Section 21, the Cooperative Societies (Amendment) Act, 2022, Section 2
and The Partnerships (Amendment) Act, 2022, Section 2 relate to beneficial owners including the requirement for the
keeping of a register.
375
Ibid (n 11) s 1.
376
ACCA, “Register of Beneficial Ownership of Companies and Industrial and Provident Societies – Guidelines for
Insolvency Practitioners”, Technical Alert 04/2021.
377
The Insolvency Act, 2011, s 272.
378
The Insolvency (Amendment) Act, 2022, section 41, which introduces section 265A to the Principal Act.
379
Ibid (no 41), s 134 (4).
380
Ibid s 115 (4).
381
Ibid, s 44, which introduces Section 272 (2) to the Principal Act.
Judicial pronouncements
Joselyn Kalembe v. Buildnet Construction Materials and Hardware 382
The Petitioner filed this case seeking orders that the respondent company is liquidated on account of
failure to deliver an apartment that the Respondent was contracted to construct and the failure to pay
UGX. 224, 400,000 (Uganda Shillings Two Hundred Twenty-Four Million, Four Hundred Thousand)
resulting from the failure to deliver the apartment. In making his decision, Justice Ocaya Thomas
makes several key pronouncements that impact insolvency practice, key among them being that the
failure to comply with a statutory demand is only a presumption that the respondent is unable to pay
his debts using the several tests under Section 3 of the Act and as such, it does not render the petition
fatal. Following that presumption, it is required that the respondent furnishes the court with evidence
that they are indeed in a position to pay the debt, notwithstanding their failure to comply with the
demand.
Court agreed with the Kenyan decision of Re: Kisigis Stores Limited MC 383 that notice cannot be set
aside based on a mere technicality as regard should be heard to all the circumstances leading to how
the debt is owed.
The Justice further holds that when a statutory demand is filed, it is important to attach to it a statutory
declaration to accompany the demand, however, he argues that this is not always a must even when
the Act uses the word “shall”. Before this decision, the practice has been that the attachment of a
statutory declaration to a statutory demand was a prerequisite to commencing an insolvency petition.
Court precedent now qualifies this requirement.
The requirement according to the Justice may be waived if no injustice will flow from the failure to
include the statutory demand. These circumstances will exist where the debts being raised are obvious
and the respondent has long been aware of or admits them, or the respondent has been given a fair
warning because the debt and the circumstances under which the debt arose have been spelled out,
the circumstances under which it arose are clear, the demand has been made out and there is no doubt
as to the effects of non – compliance or setting aside the demand.
He further critiques provisions in the UML that require insolvency to be guided by the “wealth
maximization approach” as opposed to a pro–rescue approach. He argues that this approach is
“extremely narrow” because it sees insolvency “purely as a process of collecting debts for creditors”
and yet the insolvency process goes beyond debt obligations because several other factors go into
consideration including the employees, community, the state, and customers.
Where a business is unable to pay its debts, a decision that should be adopted by a business or the IP
is the kind that benefits the greatest number of stakeholders under the guidance of “a balancing act” 384
where one is required to balance quantitative considerations with qualitative ones. The Justice
believes that a respondent may have sufficient liquidity to pay their debts but simply refuses to do so.
In such circumstances, the solution then would not be to bring a petition for liquidation, but a civil
claim for the recovery of such monies along with other appropriate remedies such as interest and
penal damages.
382
Insolvency Petition no. 7 of 2022 (Commercial Division).
383
HC 1P. No. 14 of 2017
384
Supra.
Ranchhobhai Shiv Abhai Patel Ltd and anor v. Henry Wambuga (Liquidator of African
Textiles Mill Ltd) and anor: In the case of Ranchhobhai Shiv Abhai Patel Ltd and anor v. Henry
Wambuga (Liquidator of African Textiles Mill Ltd) and anor 385 the appellants, who were
shareholders of the respondent company under liquidation were aggrieved by the procedure that had
been adopted by the liquidator, Henry Wambuga when he sold the suit property. The court condemned
the actions of the liquidator arguing that there is a duty fiduciary duty of care imposed on an IP in the
way he or she conducts the business of the company. This duty of care is of a very high standard and
is owed to both the creditors and the members of the company 386. It, therefore, became unprofessional
when the liquidator chose to put the interest of one creditor over and above the interests of any other
creditor and the interests of the members of the company.
The Supreme Court agreed with the observations of the lead Justice Paul K. Mugamba who
pronounced that while an ordinary sale of movable and immovable assets of the company in
liquidation can be done by the liquidator without the sanction of a resolution of the company, it must
be sanctioned where the sale will not amount to a form of payment to creditors or where it is not done
in fulfillment of a compromise with creditors, something that the liquidator was accused of doing.
It was stressed that a liquidator, especially in a members’ voluntary winding-up procedure cannot pay
a creditor or enter into any arrangement with the creditors in the absence of a special resolution by
shareholders. This rule hence creates the exception to the general rule that a liquidator assumes all
rights and responsibilities of officers and or directors of a company in liquidation.
Digitalization of insolvency processes at Uganda Registration Services Bureau & the courts.
On the 9th of December 2022, URSB went online following the introduction of the OBRS 387 which
now requires companies to use the portal for their processes. While the portal is still in its nascent
stages, many processes like the incorporation of companies and reservations of names can be done
online. Other activities will be onboarded in a phased manner. With the system, an IP will be able
to certify and register company documents, register charges over the property of a company, file
resolutions and returns (including the returns of an IP), perform a search, and also allow new
practitioners to apply to be an IP.
The courts have also been digitized following the launch of the Electronic Court Cases Management
Information System (ECCMIS) on 1 March 2022. ECCMIS has been described as “a fully–featured
system that automates and tracks all aspects of a case file from initial filing through disposition and
appeal…” 388. At the launch, the system is being piloted in the Supreme Court, Court of
Appeal/Constitutional, High Court (Land, Civil, Commercial, and Anti–Corruption Divisions), and
the Chief Magistrate Court of Mengo.
The implication of these two systems, therefore, is that all company and insolvency matters that have
to be filed with the courts or URSB have to be done through ECCMIS and OBRS respectively.
4. Conclusion
The procedures for insolvency that will be employed by IPs can either make or break a business
depending on what approach has been taken to try and pay creditors or depending on how the IPs
conduct the affairs of the company. In the execution of their duties, it is expected that IPs keep abreast
with the recent developments regulating their practice to be able to take an approach that, in the words
of Justice Ocaya Thomas “benefits the greatest number of stakeholders”. An IP must also be able to
385
SCCA no. 06 of 2017.
386
Supra.
387
The Online Business Registration System is available at https://obrs.ursb.go.ug/ .
388
Judiciary of Uganda, “About ECCMIS”, available at http://judiciary.go.ug/data/smenu/143/About%20ECCMIS.html.
Accessed on the 25th January 2023.
Bibliography
1. ACCA, ‘Register of Beneficial Ownership of Companies and Industrial and Provident
Societies – Guidelines for IPs’, Technical Alert 04/2021.
2. ALP East Africa, ‘Amendments to Companies and Insolvency Laws in Uganda’, Available at
https://alp-ea.com/amendments-to-companies-and-insolvency-laws-in-uganda/. Accessed on
the 25th January 2023.
3. Association of Business Recovery Professionals, ‘The Role and Value of IPs in the UK
Economy’, available at
https://www.r3.org.uk/stream.asp?stream=true&eid=22125&node=195&checksum=4815BB
B27796E96400CE0E7B4BD9D89. Accessed on the 24th January 2023.
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on 19th January 2023.
5. Joselyn Kalembe and BuildNet Construction Materials and Hardware Insolvency Petition no.
7 of 2022 (Commercial Division)
6. Kevin Mcleod, ‘What’s an Insolvency Practitioner’, available at
https://www.aarbrs.com/services/advice/difference-between-insolvency-practitioner-and-
liquidator/. Accessed on the 24th January 2023.
7. MMAKS, ‘Cross Border Insolvency: Is East Africa Ready’, Available at
https://www.mmaks.co.ug/sites/mmaks.co.ug/files/article-attachments/2017/07/cross-
border-insolvency-article-final-draft.pdf. Accessed on the 25th January 2023.
8. Ndugga v. Kabito and Anor (Receivers of Spencon Services Limited in Receivership)
(Miscellaneous Cause no. 219 of 2020).
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Registration Services Bureau published on the 11th January 2023.
10. The Companies (Amendment) Act, 2022.
11. The Cooperative Societies (Amendment) Act, 2022.
12. The Insolvency (Amendment) Act, 2022.
13. The Insolvency (Amendment) Bill, no. 20 of 2022, Bills Supplement No. 17, 12th August
2022.
14. The Insolvency Act no. 14 of 2011.
15. The Insolvency Practitioners Regulations, SI 2017 – 55
16. Judiciary of Uganda, ‘About ECCMIS’, available at
http://judiciary.go.ug/data/smenu/143/About%20ECCMIS.html. Accessed on the 25th
January 2023.
17. The Online Business Registration System available at https://obrs.ursb.go.ug/ .
18. The Partnerships (Amendment) Act, 2022
19. The United Nations Commission on International Trade Law (UNICTRAL) Model Law on
Cross – Border Insolvency with Guide to Enactment
20. United Nations Commission on International Trade Law (UNICTRAL) Model Law on Cross
– Border Insolvency: The Judicial Perspective, New York, 2012.
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Abstract
Purpose - This article sets out to examine the challenges that the Uganda courts, insolvency
practitioners, and scholars will encounter in identifying the Centre of Main Interests of a business
enterprise and review the effectiveness of the Insolvency Act 14 of 2011 in dealing with these
challenges.
Design/methodology/approach – Desk Review
Findings - There is still a long way to go before satisfactory answers to the unique challenges that are presented
by insolvent business enterprises are obtained. Since the title a foreign proceeding is given (main or non-main)
affects the reliefs and whether such reliefs are automatic or have to be applied for, the Insolvency Act 14 of 2011
ought to do better than just give a rebuttable presumption in resolving the issue of COMI.
Implications - While pursuing better answers is inevitable it is submitted that a comprehensive approach should
be taken by the law and the courts in determining the COMI. Regard should be had to the group enterprise’s
operational nerve centre, location of its assets, location of most of its creditors, and the reasonable expectation of
the general body of creditors and other key stakeholders.
Originality/Value - This paper highlights the need for change in the law to provide for communication,
cooperation, and coordination as opposed to recognition of proceedings so that an entity or group of companies
conducting business across several jurisdictions can be better dissolved or rescued.
1. Introduction
The development of the concept of the Centre of Main Interests (COMI) was mainly to determine
the jurisdiction, law applicable, and reliefs available to insolvent entities. This term was
introduced by Working Group V in the UNCITRAL Model Law on Cross-Border Insolvency (the
Model Law) and subsequently included in the EU directive 1346/2000 and has been maintained
in the Regulation (EU) 2015/484 of the European Parliament and the Council of 20 May 2015 on
insolvency proceedings (EIR Recast).
As markets have evolved and the manner of doing business has taken on a new character,
businesses have quickly followed suit. Business enterprises have evolved into business dynasties
or multinational businesses and like the kingdoms of old have trekked the earth in search of new
consumers and markets. In their scramble to “colonise” new markets, enterprises have been forced
to comply with local laws to authenticate their business status to enable them to legally operate
in those markets. In so doing, “new” businesses though under the same name or management
have been “birthed” in several nations around the world operating under different legal regimes.
Over the last century, business enterprises have increasingly organized themselves as
multinational groups of companies. 389 The globalisation of business means that multinational
enterprises operate in many countries through companies incorporated under local laws. These
companies might be tightly tethered to a parent company or loosely related to other entities spread
across countries and continents without significant centralized control. 390
389
Sid Pepels, Defining groups of companies under the European Insolvency Regulation (recast): On the scope of EU
group insolvency law, International Insolvency Review published by INSOL International and John Wiley & Sons Ltd at
Page 96-97 at https://onlinelibrary.wiley.com/doi/full/10.1002/iir.1402 accessed on 31 January 2022.
390
Professor Sandeep Gopalan and Michael Guihot, “Cross Border Insolvency Law and Multinational Enterprise Groups:
Judicial Innovation as an International Solution” at Page 551-552 at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2773346# accessed on 30 January 2022.
While groups of companies comprise legally separate entities, they will often economically
operate as integrated enterprise. If that is the case, the value of that business enterprise in case of
financial difficulties may very well be higher if a solution is found for the group. The
interdependency between the group companies will often also result in a “domino effect”: If one
or several group companies become(s) insolvent, the financial difficulty will often push other
group companies into insolvency proceedings as well. Within national contexts, insolvency
practices have regularly developed methods of dealing with these challenges. When multiple
national insolvency laws come into play, however, these difficulties increase exponentially. 392
The global insolvency system however suffers from a critical mismatch. An effective
restructuring aims to preserve the value of the business, but the national and cross-border legal
tools available to achieve that result instead focus on the separate legal entities that make up the
business. Since virtually every significant business enterprise is divided up into multiple different
legal entities, the business cannot be restructured unless all critical enterprise group members
adopt consistent rescue plans. This is a problem under most national financial restructuring
regimes even if all members of the enterprise group are located in the same jurisdiction. The
challenge of developing a group-wide solution to financial distress is exacerbated if the
restructuring proceedings of different critical group members must take place in different
jurisdictions under differing legal regimes. 393
In Uganda, this challenge has been addressed by Sections 227 to 252 of the Insolvency Act 14 of
2011 which provide for recognition of foreign proceedings and foreign representatives to facilitate
a collective resolution or rescue of an insolvent entity established across borders. The Uganda
courts can recognize a foreign proceeding 394 as a foreign main or foreign non-main proceeding.
Section 226(1) defines a foreign main proceeding as a foreign proceeding taking place in the State
where the debtor has a centre of main interests and a foreign non-main proceeding as a foreign
proceeding other than a foreign main proceeding, taking place in a State where the debtor has an
establishment 395.
In other words, the Uganda courts will recognise a proceeding as a foreign main or foreign non-
main proceeding. To determine whether a proceeding will be recognized as either a main or non-
main proceeding, the court must first be satisfied that the debtor either has its centre of main
interests or establishment in a foreign State. Whereas it may be easy to determine the existence
of an establishment it is not the case for the centre of main interests. This is because the law,
though it defines an establishment, omits to define the centre of main interests.
391
Organisation for Economic Co-operation and Development, “Glossary of Industrial Organisation Economics and
Competition Law” at Page 42 at https://www.oecd.org/regreform/sectors/2376087.pdf accessed on 30 January 2022.
392
Sid Pepels, supra.
393
G. Ray Warner and Michael Veder, “Enterprise Group Restructuring: Dutch Options and United States Enforcement”
at https://eirjournal.com/content/EIRJ-2021-7 accessed on 30 January 2022.
394
Section 226(1) defines a foreign proceeding as a collective judicial or administrative proceeding in a foreign State and
includes an interim proceeding, under the law of insolvency, where the assets and affairs of the debtor are subject to
the control or supervision by a foreign court, for the purposes of reorganization or liquidation.
395
An establishment is defined as any place of operations where the debtor carries out a permanent economic activity.
This article sets out to examine the challenges that the Uganda courts, insolvency practitioners,
and scholars will encounter in identifying the Centre of Main Interests of a business enterprise
and review the effectiveness of the Insolvency Act 14 of 2011 in dealing with these challenges.
This short paper is therefore organized as follows: Chapter 1 is a brief introduction to the paper.
Chapter 2 deals with the concept of COMI. Chapter 3 will identify the challenges that business
enterprises present to finding the COMI and assess the effectiveness of the Model Law and EIR
Recast in addressing these challenges. Chapter IV is the conclusion.
The work of the European Union (EU) and the United Nations Commission on International Trade
Law (UNCITRAL) is part of the global effort to find solutions for the unique problems presented
by business enterprises that are faced with insolvency. The evolution of cross-border businesses
guaranteed that such a business would have assets and liabilities across borders.
Insolvency law has always had to deal with the debtor’s instinct to hide assets and the scrabble
and partition of the debtor’s estate by creditors seeking to collect through attachment. Such actions
which are purely driven by human instinct and greed rarely provide for an orderly manner of
dealing with the affairs of an insolvent entity.
To regulate the cross-border insolvency issues of multinational groups of companies, the choice
is generally between either taking a worldwide perspective so that global solutions may be applied
(a universalist approach) or having proceedings against group members handled within each
relevant territory (a territorialist approach). 396
The term "centre of main interest" is a legal term introduced in the UNCITRAL Model Law on
Cross-Border Insolvency. The development of the concept of COMI was and is intended to curb
the debtor’s desire to forum shop and enable an orderly distribution of the debtor’s estate. It
addresses the debtor’s instinct of hiding assets by determining which court should have
jurisdiction over the debtor’s assets while providing an automatic stay against creditor action. The
key role of the COMI is therefore to determine which court has jurisdiction to open a main
insolvency proceeding and what reliefs can be obtained by the debtor. The COMI is of great
importance in cross-border matters as it determines both jurisdictional and governing law matters.
The COMI of a debtor is, in legal terminology, a connecting factor. Connecting factors come into
play when a conflict of laws occurs and must be resolved as to which law or legal order applies.
A connecting factor serves to dictate governing law in cross-border cases. 397
Like the Model Law, the Insolvency Act 14 of 2011 does not define COMI. By law, only the
European Union has defined COMI in Regulation (EU) 2015/484 of the European Parliament and
396
Eva M. F de Vette Multinational enterprise groups in insolvency: how should the European Union act? at
https://www.utrechtlawreview.org/articles/10.18352/ulr.156/ accessed on 5 February 2022.
397
^ƚƎşǎŽǀĄ͕sĞƌŽŶŝŬĂ͕dŚĞEĞǀĞƌ-Ending Challenge of Defining COMI (This Time Due to Groups of Companies) (June 27,
2019). Charles University in Prague Faculty of Law Research Paper No. 2019/II/6, Available at SSRN:
https://ssrn.com/abstract=3415584 or http://dx.doi.org/10.2139/ssrn.3415584 accessed on 3 February 2022.
The legislative approach is that each entity has its own COMI. This however raises the pertinent
question of how many COMIs a business enterprise may have. The legislative texts of both the
Model Law and the Insolvency Act 14 of 2011 provide little help on how to deal with this
quandary. With little clarity as to what the COMI of a business enterprise is, the attempt by the
Model Law and Insolvency Act 14 of 2011 to legislate for group insolvencies has presented more
challenges than answers.
Despite the great work in dealing with enterprise group insolvencies, finding the COMI for
business enterprise group insolvencies faces many challenges.
Definition
Unlike the EIR Recast which has attempted to define the COMI in Article 3(1) as the place where
the debtor conducts the administration of its interests regularly, and which is ascertainable by
third parties 399 the Ugandan law provides for only a rebuttable presumption. Whereas the
registered place of business still has a role to play, the courts will give special consideration to
creditors and their perception as to where a debtor conducts the administration of its affairs when
determining the location of the COMI.
As has been shown over time, the way businesses are conducted in Uganda, a registered office
isn’t sufficient to establish the COMI of an entity. For many companies in Uganda, the registered
office in the registry isn’t the entity's place of business yet in some instances, Uganda can be the
location where an entity has its centre of main interests for which proceedings would then have
to be recognized as a foreign non-main proceeding. It is sad to note that the Insolvency Act,
neither defines the COMI nor provides a criterion for finding the COMI of a business enterprise.
This creates a lacuna in the law that will be exploited by creditors or debtors.
This means the Uganda Courts and insolvency practitioners will have to borrow concepts and
ideas from the EIR (Recast). However, the EIR Recast though gives its courts better guidance, if
fails in elaborating what “the administration of an enterprise’s interests regularly” and
“ascertainable by a third party” constitute. This presents its challenges in determining where the
COMI is situated for business enterprises as creditors may have different views as to where the
administration of a business is.
Whereas developing a definition that would be globally accepted, voluntarily adopted, and
enforced by the courts is no doubt an uphill task. This however is not an excuse for the omission.
The possibility of having two locations for the COMI is not envisaged by both legislative texts,
especially in a business enterprise situation nor do they address the unique character of business
398
Article 3(1) Regulation (EU) 2015/848 of the European Parliament and the Council of 20 May 2015 on insolvency
proceedings (recast) at https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32015R0848 accessed on 2
February 2022.
399
Article 3(1) Regulation (EU) 2015/848 of the European Parliament and the Council of 20 May 2015 on insolvency
proceedings (recast) at https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32015R0848 accessed on 2
February 2022.
Thus, one can deduce that the place where the main activity is carried out does not definitively
determine the COMI, but the administration of the interests of the debtor on a day-to-day basis
coupled with the ascertainment of third parties (particularly creditors) could be of assistance.
However, it has been argued that creditors (third parties) may have differing views concerning
such ascertainment and may create a challenging scenario. Nevertheless, it is suggested that
creditors with the highest worth claims should be considered in such concerned cases. 400 This
invariably puts creditors with lesser values at a disadvantage even in instances where their view
about the location of the COMI is the right one.
What is even more disturbing with the definition or criterion is that it leaves out the role of the
location of assets in the determination of the COMI yet preserving value is at the heart of
insolvency law. It is noted that in secondary or non-main proceedings if it is established that the
foreign proceeding is taking place where an entity has an establishment while main proceedings
are opened it is established that the debtor has a centre of main interests where the foreign
proceeding has commenced, not assets yet the debtor’s assets are of critical importance when an
entity is faced with insolvency. The most valuable assets of an entity may be in a place where the
centre of main interest or establishment isn’t.
Not defining the COMI or providing a better criterion to assist courts will create uncertainty that
may and will create unnecessary litigation, which in the long run will create unnecessary delay in
dissolving or rescuing a business entity. This may in the end devalue a business and/or its assets
which will in the end negatively impact the likely outcome of an insolvency proceeding.
The recent global health pandemic and enormous work on artificial intelligence and its impact on
the way businesses conduct their affairs present a unique challenge in locating the COMI of a
business enterprise. The Insolvency Act 14 of 2011, like other insolvency laws, did not legislate
for such challenges. The pandemic showed that the concept of the COMI of a business let alone
a business enterprise can be affected by external forces that make it increasingly difficult to find.
More significantly such a pandemic and the work in artificial intelligence have shown that the
presumption of a registered place of business being the COMI is no longer worth considering.
Business can be done from anywhere at any time even mid-flight. More so, whereas the actual
impact of COVID is yet to be felt, it is likely that many businesses will go insolvent, especially
those that were specifically established to deal with the pandemic and do not quickly evolve into
a more sustainable line of business.
400
All Answers Ltd, 'Centre of Main Interests (COMI) Challenges in EU States' (Lawteacher.net, February 2022)
<https://www.lawteacher.net/free-law-essays/european-law/centre-of-main-interests-eu-states-1375.php?vref=1>
accessed 3 February 2022.
Forum shopping
An insolvency system should aim at enabling creditors to foresee where the insolvency of a
company is going to take place and calculate their risk accordingly. 401 Unfortunately, the
insolvency regime in Uganda does not provide such clarity. Whereas the EIR Recast gives some
direction, the likelihood of the COMI changing during the lifetime of the enterprise cannot be
barred by legislation. Enterprises will, like human beings, change location. Whether this is done
purely for strategic advantage or otherwise should not be the basis of discouraging such
movement. Owing to the unpredictable nature in which these entities operate, the risk accessed at
the point of contract may fundamentally change at the point of insolvency. Unfortunately, courts
do not determine the COMI at the point of incorporation or entering into transactions but rather
at the point of filing insolvency proceedings. This presents a window of opportunity for enterprise
groups to withdraw from one jurisdiction to another to take advantage of a better insolvency
regime. This will present a major challenge not necessarily for the courts but for third parties
dealing with enterprise groups.
Worse still, a mere agreement establishing the COMI of the enterprise at the point of dealing with
an enterprise group is not sufficient to determine the COMI. While a contract may select the
choice of law, the court determining the COMI is not obligated to use that law. Because of this
challenge, an enterprise group may obtain an advantage at the expense of third parties by resorting
to “evasive or confusing techniques of organising its business or personal affairs, in a way
calculated to conceal the true location from which interests are systematically administered”. 402
The challenge of forum shopping seems to persist despite the courts' detesting it. This is inevitable
due to the increase in human creativity and the evolution of business strategies. Usually, an entity
gradually slides into insolvency. This means that entities can strategically shift their COMI to
comply with the legislative requirements and evade the restrictions on forum shopping. What
would probably be harder to shift namely assets is ignored in locating the COMI of an entity.
The central difficulty is the tension between the legal theory of the corporate form and the reality
of group conduct. The corporate form is not merely a legal concept to be safely ignored in the
face of practical realities. It is economically important to defend that form to the extent of
legitimate expectations it creates in various actors, notably shareholders, managers, and creditors.
On the other hand, a corporate group may create group-oriented expectations and collective legal
difficulties not associated with stand-alone companies. The whole problem is further complicated
by the great variation in the relationships among affiliates in a corporate group. Some affiliates
are virtually independent, with the group a passive investor, while others are mere shells under
401
Irit Mevorach, The ‘Home Country’ of a Multinational Enterprise Group Facing Insolvency” at Page 433-434 at
https://nottingham-repository.worktribe.com/preview/1015327/Mevorach_ICLQ_pdf.pdf accessed on 2 February
2022.
402
Fletcher, Ian F, Insolvency in Private International Law, Second Edition, Oxford University Press, p. 367.
There is therefore no doubt that whereas the concept of COMI on its own may have a little
challenge, the problem seems to be the failure to tailor the COMI to fit enterprise groups. The law
seems to presume that each entity has its own COMI without putting into consideration the unique
challenges a group of companies presents especially where each company controls a specific
central administrative function for the group thereby sending mixed signals as to where the group
conducts its day-to-day affairs.
Jurisdictional Conflicts and Conflicts in law
It is no doubt that it is “difficult to avoid parallel proceedings being commenced in several states
with each seeking to be the main proceedings and determining the Enterprise Group COMI would
not reduce the number of different laws that might be applicable. 404
Insolvency law is not immune to the danger of conflicting court decisions on a matter. It,
therefore, follows that under some circumstances, two different courts in two jurisdictions may
conclude that the COMI is located in their territory. In dealing with this matter Judge Brozman
held in Re Maxwell Communication Corporation Plc, 170 BR 800 at 817
“in the age of multinational corporations, it may be that two (or more) countries have equal
claim to be the “home country” of the debtor. Certainly, one could not simply employ the
nation of incorporation alone as the determinant for identification of the home country.
Rather, to arrive at a reasoned selection for choice-of-law purposes, one must look at this
factor and more, factors such as where the debtor's "nerve center," assets, and creditors are
located and where the debtor's business is primarily conducted. Other factors would include
the reasonable expectations of parties, as the Supreme Court adverted to in Gebhard. 405
Such safeguards are aimed at “minimizing the impact of any attempts to open proceedings in a
jurisdictionally improper forum.” 406 However, the greatest innovation of these laws, to lighten
this challenge, is the promotion of communication, cooperation, and coordination of proceedings
between courts that are handling these matters. This approach has enabled courts and insolvency
practitioners to wade through the murky waters of enterprise group insolvencies. Probably the
law should be amended to provide for communication, cooperation, and coordination as opposed
to recognition of proceedings so that an entity or group of companies conducting business across
several jurisdictions can better be dissolved or rescued.
4. Conclusion
Since the title a foreign proceeding is given (main or non-main) affects the reliefs and whether
such reliefs are automatic or have to be applied for, the Insolvency Act 14 of 2011 ought to do
better than just give a rebuttable presumption in resolving the issue of COMI.
403
Professor Jay Lawrence Westbrook, supra at page 9.
404
Eva M. F de Vette Multinational enterprise groups in insolvency: how should the European Union act? at
https://www.utrechtlawreview.org/articles/10.18352/ulr.156/ accessed on 5 February 2022
405
At https://casetext.com/case/in-re-maxwell-communication-corp-plc-1 accessed on 28 January 2022
406
Fletcher, supra, page 372.
Witness Nabalende
Advocate and Law Lecturer, Member of Uganda Law Society, East Africa Law Society, FIDA (U),
Uganda Christian Lawyers
Email: witnessnab@gmail.com
&
Patience Tusingwire
Advocate and Law lecturer Advocate and Lecturer of Law; Member of Uganda Law Society.
Email: tusingwirepj@yahoo.co.uk
Abstract
Purpose - This article examines cross-border insolvency within the (EAC) and the challenges faced
in implementing the relevant laws across the region.
Methodology - A desk research method was adopted and involved the use of both primary and
secondary sources
Results - Our research revealed that recognition of foreign insolvency proceedings creates a degree
of legal certainty in its furtherance. In the EAC, such an arrangement would not only curb unfair
practices during cross-border insolvency proceedings but also maximise the value of debtors’
bankruptcy estate. However, the framework within the EAC varies due to the differences in the legal
systems, hence a challenge in forming a harmonized insolvency regime. Among the seven Member
States, only Uganda and Kenya have taken steps to domesticate the UNCINTRAL Model Law which
the rest need to fast-track even if adoption is voluntary.
Implications - Although a substantial body of literature has developed in recent years in the area of
cross-border insolvency, there is the need for a perspective from the East African region as undertaken
in this article which makes an in-depth discussion on the implementation of the cross-border
Insolvency legal regime in the region, given the ever-growing multinational trade and investment.
Originality/Value - The article offers the perspective that has hitherto been insufficiently addressed
and provides recommendations for the identified. Coordinated EAC cross-border insolvency practice
is only effective where there is a reciprocal legal regime in each State.
With these cross-border activities, trading disputes, financial difficulties, and liquidations among
other concerns are likely to happen as these are a common occurrence in competitive market
407
R.W. Harmer, ‘The UNCITRAL Model Law on Cross-Border Insolvency’, (1997) 6 International Insolvency Review
145, 146
408
Jenny Clift, ‘The UNCITRAL Model Law on Cross-Border Insolvency – A Legislative Framework to
Facilitate Coordination in Cross-Border Insolvency’ (2004) 12 Tul. J. Int’l. & Comp. L. 398
Insolvency is a financial state in which a natural or legal person (a firm) is unable to meet its financial
obligations. 411 There are two forms of insolvency, namely; cash-flow insolvency and balance-sheet
insolvency. According to the Supreme Court decision in BNY Corporate Trustee Services v Eurosail-
UK 2007-3BL, 412 the balance sheet insolvency test required a court to be satisfied that, on the balance
of probabilities, a company has insufficient assets to meet its liabilities, considering prospective and
contingent liabilities. On the other hand, cash-flow insolvency is when a person or company has
enough assets to pay what is owed but does not have the appropriate form of payment. 413
Cross-border insolvency on the other hand denotes a situation where the insolvent debtor has assets
in more than one jurisdiction or where some of the creditors of the debtor are not from the jurisdiction
where the insolvency proceedings have been filed. 414
Professor Ian Fletcher, a renowned scholar on aspects of commercial insolvency, proposes that ‘cross-
border insolvency’ should be considered as a situation
‘…in which an insolvency occurs in circumstances which in some way transcend the confines
of a single legal system, so that a single set of domestic insolvency law provisions cannot be
immediately and exclusively applied without regard to the issues raised by the foreign
elements of the case.’ 415
A majority of significant corporate failures in recent times highlight the involvement of more than
one jurisdiction making cross-border insolvencies common. 416 The increase in the globalization of
business activities results in such businesses encountering a wide range of legal systems. Therefore,
when such companies become insolvent, such insolvencies have cross-border consequences. 417
Therefore, the cross-border insolvency regulatory framework becomes an imperative asset to govern
and regulate cross-border business and commercial dealings between Member States.
The United Nations Commission on International Trade Law Model Law on Cross Border Insolvency
(UNCITRAL Model Law), 418 is designed to assist States in developing a modern, harmonized, and
fair insolvency framework to effectively address cross-border proceedings concerning debtors
experiencing severe financial distress or insolvency.
409
Rosalind Mason, ’Cross-Border Insolvency Law: Where Private International Law and Insolvency Law
Meet’ in Paul J. Omar (ed), International Insolvency Law (Ashgate Publishing 2008).
410
Kent Anderson, ‘The Cross-border Insolvency Paradigm: A Defense of the Modified Universal Approach Considering
the Japanese Experience’, (2000) 21 U. Pa. J. Int’l Econ. L. 679.
411
https://www.europarl.europa.eu/RegData/etudes/STUD/2016/574428/IPOL_STU(2016)574428_EN.pdf. Last
accessed on November 29, 2022.
412
BNY Corporate Trustee Services v Eurosail-UK 2007-3BL [2013] UKSC 28
413
Ibid.
414
Halliday, T.C. and Carruthers, B.G., ‘The recursivity of Law: Global Norm Making and National Law making in the
Globalization of Corporate Insolvency Regimes’, (2007) 112(4) American Journal of Sociology, 1135-1202
415
Ian F. Fletcher, ‘Insolvency in Private International Law: National and International Approaches’ Nordic Journal of
International Law, 69(4), pp.527-528.
416
B.S. Masoud, ‘The Context for Cross-Border Insolvency Law Reform in Sub-Saharan Africa’ (2014) 23(3)
International Insolvency Review, 181-200.
417
Fletcher, I.F., 2005. Insolvency in Private International Law: National and International Approaches (Oxford Private
International Law Series). Oxford University Press.
418
UNCITRAL was established by General Assembly Resolution in 1966 and consists of 36 member states. In addition
a number of observer states and governmental and private international bodies were present at its meetings.
Initially, several measures were developed to deal with cross-border insolvencies. 420 Most of these
measures have traditionally been effected either by treaties concluded between two or more countries
having close commercial relations or unilateral initiatives undertaken by respective countries. 421
However, international initiatives emerged and one of the significant developments in this respect is
the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross
Border Insolvency.
The need for cross-border insolvency legislation came into play in the 1990s. To devise an effective
method to handle cases involving cross-border insolvency, the United Nations Commission on
International Trade Law (UNCITRAL) 422 proposed the UNCITRAL Model Law on Cross Border
Insolvency (Model Law) which was adopted by UNCITRAL at its 30th session on May 30, 1997.423
The Model Law was ratified in that same year by the United Nations General Assembly, and, as of
this year 424 when it celebrates its 25th anniversary, it has been adopted in 50 States 425 including
Uganda, which adopted it in 2011.
The Model Law's purpose is to work as a procedural mechanism to be incorporated into local
insolvency laws through which debtors and creditors can seek redress in various separate national
forums. 426 The law covers four principal sets of circumstances: (1) "inbound" requests for recognition
and assistance of a foreign insolvency case; (2) "outbound" requests by one country that another
country recognize a pending case in the former; (3) coordination of proceedings occurring
simultaneously in two or more countries; and (4) foreign creditor participation in pending cases.
In its preamble, the Model Law sets out to promote five key objectives, which include the following:
(a) Cooperation between courts and competent authorities of the jurisdictions involved in cross-
border insolvency; (b) Greater legal certainty for trade and investment; (c) Fair and efficient
administration of cross-border insolvencies that protect interests of all creditors and debtors; (d)
419
U.N. Secretariat, Possible Future Work: Cross-Border Insolvency: Note by the Secretariat, U.N. Doc.
A/CN.9/378/Add.4 (June 23, 1993), available at
http://daccess-ddsny.un.org/doc/UNDOC/GEN/V93/865/52/IMG/V9386552.pdf? Accessed on 25th November 2022.
420
Ian Fletcher, Insolvency in Private International Law(2nd edn OUP, Oxford 2005)
421
ibid
422
UNCITRAL was established by General Assembly Resolution in 1966 and consists of 36 member states. In addition
a number of observer states and governmental and private international bodies were present at its meetings.
423
Report of the Working Group on its work at its 21st Session (New York, 20-31 January 1997) A/CN.9/435, paragraph
16
424
30th May 2022 marks the 25th anniversary of the adoption by the United Nations Commission on International Trade
Law (UNCITRAL) of the Model Law on Cross-Border Insolvency.
425
See ‘25th Anniversary of the UNCITRAL Model Law on Cross-Border Insolvency’, http://uncitral.un.ord/en/mlebi25
accessed 27th November 2022
426
Bryan Rochelle, ‘Cross-Border Insolvency in the U.S. and U.K.: Conflicting Approaches to Defining the Locus of a
Debtor's Center of Main Interests’ (2017) vol.50(2) International Lawyer, 392.
More so, the Model Law does not prescribe the mandatory unification of the substantive domestic
laws of the various States implementing it. Rather it is built on four principles to facilitate the cross-
border insolvency resolution process 427: “access” by a foreign representative and creditors to the
courts of the enacting State to seek assistance about the insolvency proceedings; 428 “recognition” by
the state of the foreign proceedings these are recognised to save time and resources; 429 “relief” which
ensures the granting of interim reliefs pending recognition 430 and “co-operation” and “co-
ordination” which require courts and insolvency administrators in various states to communicate and
co-operate with foreign courts and foreign representatives for maximization of assets for the benefit
of all creditors. 431
It should be noted however, that the Model Law, unlike a multilateral convention, merely provides a
legislative guide for States to modify their laws to ensure consistency of insolvency laws and practices
between different countries. 432 The Model Law thus confers the freedom of a State to decide how it
wishes to incorporate the Model Law into its domestic legislation. 433 Further, the Model Law contains
a public policy exception which holds that courts in a State may refuse to take an action governed by
the Model Law if such action would be ‘manifestly contrary to the public policy’ of that State. 434
Therefore, the Model Law presents a modest yet viable approach to resolving cross-border insolvency
issues. 435
427
Bob Wessels, Bruce A Markell and Jason J. Kilborn, International Cooperation in Bankruptcy and Insolvency Matters
(Oxford University Press 2009), para 8.2.1.4, page 250.
428
Chapter II of the Model Law. (Articles 9, 11, 12 and 13).
429
Articles 15, 16 and 17. Under Article 17(1), the Model Law sets criteria that must be met by States for foreign
proceedings to be recognised subject to public policy exception
430
See articles 19 and 20.
431
Articles 25-30
432
Andre J. Berends, ‘The UNCITRAL Model Law on Cross Border Insolvency: A comprehensive review’, (1998) 6
Tulane Journal of International Comparative Law 309
433
Bob Wessels, Bruce A Markell and Jason J. Kilborn, International Cooperation in Bankruptcy and Insolvency Matters
(Oxford University Press 2009) 202.
434
Article 6 of the Model Law.
435
J.L. Westbrook, ‘A journey of a 1000 miles begins with a single step’ (2005) American Bankruptcy Law Journal, 79,
713.
436
Treaty for the Establishment of the East African Community, Chapter II, Article 2. It was commissioned on 7 July
2000. available at
<http://eacj.org/wp-content/uploads/2012/08/EACJ-Treaty.pdf > (accessed 8 November 2022).
437
Protocol on the Establishment of the East African Customs Union, available at
<https://www.ifrc.org/Global/Publications/IDRL/regional/Protocol%20on%20the%20Establishment%20of%20t
he%20East%20African%20Customs%20Union.pdf > (accessed 8 November 2022) (Customs Union Protocol).
438
Protocol on the Establishment of East African Community Common Market, available at <http://eacj.org/wp
content/uploads/2012/08/Common-Market-Protocol.pdf> (accessed 8 November 2022) (Common Market Protocol).
439
EAC Treaty, Art. 126, and Common Market Protocol, Art.47
Article 14 of the EAC Treaty established the Sectoral Council on Legal and Judicial Affairs 441 whose
mandate is to ensure that legislation passed by the East Africa Legislative Assembly (EALA) 442 is
transposed into EAC Member States’ domestic laws, treaty compliant and approximated and
harmonised across the region. Under the Sectoral Council on Legal and Judicial Affairs is the Sub-
Committee on Approximation of Laws. 443 The main role of this Sub-Committee is to study EAC
Member States’ domestic laws and to advise the Sectoral Council on Legal and Judicial Affairs on
harmonisation and approximation of laws across the region.
The legal frameworks within the EAC Member States vary due to the differences in the legal systems
inherent in these Member States which poses a challenge in harmonized insolvency regimes.
A solution to these perceived challenges lies in the adoption of the Model Law which provides a
model framework within which cooperation and coordination between jurisdictions concerning the
regulation of corporate insolvency and financial distress involving companies, which have assets or
creditors in more than one State. 446
To note however, among the seven Member States making the EAC, only two i.e. Uganda and Kenya
have taken steps to incorporate the Model Law into their domestic laws. Tanzania, Rwanda, Burundi,
South Sudan, and DRC have yet to incorporate the Model Law into their domestic insolvency laws.
Apart from hindering efficiency in this area, this also defeats the objectives of integration under the
EAC.
Uganda
The need for an approach to managing cross-border insolvencies became a pressing matter of policy
in Uganda in 2009. In efforts to improve its insolvency laws following the global economic recession,
the Ugandan government commissioned the Uganda Law Reform Commission (ULRC) to review its
insolvency and bankruptcy laws and to make recommendations for reform to match international
440
EAC Treaty, Art. 5(1).
441
EAC Treaty, Art. 14(3) (I) and (J).
442
The EAC has an established regional parliament known as the East African Legislative Assembly (EALA) comprising
of legislators from all EAC Member States.
443
This Sub-Committee is made up of Chairpersons of the Law Reform Commissions or equivalent government agencies,
such as Ministries of Justice or offices of the Attorney Generals of Member States, who are tasked with overseeing law
reform exercises within Member states
444
Guide to the Enactment of the UNCITRAL Model Law on Cross-border Insolvency, UNCITRAL, 30th Sess,
Annex, UN Doc A/CN.9/422 (1997), para.27
445
Lynn M. LoPucki, “The Case for Cooperative Territoriality in International Bankruptcy” (2000) 98(7) Mich.
L. Rev. 2216, 2220.
446
Andre’ J. Berends, ‘The UNCITRAL Model Law on Cross-border Insolvency: A Comprehensive Overview’
(1998) 6 Tul J. Int’l & Comp. L. 309, 321
Part IX of the Insolvency Act sets out provisions for cross-border insolvency law in line with the
UNCITRAL Model Law on Cross-Border Insolvency. For instance, S.212 thereof provides for
reciprocity of other EAC Member States’ insolvency laws on corporate insolvency. 448
In addition to the above, S.225(3) of the Act has provisions for harmonisation of cross-border
Insolvency Rules subject to Ministerial statutory declaration. 449
In addition to the Insolvency Act, Uganda also has other statutes such as The Foreign Judgments
(Reciprocal Enforcement) Act Cap 9, The Judgment Extension Act Cap 12, and The Reciprocal
Enforcement of Judgments Act Cap 21 which aim to acknowledge, enhance recognition, and
enforcement of foreign judgments across other Member States.
However, it should be noted that although Uganda has made such efforts through legislation on cross-
border harmonisation of insolvency laws across the EAC, parallel effort within other EAC Member
States is required to inform a concerted effort.
Kenya
Kenya is the other EAC Member State to have taken steps to incorporate the Model Law into its
domestic insolvency laws. Court in Re Cooperative Muratori & Cementisti – CMC DI Ravenna
MISC. Application No. E088 of 2019 observed that the UNCITRAL Model Law on Cross-border
Insolvency has the force of law in Kenya in the form set out in the Fifth Schedule of the Insolvency
Act of Kenya 2015. 450 S.720 (1) 451 provides that the Model Law on Cross-border insolvency has been
transposed and adopted into Kenya’s insolvency law to deal with cases on cross-border insolvency. 452
It is apparent from this section that the model law is Kenyan law on cross-border insolvency to the
extent set out in the Act’s Fifth schedule is in tandem with the aspiration of the Model Law that while
it provides a template on how a country may structure its legislation on cross-border insolvency, each
country elects the extent to which it adopts the provisions.
In addition to the above, s.720 (2) sets out the objectives of the provisions on cross-border insolvency
within the Kenyan Insolvency Act 2015. These are mainly: (a) Cooperation between courts and other
competent authorities of Kenya and foreign states in cases of cross-border insolvency; (b) Greater
legal certainty for trade and industry; (c) Fair and efficient administration of cross-border insolvency
that protects the interest of all creditors and debtors; (d) Protection and maximisation of the value of
the debtor’s assets; and (e) Facilitation of the rescue of financially troubled businesses to protect
investment and preserve employment.
Paragraph 3 of the Fifth Schedule lays down the scope of application of the Schedule. Thus, the
Schedule applies where: (a) assistance is sought in Kenya by a foreign court or a foreign
representative in connection with a foreign proceeding;(b) assistance is sought in a foreign State in
connection with a proceeding under this Act and any other written law relating to insolvency in
Kenya; (c) a foreign proceeding and a proceeding under this Act and any other written law relating
447
C. Nyombi, A. Kibandama & D. Bakibinga, ‘The Motivation Behind Uganda’s Insolvency Act 2011’ (2014)
(8) J. B. L 651, 666.
448
The section provides that: “Where the Minister is satisfied that any State has enacted laws for reciprocity in bankruptcy
/ insolvency which has the same effect as Part IX, the Minister may by statutory instrument declare such a State to be a
reciprocating State, whereby any court having jurisdiction in insolvency/ bankruptcy will be a reciprocating court for
purposes of the Insolvency Act 2011
449
The Act provides that: “Cross-border Insolvency Rules shall not come into force until declared by the Chief Justice
via statutory instrument that a reciprocating state has similar Insolvency Rules
450
Insolvency Act of Kenya, No. 18 of 2015.
451
Ibid.
452
Insolvency Act of Kenya 2015, Part III, 5th Schedule, Supplementary Provisions, s.720
The globalisation of trade and investment and the consequent increase in international business have
enhanced the challenges for cross-border insolvencies in the world. This section looks at the
challenges associated with cross-border insolvency.
For example, Section 212 of the Ugandan Insolvency Act 2011, is to the effect that, where the
Minister is satisfied that any State, has enacted laws for reciprocity, he or she may by Statutory
Instrument declare such a state to be a reciprocating State. S.225(3) of thereof further provides that
Cross Border Insolvency Rules shall not come into force until the Chief Justice by statutory
instrument declares that the reciprocating state has similar rules.
This, therefore, means that for Uganda and Kenya to have a coordinated cross-border insolvency
practice, it is not enough that both Uganda and Kenya have incorporated the Model Law in their
respective insolvency legislations, but that enabling regulations must be passed by the line Minister
in Uganda under a Statutory Instrument, declaring Kenya a reciprocating state.
Worse still, other Member States of the EAC have not yet incorporated the said Model Law in their
regulatory framework.
Then there is the problem of different insolvency administrators requiring the assistance of national
courts and authorities to principally bring about benefits to foreign creditors. Territoriality or the
upholding of domestic laws over the laws of other states is a sensitive issue as it is so much part of
the concept of state sovereignty. There is in this area an ongoing debate on the advantages and
disadvantages of various approaches to insolvency resolution including universalism, modified
universalism, territorialism, and contractualism. 458
Morrisey 459 notes that “Member States have priority laws to ‘push through’ their domestic legislative
assemblies dictated, mostly, by political factors. Very often, Member States give priority to laws that
are politically favourable to leaders. Political ambitions such as re-election strategies and fulfilling
pre-election promises to win subsequent elections are considered a priority over EAC commitments.
Therefore, political factors dictate and influence policies on harmonisation and approximation of
EAC laws.
The Model Law is not a treaty or convention but a recommended legislative text which does not
compel adoption or implementation. 462 There is therefore no obligation upon states to adopt the
guidelines as is the case with some treaties and other international agreements.
456
Nsubuga Hamisi Junior, ORCID logoORCID: https://orcid.org/0000-0001-6902-3575 (2019).
457
Ian F. Fletcher, The Law of Insolvency (4th edition, Sweet & Maxwell 2009).
458
Kent Anderson, “The Cross-Border Insolvency Paradigm: A Defense of the Modified Universal Approach Considering
the Japanese Experience”, (2000) 21 U.Pa.J.Int’l Econ.L. 679.
459
O. Morrisey, “Politics and Economic Reforms: Trade Liberalisation in Sub-Saharan African” (1995) 7 Journal of
International Development 4, 599 – 618
460
JL Westbrook and D Trautman ‘Conflict of Laws Issues in International Insolvencies’ in J Ziegel (ed), Current
Development in International and Comparative Corporate Insolvency Law (Clarendon Press, Oxford 1994) 657, 658
461
Ian Fletcher, ‘The European Convention on Insolvency Proceedings: Choice of Law Provisions’, (1998) 33 Tex Int’l
LJ 119,124
462
The fact that a State may choose to enact as much or as little as it wants to, might be viewed as an “Archilles’ heel” of
this attempt at international harmonization” : Ian Fletcher, Insolvency in Private International Law, (2nd edition, OUP
2005), paragraph 8.73,486.
Harmonisation of the various legal frameworks aims to enable economies to promptly respond to
default conditions and insolvency in a way that promotes economic growth and competition. 465
EAC Member states need to prioritize the said harmonisation reflected in action and funding
prioritization.
This will improve the process of implementing cross-border insolvency proceedings also in business
in the region and further harness efforts toward regional integration and economic development.
Investors will also have legal certainty on cross-border trade and insolvency proceedings in the
region.
As regional integration is premised on the power of concerted effort in achieving common objectives,
the EAC Member States need to follow through the process of integration even in the area of cross-
border insolvency which gives mileage including investor confidence across borders.
Bibliography
Books
1. Bob Wessels, Bruce A Markell and Jason J. Kilborn, International Cooperation in Bankruptcy
and Insolvency Matters (Oxford University Press 2009), para 8.2.1.4, page 250.
2. Ian Fletcher, Insolvency Law in Private International Law (2nd edn OUP, Oxford 2005) 1-4
3. Rosalind Mason, Cross-Border Insolvency Law: Where Private International Law and
Insolvency Law
4. Meetin Paul J. Omar (ed), International Insolvency Law (Ashgate Publishing 2008).
Articles
463
https://onlinelibrary.wiley.com/doi/10.1002/iir.1432. Last accessed on November 29, 2022.
464
World Bank, Principles and Guidelines for Effective Insolvency and Creditor Rights Systems, April 2001.
465
Gauci-Maistre Xynou, ‘Cross-border insolvency: making a case of harmonised insolvency laws across the EU’.
https://www.lexology.com/library/detail.aspx?g=271f360d-3dea-40dd-9312-d0bb4f708e8f (Last accessed on November
29, 2022.
“Technology will always win. You can delay technology by legal interference, but
technology will flow around legal barriers” 466
1. Introduction
Human history has had phases and revolutionary changes that have upended many facets of human
interaction and transactions. For the longest time, the human notions of resources, wealth, and money
have primarily been based on known and acceptable principles hinged on the primarily tangible
subject matter. With time, the notion of wealth has had a corresponding concept of property attached
to it and against which wealth has been measured. While the property was historically viewed from
the lenses of tangible subject matters, it has increasingly taken on other acceptable modes, such as
intangible property. As with many areas of human life, these subjects keep on being expanded and
boundaries pushed.
In October 2008 the pseudonymous Satoshi Nakamoto published a paper entitled Bitcoin: A Peer-to-
Peer Electronic Cash System 467 (the “White Paper”). The White Paper proposed a new electronic
payment system based on cryptographic proof and using digital assets or tokens (bitcoins) as an
* Augustine Obilil Idoot, is a Partner in the law firm Kampala Associated Advocates (www.kaa,co.ug), and practices
Technology and Telecommunications Law, Intellectual Property Law, Data Protection & Privacy law. He has a masters in
Communications & ICT Law from the University of Oslo, Norway.
466
Andy Grove. Former Chief Executive and Chairman of Intel Corporation.
467
Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ <https://bitcoin.org/bitcoin.pdf> accessed 30
November 2022
For the last fourteen years, the nascent Bitcoin and the supporting Blockchain technology, have
created an evolving crypto ecosystem whose average collective market cap is in the region of $1
trillion. 468
The above seemingly rosy picture of the crypto ecosystem however does not paint the complete
picture considering the various legal, economic, and regulatory challenges it has had to deal with.
While there have been various wins and obstacles, one thing remains unchallenged; human beings
will always adopt new technological developments regardless of the prevalent legal grey areas. This
is true of cryptocurrencies.
Various individuals and businesses the world over, have taken to the acquisition, use, exchange, and
trading of various Cryptocurrency categories with close to 4.2 of the global population believed to
own some class of Cryptocurrency as of 2021. 469 The acquisition, use, and adoption of these
Cryptocurrencies by individuals and businesses ultimately shape and influence one’s balance sheet
or the overall notion or computation of wealth. While there are boundless examples of individuals
and entities whose wealth valuation has been significantly boosted by the gains made in
Cryptocurrency ownership and trade, there are equally examples where there have been detrimental
and adverse developments that have rendered the owners incapable of managing their financial
obligations.
This increasing adoption of Cryptocurrency use and ownership amidst reluctant legal and regulatory
recognition and oversight comes with the inevitable risk of managing concerns such as those that
insolvency law seeks to address.
With the developments in Cryptocurrency being novel and grey, legal issues that surround its
recognition and use have created new challenges to insolvency practices in Uganda and the world
over. While there have been great milestones made in the management of Cryptocurrencies in the
context of insolvency proceedings, there is still no consensus on the principles and legal
considerations for the management of this nascent technology. This write-up, therefore, is intended
to further explore the various viable alternatives for insolvency practitioners.
This article argues that on the balance, the legal regime for the effective management of
cryptocurrencies within the context of insolvency proceedings is lacking and incoherent, and as such
creates a practical challenge and potential obstacle to the realization of the potential benefits that
creditors can get in insolvency proceedings.
The article starts by tracing the practical and legal origins of insolvency proceedings and attempts to
highlight the current legal principles that underpin insolvency proceedings. The article subsequently
attempts to highlight the novel challenges that the technological innovations have cast on the
conceptual and procedural workings of insolvency law and the various comparative approaches that
many jurisdictions, confronted by the reality of the technological advancement and limited legal
468
<https://coinmarketcap.com/all/views/all/> accessed 20 September 2022
469
<https://triple-a.io/crypto-ownership-data/> accessed 20 September 2022.
The article will attempt to diagnose the legal challenges presented by emerging technology and
propose policy and legal remedies. This article advances legal scholarship in Uganda and represents
an attempt to appraise insolvency law within the context and practical reality of a technological reality
that potentially threatens to upend the very purpose of insolvency law.
Insolvency
In a society that facilitates the use of credit by companies, 471 there is a degree of risk that those who
are owed money by a firm will suffer because the firm has become unable to pay its debts on the due
dates or during ordinary trading and business. This state of affairs is defined as an insolvency. 472
Several commentators have argued that the proper function of insolvency law can be seen in terms of
a single objective: to maximize the collective return to creditors. 473 According to these commentators,
the primary rationale for bankruptcy law is to maximize the pool of assets available for distribution
amongst creditors. In this approach, all policies and rules are designed to ensure that the return to
creditors as a group is maximized. The creditor wealth maximization approach has been criticized as
470
UK Jurisdiction Taskforce Legal Statement on Crypto assets and Smart Contracts (The Law Tech Delivery Panel,
November 2019) (Legal Statement on Crypto assets and Smart Contracts) https://technation.io/news/uk-takes-
significant-step-in-legal-certainty-forsmart-contracts-and-cryptocurrencies/ accessed 27 November 2022
471
Cork Report: Report of the Review Committee on Insolvency Law and Practice (Comnd 8558, 1982) ch. 1; see Ch.3
472
Black’s Law Dictionary, 7th Edition Bryan A. Garner. Page 799
473
Thomas Jackson, The Logic and Limits of Bankruptcy Law (1986). See also Douglas Baird and Thomas Jackson,
‘Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of
Secured Creditors in Bankruptcy (1984) 51 University of Chicago Law Review 97
In other countries, cryptocurrencies are considered, property/ financial assets. In the vast majority of
countries, however, there are no regulatory frameworks to either ban or enable the regulated adoption
or use of cryptocurrencies and as such, cryptocurrency use by ordinary citizens is neither prohibited
nor recognized within the mainstream financial sector.
Generally speaking, however, there is consensus that there is not enough regulation surrounding
cryptocurrencies and many countries are taking steps to rein in the use of cryptocurrencies.
In 2017, China took steps to ban initial coin offerings (ICOs) and regulations concerning
cryptocurrency exchanges. Additionally, South Korea banned the anonymous trading of
cryptocurrencies on exchanges. These examples suggest that some countries are concerned with how
long-term daily transactions can be conducted using cryptocurrency without any record of who is
buying or selling them. It should also be noted that some countries have stepped in to regulate ICOs
more strictly because they have become "Ponzi schemes.” ICOs allow companies to raise capital by
issuing tokens in exchange for cryptocurrency to investors. These tokens, however, provide limited
rights and value. Some ICOs have been reported as lopsided scams that take advantage of investors.
In October 2022 the European Council approved the Markets in Crypto-Assets (MiCA) Regulation.
The main aims of MiCA are industry regulation, consumer protection, prevention of market abuse,
and upholding the integrity of crypto markets. Once introduced, it will lay out a comprehensive
framework that sets out requirements for the operation and governance of major crypto-asset issuers
and service providers, as well as detailed protections for holders of crypto-assets and other clients of
service providers. MiCA will provide a unified licensing regime for the European Union. This is
arguably one of the first attempts globally at comprehensive regulation of cryptocurrency markets
and one that is likely to set the direction and structure for the global regulation of cryptocurrencies as
a continuation of what is now known as the Brussels effect 475.
In addition to the above mainstream regulatory interventions, several international groups have made
some efforts to provide guidelines for governments to follow when considering how to regulate
cryptocurrency. One example is the Financial Action Task Force (FATF) 476 which encourages a
comprehensive approach to combatting money laundering and terrorism financing including effective
474
Elizabeth Warren. Bankruptcy Policymaking in an Imperfect World. Michigan Law Review (1993) Volume 92 Issue 2.
475
Anu Bradford. The Brussels Effect: How the European Union Rules the World. Oxford University Press, 2020
476
The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes
policies to protect the global financial system against money laundering, terrorist financing and the financing of
proliferation of weapons of mass destruction.
Suffice it to note that, the regulatory landscape is bound to change soon as the uptake, use, and
consumer protection concerns become ever more prevalent with every new scandal that emerges and
highlights the need for some regulatory intervention.
Regardless of the above regulatory lacuna in most countries, various individuals and business
enterprises the world over have taken to the use and adoption of cryptocurrencies. This adoption has
generally triggered the question of how cryptocurrencies should be treated or classified. Different
countries have taken different approaches.
5. Is cryptocurrency property?
Cryptocurrency is a term that describes any digital currency that uses encryption to control the
creation of units of currency and verify the transfer of funds, operating independently of a central
bank. By this very nature and reality, it is a construct of an intangible existence. In the ordinary course
of business, investment, or trade, most things are approached from the perspective of either an asset
or liability to appreciate its overall impact and effect of its acquisition, use, or exchange. Different
jurisdictions have been faced with this question and have come up with different views on the status
of cryptocurrencies.
Cryptocurrencies as property
In England and Wales, the High Court has guided in the cases of AA guided 480. Justice Bryan held
that on a "true interpretation" of English law "cryptocurrencies are a form of property capable of
being the subject of a proprietary injunction." Because cryptocurrencies are "definable, identifiable
by third parties, capable in [their] nature of assumption by third parties, and have some degree of
permanence or stability," as stated in Lord Wilberforce's classic definition of property in National
Provincial Bank v. Ainsworth. 481
Similarly, in New Zealand, the issue of whether cryptocurrency constitutes property has been decided
by the High Courts in the case of Ruscoe v. Cryptopia Ltd (in Liquidation). 482 According to the
account holders in the dispute, cryptocurrencies must be considered a type of intangible personal
property under common law and as defined in section 2 of the Companies Act 1993 of New Zealand
477
The FATF Recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist
financing (CFT) standard
478
Established by the Anti- Money Laundering Act, Act No.12 of 2013
479
International Standards On Combating Money Laundering And The Financing Of Terrorism & Proliferation The FATF
(Financial Action Task Force) Recommendations, October 2018 <https://www.fatf-
gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets-2021.html> accessed 14
November 2022
480
AA guided [2019] EWHC 3556
481
National Provincial Bank v. Ainsworth [1965] 1 AC 1175.
482
Ruscoe v. Cryptopia Ltd (in Liquidation) [2020] NZHC 728.
Similarly, in Singapore, the Courts have recognized cryptocurrency as property and granted a freezing
injunction against persons unknown in the case of CLM v CLN. 484 The Claimant commenced an
action to trace and recover 109.83 Bitcoin and 1497.54 Ethereum that were allegedly stolen by
unknown individuals and entities. In the judgment, High Court judge Lee Seiu Kin ruled that
cryptocurrencies are recognized as property as they are distinct based on their "computer-readable
strings of characters", have exclusive ownership, are "potentially desirable" by third parties, and have
"some degree of permanence or stability"
In addition to these court cases, Courts from Ohio and California in the United States of America to
South Korea have handed down decisions finding cryptocurrencies to be property. In China, despite
a ban on initial coin offerings (ICOs), cryptocurrency exchanges, and Bitcoin, mining, some courts,
and tribunals have held cryptocurrencies to be property.
It is therefore generally safe for one to argue that there is an increasing acceptance in several
jurisdictions that Cryptocurrencies have proprietary characteristics which position presents a positive
status for insolvency-related matters as will be discussed herein below.
In discussing the above seemingly emerging consensus, the obiter dictum by Simon Thorley IJ in the
case of B2C2 Ltd v Quoine Pte Ltd 485 needs to be taken into consideration in understanding the
context of this emerging treatment.
“Cryptocurrencies are not legal tender in the sense of being a regulated currency issued by
a government but do have the fundamental characteristic of intangible property as being an
identifiable thing of value.” 486
Since the emergence of Bitcoin as the first Cryptocurrency and the subsequent growth of thousands
of altcoins, there have emerged different uses for which individuals and business entities have adopted
them. While there are still limited day-to-day use cases for Cryptocurrencies, the majority
predominantly purchase them as investment instruments (i.e. obtaining them to trade, invest and reap
profits). It is therefore possible that at any given point in time, any person or entity involved in the
483
Ainsworth v. National Provincial Bank Ltd [1965] AC 1175 at 1247–1248
484
CLM v CLN [2022] SGHC 46
485
B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(l) 3
486
Ibid
487
https://coinmarketcap.com/ accessed 14 November 2022
In the recent past, the correlation between the developments and risks associated with cryptocurrency
has become much clearer with every incident in which either various players within the
Cryptocurrency ecosystem face challenges with their liquidity or on account of some unfortunate
events such as fraud which renders the victim insolvent.
As highlighted at the start, one of the key mandates of a trustee acting in any insolvency proceeding;
is to identify, classify and realize assets belonging to the estate or entity in issue. Like any other asset
or property, a debtor’s interest in cryptocurrency on or after the date of bankruptcy will vest in the
trustee as an asset of the estate.
There is however a possibility that some Cryptocurrencies in the custody of an insolvent may be
liabilities to the extent that they are technically ‘property’ that belongs to creditors. Such is the case
of business entities engaged in the business of cryptocurrency exchange and as such may hold wallets
belonging to third-party entities. Nevertheless, insolvency proceedings are structured in such a
manner that all assets and liabilities are managed in the best interests of the creditors.
While insolvency is a generic word, this article will not attempt to exhaust the different applicable
principles and considerations that would apply to the distinct insolvency processes. I will, however,
make a general discussion on the guiding principles relevant to insolvency proceedings relating to
cryptocurrency assets or liabilities. Considering the current emerging trends, the emphasis will be on
insolvent corporate entities that are exposed or engaged in cryptocurrency transactions, investments,
and holdings. Needless to say, these same principles will be relevant to individual insolvency
proceedings.
For purposes of setting the legal context for the consideration of the principles applicable to corporate
insolvency, it is imperative to cite a few provisions of the Insolvency Act 489 that set the tone for the
exercise of any proceedings.
Section 79 of the Insolvency Act 490, provides that:
“Subject to the provisions of this Act on preferential payments, the assets of a company shall,
on its liquidation, be applied in satisfaction of its liabilities simultaneously and equally, and,
subject to that application, shall unless the articles of association otherwise provide, be
distributed among the members according to their rights and interests in the company”.
Section 2 of the Insolvency Act 491 furthermore provides helpful definitions of some keywords
relevant to the treatment of Cryptocurrency matters. This includes property which is defined to:
“Include money, goods, things in action, proceeds, land and includes every description of
property wherever situated, obligations, interest, whether present, future, vested or
contingent, arising out of or incidental to property”
488
The Insolvency Act, No.14 of 2011
489
Ibid
490
Ibid
491
Ibid
Section 97 (1) (a) of the Insolvency Act 492 importantly provides that at the commencement of
liquidation—the liquidator shall take custody and control of the company’s property;
Like any other asset, a debtor’s interest in cryptocurrency on or after the date of bankruptcy will vest
in the trustee as an asset of the estate. A trustee in this regard is an officer of the court who is elected
by creditors or appointed by a judge to act as the representative of a bankruptcy estate. 493
It is therefore incumbent on any insolvency practitioner to exercise particularly extra due diligence
and care in dealing with any insolvency proceedings involving Cryptocurrency. There are therefore
some very vital actions that need to be undertaken at the commencement of any insolvency
proceedings while attempting to meet the interests of creditors through the use of crypto assets.
Debtor profiling should be undertaken for each bankrupt estate and the trustee should immediately
seek and review the bankrupt’s bank statements to identify any transactions that are made to or from
what may appear to be related to a cryptocurrency or a cryptocurrency exchange.
As cryptocurrency is a digital asset, trustees should also consider collecting electronic evidence to
assist investigations. Potential evidence of ownership (for example, proof of purchase) includes
emails, mobile applications, QR codes, recovery seeds, internet browsing history, and hardware. A
review of electronic devices may also locate public and private keys.
Once an insolvency practitioner suspects that an insolvent entity/ person has dealt with or is dealing
with cryptocurrency, the practitioner must make further inquiries with the bankrupt to obtain details
of ownership and seek access to the relevant public and private keys. The keys will enable the trustee
to trace the past transactions through the exchange where the cryptocurrency is held and identify any
voidable transactions before bankruptcy
492
Ibid
493
Black’s Law Dictionary, 7th Edition. Bryan A. Garner, Editor In- Chief at page 1519
494
Bristol and West Building Society v Mothew [1998] Ch 1 (“Mothew”) at p.18A
b. The value of the cryptocurrency must be taken into account by the practitioner.
After the cryptocurrency has been transferred to a wallet held by the insolvency practitioner a request
can be made to the cryptocurrency exchange to sell the cryptocurrency and transfer the proceeds to
the trustee’s bank account. The process is very much similar to selling shares through a share broker
or a share trading account held online.
Due to its inherently extremely volatile nature, the secured cryptocurrency should be realized
immediately for the benefit of the creditors/ insolvent debtor/ company to minimize the risk of the
property/ asset being dissipated. For example, whereas the price of Bitcoin has increased by over one
hundred percent (100%) over the last five (5) years 495, the same Bitcoin has plunged from an All-
Time High price of USD.67,553 on 9th November 2021 to the current price of USD.16,718 as at the
16th day of November 2022 496. This is an example of the unpredictable and highly volatile nature of
cryptocurrency. In the worst-case scenarios, some cryptocurrencies have dissipated to zero value.
As stated, any insolvency practitioner once appointed assumes an office of a trustee and is, therefore
duty bound to act in a manner that is in the best interest of the creditors and the debtors as well. In
as much as cryptocurrencies can appreciate, the trustee has to perform his/ her fundamental duties.
Section 99 of the Insolvency Act, 497 for example, states that the fundamental duties of
a liquidator are to take, reasonably and expeditiously, all steps necessary to (a) collect; (b) realize as
advantageously as reasonably possible; and(c) distribute, the assets or the proceeds of the assets of
the company.
In this case, the prudent course of action would call for an immediate realization of cryptocurrency,
and decision-making considerations that would call for the delay in realizing the cash/ money value
of the cryptocurrency should be carefully documented by the trustee. In addition, if for any reason,
the trustee is required to hold a cryptocurrency asset, it ought to do so in cold storage. This involves
storing cryptocurrency offline– meaning away from any internet access as the online environment is
vulnerable to hacking.
495
<https://coinmarketcap.com/currencies/bitcoin/?period=7d> accessed 16 November 2022
496
Ibid
497
The Insolvency Act, No.14 of 2011
Bitcoin Domicile
Butcher J in the case of Ion Science Ltd v Persons Unknown (unreported, 21 December 2020) held
that:
“The lex situs of a crypto asset is determined by the place where the person who owns it is
domiciled in the present case”.
This is therefore an important consideration to factor while determining the jurisdiction where
insolvency proceedings should be commenced. Uganda has part IX of the Insolvency Act, 498
dedicated to cross-border insolvency proceedings and principles. From the provisions contained
therein, there is an enabling legal environment that can facilitate the commencement of reciprocal
and con-current insolvency proceedings both in Uganda and in other jurisdictions where any
identified cryptocurrency, cryptocurrency wallet/ exchanger may be domiciled for purposes of
enabling the expeditious control, management, and liquidation of the relevant cryptocurrency asset.
While other jurisdictions have interpreted Cryptocurrencies as property, the same is yet to be tested
in Uganda. Whereas the definition of property does not expressly mention cryptocurrency, its
expansive scope certainly accommodates the argument that in the current state of the law in Uganda,
cryptocurrencies are a form of property that naturally form part of the estate of the insolvent.
This notwithstanding, the control and liquidation of cryptocurrency assets/ property may present a
challenge for an insolvency practitioner/ trustee entrusted with the mandate to manage an insolvent
estate in Uganda if it comes to liquidating any cryptocurrency asset through the mainstream licensed
financial institutions, as these are prohibited in practice from processing or accepting any payments
from cryptocurrency-related transactions.
In other jurisdictions, there are similar guiding provisions that should be considered when
determining jurisdiction. In the context of the European Union, specifically Regulation (EU)
2015/848 of the European Parliament and of the Council of May 20, 2015, on insolvency proceedings,
the aim is to coordinate insolvency procedures through the idea of center of main interest (COMI) to
establish which EU member state (aside from Denmark) has jurisdiction to initiate insolvency
proceedings and which state's laws will take precedence if competing insolvency procedures are
started in various member states. Despite the lack of a definition for the term "COMI," it is presumed
that the debtor's registered office (or residence in the case of an individual) is the primary area of
interest. Additionally, actions may be brought in a state where the debtor does not have its COMI but
does have an "establishment," which is defined as any place of business where the debtor engages in
a permanent economic activity with goods and human resources.
Generally speaking, however, several considerations need to be factored in, for example; Is the digital
wallet located online, locally on a computer, or in a backup storage system? Is the place the subject
of the inquiry used to conduct the exchange?
498
The Insolvency Act, No.14 of 2011
10. Conclusion
Different revolutions carry with them risks that tend to fundamentally cause upheaval in the conduct
of business and normal life. Every materialization of risk puts a strain on the industry in the short
term. In the long run, however, the crypto and blockchain sectors will continue to thrive. This is
ultimately an opportunity for the industry to improve and learn through the process of trial and error.
While regulation of crypto assets is still in its embryonic stage, insolvency courts serve as a testing
(‘battle’) ground, both in terms of defining cryptocurrencies’ legal status and finding practical ways
of recovering and handling their value for the general benefit of creditors.
The law does not operate in a vacuum because, in the end, it is closely tied to power – to empower,
enable, define, regulate, and expand normative behavior. As the discussion has shown, the Courts
have and retain the power to lend insolvency practitioners the power and capacity to tap into the value
that cryptocurrencies have regardless of the seemingly grey space they occupy in terms of the
prevailing regulatory regime. This ultimately helps them advance the core objectives of insolvency
proceedings. Insolvency practitioners should therefore be steadfast in the pursuit of assets held in the
cryptocurrency ecosystem, the legal issues notwithstanding.
I registered as an Insolvency Practitioner in 2018. Since then I have conducted at least one voluntary
liquidation each year. To be more precise, members’ voluntary liquidation.
An Insolvency Practitioner obtains an Insolvency Practitioners Certificate from the Official Receiver
every year. He or she must be an individual, not less than 25 years old, and may be any of, a lawyer,
an accountant, or a chartered secretary who is a registered member of the relevant professional body
or is a registered member of any other professional body as the minister may prescribe.
The experience of being an Insolvency Practitioner has been an interesting one. Members’ voluntary
liquidation of which I have been mostly concerned may pale in comparison to Creditors’ voluntary
liquidation or Liquidation directly involving the Court in terms of complexity and the intricacies
involved but it is also not without its peculiar challenges.
Voluntary liquidation is one of the four ways in which the life of a Company, that special life
famously espoused in the oft-cited case of Salmon vs. Salmon, may come to an end. Voluntary
liquidation may take the form of Members’ Voluntary liquidation or Creditors’ Voluntary liquidation.
The other form of liquidation is Liquidation subject to supervision by Court and Liquidation by Court.
Yes, the latter two differ, notwithstanding the involvement of the Court. Whereas the one subject to
supervision entails intervention by Court after a resolution to commence voluntary liquidation has
already been passed, the second one will now normally involve a Petition being made specifically by
any of the Company stakeholders to have the Court liquidate a Company. Invariably, the modus
operandi in both is the same.
Yet again, several Companies establish in Uganda but fail to commence any form of business. They
take no further step in the existence of a Company beyond filing the mandatory Company
establishment documents, notably, the Memorandum and Articles of Association, the Statement of
Nominal Capital, Declaration of Compliance, Form 18 (this has since been repealed by the
Companies (Amendment) Act, 2022), Notification of Situation of the Registered Office, Notification
of Appointment of Directors and Secretary and the Return of Allotment.
Closure of the latter group of Companies is easier because there are often no Creditors to deal with.
All that the Insolvency Practitioner must do is strictly comply with the various procedural steps under
the law over the minimum period for concluding a members’ voluntary liquidation. This is about six
consecutive calendar months, ceteris paribus. If for instance, the Company obtained a Tax
Identification Number (TIN) as required under the law, this is what may present additional
responsibilities depending on whether or not tax returns were filed. I will elaborate below.
For the first cited group of Companies, the public notices made will often have at least one Creditor
show up to make a claim. These are mostly ordinary trade creditors. As already stated, in almost all
cases concerning Companies that have conducted some business, the tax collector cannot be avoided.
The requirement for every business entity to have a TIN means that they must also file returns with
the Uganda Revenue Authority (URA). The TIN is as good as a noose in a Company’s existence. It
must be properly unfastened to set one free. The liquidation process, therefore, involves undertaking
the process of deactivation of the TIN with URA. Anything may happen at this point. If there was tax
compliance, the TIN will be deactivated with much ease. However, if some tax was not paid or tax
returns were not filed, blues will tend to show up at this point with not-so-palatable tax assessments.
In all cases of voluntary liquidation and invariably all liquidation, one inescapable procedure, a
condition precedent, is confirmation that the Company has filed Annual Returns over the years of its
existence. While it must be known by both Company owners and Company law practitioners that
Companies speak and act through Resolutions that arise from Company meetings (Annual General
Meeting, Extra Ordinary General Meeting, and Directors Meetings), it is imperative to note that these
must also be registered with the Companies Registry at the Uganda Registration Services Bureau
(URSB), if they are to have any efficacy. As a soft measure for ensuring compliance with all Company
establishment requirements, no Resolution is registered by URSB unless the Company has filed all
the requisite Annual Returns.
What this means for an Insolvency Practitioner involved in voluntary liquidation is to ensure that
before even taking on instructions to undertake the process, confirmation is made that Annual Returns
have been filed. As already pointed out, general laxity and noncompliance by Ugandan Company
owners in many instances leads to a situation where Annual returns that should have been filed
throughout a Company’s existence, say ten years, are filed omnibus and in arrears at the same time.
Although this should attract a fine/penalty, URSB is often gracious and looks the other way in the
face of a potentially heavy bill on the part of the noncompliant Company owner. Note that no one
should find any comfort in such waivers. They are often short-lived.
The foregoing should now take us to the motive for voluntary liquidation. Quite often, the immediate
trigger for liquidating is the apprehension about the liabilities that arise from remaining on the
Companies Register. This is especially true for Companies that have been in actual business and have
in good times paid tax or filed the requisite tax returns routinely. The one-stop business center
approach indeed compels some to get TINs, not knowing that it might turn out to be their Achilles
heel in a tough business environment.
Beyond the trigger, some of the Companies which the author has facilitated voluntarily wind up, and
closed because among others: they had failed to commence business and there was no prospect of
doing any business in the future; they had for some time done business but which went down and the
shareholders wish to have the Company closed; the Company is an associated Company of another
and there is need to streamline through the merger of operations to properly manage costs; and the
purpose for which the Company was established has been overtaken by events.
Business prospects and ever-emerging opportunities in the economy often have people floating
Companies in a knee-jerk style. Some of these opportunities fail to leave a shell company. Depending
on the business personalities/credentials of the shareholders, it is such Companies that are also
deliberately liquidated. Ordinary people, mostly establish Companies for various superficial reasons
such as instigation after a thorough brainwashing and inspiring Motivational speaker talk; urging by
a Pastor or Priest for the flock to open Companies in anticipation of Miracles upon touching sermons
and anointing with oil; and inspired immigration returnees from more developed economies where
Companies are established and do conduct serious business. Some of these may often not take any
deliberate steps to close their Companies when things do not fall in place. They leave this to URSB
to manage given the related costs and cumbersome procedures.
This brings into perspective the costly as well as the long and often cumbersome procedure for
liquidation of such Companies which fail to start. In terms of cost, the bare minimum cost estimate
for voluntary liquidation in terms of disbursements has until recently been about Ugx.2,990,000/=
(Uganda Shillings Two million nine hundred ninety thousand only). The breakdown of this fee
includes the following: filing fees of Declaration of Insolvency – Ugx.50,000/=; filing fees for a
Special Resolution for winding up and appointment of a Liquidator – Ugx.30,000/-; advertising a
Notice of Special Resolution in the Gazette – Ugx.450,000/=; advertising a Notice of Resolution in a
newspaper of wide circulation – Ugx.200,000/=; advertising a public notice of the Creditor’s meeting
in the Uganda Gazette – Ugx.450,000/=; advertising a public notice of Creditor’s meeting in a
Newspaper – Ugx.200,000/=; filing fees for a preliminary report – Ugx.30,000/=; advertising a public
notice for viewing the preliminary report in the Uganda Gazette- Ugx.450,000/=; advertising a public
notice for viewing the preliminary report in a Newspaper – Ugx.200,000/=; Public Notice for a
General Meeting in the Gazette – Ugx.450,000/= and Newspaper – Ugx.200,000/=; filing fees for a
final report and Account of the liquidation – Ugx.30,000/=; filing other correspondences –
Ugx.50,000/=; transport to file documents and correspondences and paying fees at URSB, UPPCL
By comparison, many Companies often establish themselves with a minimum nominal capital of
Ugx.1,000,000/=. We may put the total cost for the establishment of such a Company, that is, statutory
fees and professional fees at a conservative total of say Ugx.1,000,000/=. If the Company did not
indeed commence and conduct any business which earned it profit, it means that with an estimated
closure cost of Ugx.6,000,000/=, the shareholders are compelled to part with a lot more money to
close the Company, than they would have earned in the lifetime of the Company. This is besides other
costs such as filing Annual Returns in arrears at another relatively high cost.
Speaking of the cumbersome nature of the procedure, each of the above cost items involves the
preparation and filing of the specified documents. This is at various intervals. Where a Company does
not have any problematic liabilities and there are no force majeure events such as Covid19 and the
attendant lockdowns, the liquidation should, as already stated, often last about six (6) calendar
months.
At the Insolvency Conference of 2019 at Speke Resort Munyonyo, the issues highlighted were raised
as a matter of concern by Insolvency Practitioners. Since then, there has been only a slight reduction
in some of these overhead costs. We have had Uganda Printing and Publishing Corporation (UPPCL)
reduce the Uganda Gazette notice cost to Ugx.300,000/=. For newspapers, the cost has not changed.
This means that the cost of voluntary liquidation remains high.
It is worth noting that the greater part of the fees goes to stakeholders other than URSB. While the
Gazette fees are paid to the (UPPCL), the newspaper fees are paid to a newspaper of wide circulation
of the Insolvency Practitioner’s choice. It is often the New Vision or Daily Monitor. URSB has no
control over these other than lobbying or entering into mutually beneficial arrangements. This is at
least the response that was given when questions were raised in 2019.
So far as legal reform touching voluntary liquidation is concerned, the Companies (Amendment) Act,
2022 has created a window for the closure of Companies, described as defunct, outside the long and
cumbersome procedure highlighted in this article. Thus, the new section 265A of the Act provides
that the Registrar may, at the request of the Company or on his or her own accord, cancel the
registration of a Company under the Act following regulations made by the Minister. The
consequence of the foregoing is that the Company ceases to carry on business.
This new provision is also not without some waiting period. Subsection 3 requires the Registrar to
give thirty (30) days’ notice to the Company of the intention to cancel its registration. The notice
must be published in the Gazette or other media of wide circulation as the Registrar may determine
by again notice published in the Gazette. It is where there is no objection and upon the expiry of the
thirty days’ notice that the Registrar shall then strike the Company off the Register.
Although regulations to put into effect the provision is yet to be released and published, it is not
entirely risky to state this is a welcome reform so far as the closure of largely dormant Companies,
described as defunct in the Act, is concerned. The minimum period for one to see a qualifying
Company closed has been cut by at least five (5) months. Should the Gazette cost be passed to the
Company owners, again the cost of one notice which is currently at Ugx.300,000/= would not be
prohibitive. The amendment also appears to suggest that one would have a choice between the Gazette
and a newspaper. This makes it even more affordable.
One point worth mentioning as far as the Gazette is concerned is that because of the fixed publication
schedules set by UPPCL, the statutory minimum periods notices are not realised. As a matter of
practice, every document is first submitted to URSB upon paying fees and stamped, before being
delivered to and accepted by UPPCL. Time is lost in that process. The result is having, for instance,
a notice for a meeting 30 days ahead, appearing in the Gazette long after the said meeting date.
Key lessons learned from voluntary liquidation may be summarised into three things. Firstly, do a
thorough assessment of the Company to be liquidated to confirm full compliance with all Company
law legal requirements. Secondly, keep it professional by reading and understanding the law very
clearly, taking into consideration that there is dual regulation of the process in the Companies Act,
2012, and the Insolvency Act, 2011 as well as their respective subsidiary legislation. Thirdly, confer
with the officers at the Uganda Registration Services Bureau on their interpretation and understanding
of the legal requirements to ensure that both positions align with the law and the practice.