The Corporate Insolvency and Restructuring Act, 2020 (Act 1015) (the “Act”) became law in Ghana on 30 April 2020. The Act prescribes the regime for the administration and restructuring of the affairs of distressed companies or for the liquidation of such companies.
A company may be said to be financially distressed if it is insolvent, likely to be insolvent or has a negative net worth. Corporate administration is the process of enabling the rehabilitation of a financially distressed company.
In the light of the protection given to companies in distress under the Act, a pertinent question that should concern businesses (particularly in the light of the impact of COVID-19) will be how the Act will play out in the resolution of disputes before our courts.
It is therefore important for businesses, financial institutions, creditors and shareholders of financially distressed companies to understand the powers assigned to the Court and the various interventions the Court can make to ensure the smooth rehabilitation of such distressed companies. Lawyers representing corporate entities in distress may also utilise the provisions of the Act as a shield or a sword.
This article seeks to highlight the powers and the roles the Act has assigned to the High Court (the “Court”) in the administration and restructuring stages of companies in distress. These powers will be considered under four main headings: (1) powers for efficient corporate administration; (2) powers during the restructuring phase; (3) powers to extend timelines; and (4) general supervisory powers.
- Powers for Efficient Corporate Administration
The Court is vested with the following powers to direct the orderly and efficient administration of companies in distress:
- Appointment of Administrator
The Court is empowered to appoint an Administrator upon an application by a creditor of the company, the liquidator or the Registrar of Companies (“the Registrar”). The Court may also determine the fees of the Administrator in the event of a disagreement with the Committee of Creditors on the remuneration payable.
- Sanction of Transactions during Administration
Once a company is put into administration, there is a freeze on transactions the company may enter into. However, the Court has power to sanction such transactions which will be valid even without the consent of the Administrator. These include the transfer of shares during the administration of a company.
- Power in Relation to Meetings of Creditors
An Administrator is obligated to have at least two meetings with creditors for the administration process – the First Meeting and the Watershed Meeting. These meetings must be held within ten (10) and twenty (20) days of the date of the appointment of the Administrator respectively. Further, an Administrator or a creditor who is dissatisfied with the outcome of the proceedings in any meeting of creditors, may apply to the Court for an appropriate order.
The Court may set aside the resolution, order a new meeting to be held to vote on the resolution, order that a particular creditor not be allowed to vote on the resolution, or make any other orders it considers appropriate.
- Protection of Property of a Company in Administration
Corporate administration places a temporary freeze on some rights of creditors and other claimants against a distressed company. However, the Court has the power to permit the following activities at the time of the temporary freeze:
- The enforcement of a charge by secured creditors over the property of a company in administration;
- An action by the owner or lessor of property for possession or recovery of property that was used or occupied by the company;
- The commencement or continuation of legal proceedings against the company or its property.
- The enforcement of a guarantee in respect of a debt or liability against a director of the company, spouse or relative of a director, or a related company.
It is our considered opinion that creditors, landlords and shareholders of distressed companies must pay rapt attention to these powers of the Court in the protection of property of a company in administration. It is noteworthy that a creditor cannot sue a company in administration for recovery of debts owed by the company, even if such debt is unchallenged, without the Court’s permission. Even where a creditor has instituted an action in court prior to administration, permission from the Court is still required for the matter to proceed. Additionally, a creditor who has obtained judgment after a lengthy trial against the company is also barred from enforcing that judgment or going into execution against the company in administration without the Court’s permission. This could impact the enforcement of loan and security transactions, as the grant of leave or permission to proceed against the company is at the Court’s discretion.
Financial institutions also need to be extremely vigilant and conduct due diligence on their corporate customers before approving their applications for loans, especially where the permission of the Court is also required before a creditor can proceed against the guarantors of a loan.
- Termination of Administration
Administration may come to an end through several ways. The Court has power to terminate the administration process:
- By the appointment of a liquidator;
- By refusing to extend mandatory periods to hold a meeting. When an application is made to the Court for the extension of the initial convening period (the first 28-day period between the appointment of the Administrator and the holding of the Watershed Meeting), and the Court deals with the application without extending the convening period;
- By declaring that a company has becomes solvent; or
- By ordering the termination for any other sufficient reason upon an application by any person with an interest in the administration.
- Powers during the Restructuring Phase
The execution of a Restructuring Agreement moves the company from an administration phase to a restructuring phase (which usually involves the implementation of a proposed plan towards the payment of the company’s debts). The powers conferred by the Act on the Court during the restructuring phase include the following:
- Protecting the Objects of the Restructuring Agreement
A duly signed Restructuring Agreement binds creditors, officers and shareholders of the company, the Restructuring Officer and the company itself. Creditors, in particular, are barred from doing anything inconsistent with the Restructuring Agreement except with the leave of the Court.
All persons who are bound by the Restructuring Agreement are prohibited from:
- applying or pursuing an application in the Court for the appointment of a liquidator.
- initiating or pursuing legal proceedings or enforcement processes against the company or property of the company while the Restructuring Agreement is still in force.
Notwithstanding the above, the Court has the power to permit a secured creditor to enforce the secured charge or for an owner or lessor of property being used by the company to recover the property or exercise rights in relation to the property. Before granting such permission, the Court must satisfy itself that the enforcement of the charge or recovery of possession will not adversely affect the achievement of the objects of the Restructuring Agreement or prejudicially outweigh the interests of the other creditors.
- Validity and Variation of Restructuring Agreement
Under the Act, the Court has the power to rule on the validity of the Restructuring Agreement. On an application made by the Restructuring Officer, the Registrar, shareholder or creditor of the company, the Court may declare the Restructuring Agreement or a provision in the agreement void.
Where a provision in the Restructuring Agreement is declared void, the Court may vary other provisions of the agreement with the consent of the Restructuring Officer. The company’s creditors may also vary the Restructuring Agreement by passing a resolution. When such a variation is made by the creditors, the Court may, upon hearing an application brought by a creditor, cancel or confirm the variation and make further orders as it deems appropriate.
- Termination of Restructuring Agreement
Generally, a Restructuring Agreement will terminate on the occurrence of the circumstances set out in the agreement as events of termination. However, the Court also has the power to terminate the Restructuring Agreement on an application by the company, a creditor of the company, the Restructuring Officer, or any other person with an interest in the termination of the Restructuring Agreement.
The Court, upon receipt of such an application for the termination of the Restructuring Agreement may terminate the agreement if satisfied.
- Powers in the Extension of Timelines
The Act provides timelines for the taking of certain crucial steps by the Administrator or Restructuring Officer. These timelines may be extended by the Court in certain circumstances on an application for extension of time by the relevant person. The Court has power upon application to extend the period for:
- holding the First Meeting between the Administrator and creditors upon commencement of administration;
- holding the Watershed Meeting, which is the meeting for creditors to decide on proceeding with administration by executing a Restructuring Agreement, or agreement to end administration and put the company into official liquidation; and
- execution of the Restructuring Agreement.
The powers of the Court to extend timelines could be subject to abuse by lawyers and insolvency practitioners as the Act does not specify the number of times an application for extension of time would be entertained by the Court. Another issue is whether cases filed under the Act will be prioritised or will have to compete with the regular commercial cases that take years to conclude.
Within twelve (12) months of coming into force, the Act obligates the Minister for Justice to make Regulations to, among others, provide for matters necessary for the implementation of the provisions of the Act. It is recommended that the Regulations stipulate the number of times an application for extension of time may be brought before the Court to avoid abuse.
In the meantime, it is recommended that judges take a proactive approach to achieving the objects of the Act and subject applications for extension of time to stringent scrutiny. Applications brought in bad faith that seek to extend time ought to be dismissed. Also, we recommend that judges adhere strictly to the order of business during court sittings as set out in Order 79 Rule 2 of the High Court (Civil Procedure) Rules, 2004 (CI 47) as amended, so that applications brought under the Act are dealt with swiftly.
General and Supervisory Powers of the Court
The Court has general and supervisory powers to:
- grant orders it considers appropriate in the administration of the company upon an application;
- make orders necessary for the protection of the interests of the creditors of the company;
- order an Administrator or Restructuring Officer to remedy any default;
- make any orders it considers appropriate where the office of an Administrator or Restructuring Officer is vacant or in-active;
- determine the validity of the appointment of an Administrator or Restructuring Officer;
- give directions in respect of the performance of an Administrator or Restructuring Officer’s functions and the operations of the Restructuring Agreement;
- order the prohibition of an Administrator or Restructuring Officer who is unfit to act from so acting; and
- order the prohibition of a person from acting as an Insolvency Practitioner. Such prohibition order shall remain in force for not more than five (5) years.
The Court supervises the work of the Administrator or Restructuring Officer and may make any orders it considers necessary where it is satisfied that the conduct of an Administrator or Restructuring Officer or the management of the affairs of the company by that Administrator or Restructuring Officer is prejudicial to the interests of the creditors and shareholders of the company.
Conclusion and Recommendations
The Act has empowered the Court extensively to make orders, grant leave to the relevant stakeholders to perform their duties, extend timelines in the administration and restructuring of companies, and to generally play a supervisory role as it considers appropriate.
It is recommended that stakeholders of distressed companies pay particular attention to this supervisory role of the Court in corporate administration. Stakeholders of distressed companies ought to appreciate their respective roles and the options at their disposal in seeking the interventions of the Court and the timelines within which such interventions may be sought in the successful administration or restructuring of a company.
Finally, it is recommended that judges of the High Court, particularly the Commercial Court division which is likely to deal with cases under the Act, ought to be equipped with the relevant commercial and legal training to enhance their capacity to handle cases governed by the Act to meet the purpose and intention of the Act.