By Eric Ofori KWAAH
Insolvency refers to a business that can no longer pay its debts, typically to its creditors.
Creditors are individuals or institutions to whom a business owes money for goods, services, or loans received.
A company might experience a significant drop in income due to lost sales, face increased expenses from rising costs of goods or labor, or be impacted by poor management decisions that hinder its growth.
Financial distress can quickly threaten the stability and future of any business, no matter its size or industry. When a company is unable to meet its financial obligations, it enters the critical zone of insolvency, a defining moment that requires decisive action.
At this critical juncture, stakeholders face an important decision: should the business attempt to restructure its operations and finances to regain the ability to pay its debts (a state known as solvency), or should it undergo liquidation, leading to an orderly dissolution of the company.
The choice between these two paths carries profound implications for creditors, employees, shareholders, and the wider community.
This article delves into the details of restructuring and liquidation, exploring the factors that guide the selection and offering valuable insights to guide stakeholders toward the most viable and beneficial outcome in insolvency proceedings.
What is corporate restructuring?
Corporate restructuring is an action taken by a corporate entity to significantly modify its capital structure or operations.
This means that the company may change how it operates, reduce costs, renegotiate debts, or adjust its business model in order to recover financially and continue running effectively.
The types of corporate restructuring under Ghana’s Corporate Insolvency and Restructuring Act, 2020 (CIRA Act) include: administration, mergers, and arrangements. For a more detailed explanation on the above, refer to our article on Corporate Restructuring and The Role of the Board in Ghana.
The restructuring process typically focuses on three core areas: financial, operational, and strategic restructuring.
- Financial restructuring focuses on modifying the company’s debt obligations, potentially involving debt rescheduling (extending repayment terms), debt-equity swaps (converting debt into equity), or the strategic sale of non-core assets to reduce debt. Example: A manufacturing company that owes a large amount to several banks may negotiate with them to extend its loan repayment period and sell off an unused warehouse or asset to pay some of its debts.
- Operational restructuring involves making fundamental changes to the business model, streamlining operations to reduce costs, implementing new management, or even exiting unprofitable business segments. Example: A retail chain might close stores that are consistently losing money and introduce a new supply chain system to reduce delivery delays and costs.
- Organizational restructuring focuses on reconfiguring the company’s hierarchy, which may involve merging departments, downsizing, or redefining roles to improve communication and decision-making. Example: A tech firm might merge its product development and marketing departments to ensure better coordination and reduce overlapping roles.
For a more detailed explanation on the above, refer to our articles on Corporate Restructuring and The Role of the Board in Ghana, The Key Role of Due Diligence in Corporate Restructuring Transactions in Ghana, and Practical Steps in a Corporate Restructuring Transaction in Ghana
An example of the use of Restructuring is that in 2022, Ghana faced a severe debt crisis, defaulting on most of its US$30 billion international debt due to economic challenges worsened by the COVID-19 pandemic, global interest rate hikes, and the war in Ukraine.
To address this, the government initiated a comprehensive debt restructuring under the G20 Common Framework. Ghana launched an offer to restructure approximately US$13 billion of its international bonds.
Bondholders were invited to exchange their holdings for new bonds with two options: one option offered a bond with an interest rate that can change over time and a reduced amount of the original loan to be repaid; the other option offered a bond at full value with a fixed interest rate, no reduction in the original loan amount, but with a lowered amount of overdue interest to be paid.
This agreement aimed to alleviate about US$4.7 billion of loans and provide US$4.4 billion in cash flow relief until the end of Ghana’s current International Monetary Fund (IMF) program in 2026.
The restructuring effectively slashed Ghana’s debt by over US$4 billion in the next two years and paved the way for Ghana to exit its state of debt default, restoring investor confidence and positioning the country favorably for the business world.
This restructuring effort was pivotal in resolving the financial crisis that had forced Ghana to halt debt repayments for almost two years, demonstrating how strategic restructuring can lead to economic recovery and stability.
This type of restructuring, where debt terms are renegotiated, repayments adjusted, and financial relief granted, is not unique to governments. Companies in financial distress often adopt similar strategies.
Just like Ghana, a business may negotiate with creditors to reduce or reschedule debt payments, swap debt for equity, or sell off non-essential assets in order to restore financial stability. This highlights how strategic restructuring, whether at a national or corporate level, can be a powerful tool for economic recovery and long-term sustainability.
Now let us look at some benefits and challenges of Restructuring:
Benefits of restructuring:
- Business continuity and value preservation – Restructuring enables a company facing financial distress to continue its operations. This approach safeguards jobs, maintains relationships with customers and suppliers, and protects valuable intangible assets such as brand reputation and goodwill.
- Moratorium protection under the CIRA Act – Under the CIRA Act, when a company enters administration, a temporary pause is put in place. This legal stay stops creditors from taking actions like lawsuits or seizing assets, giving the company important time to reorganize and implement a recovery strategy.
- Improved outcomes for creditors – Creditors often have a better chance of recovering funds through restructuring rather than liquidation, especially if the company possesses long-term contracts, income-generating assets, or significant goodwill. A viable restructuring plan can preserve and enhance the company’s value, ultimately benefiting all parties involved.
- Stakeholder negotiation platform – During restructuring, important groups like creditors, suppliers, employees, and others who are affected come together to talk and work things out. These discussions help everyone reach agreements and create a plan that benefits the company and all parties involved.
- Continued role for directors and shareholders – Although control of the business shifts to the appointed administrator, directors and shareholders may continue to influence the rescue plan. In cases where they present a feasible proposal that gains creditor support, their participation can be instrumental in shaping the company’s recovery.
Challenges of restructuring
- Weak governance structures – Restructuring is not always a viable solution. If a company has deep-rooted problems, such as weak governance structures, an outdated business model, or a loss of market relevance, restructuring may only postpone an unavoidable insolvency. In these situations, the process can waste valuable time and resources without leading to any long-term recovery.
- Cost of implementation – The restructuring process often involves hiring insolvency practitioners, as discussed in our previous article on The Role of Insolvency Practitioners in Business Recovery, as well as legal advisers and financial consultants. For small and medium-sized enterprises (SMEs), these professional fees can be burdensome. Without adequate funding or liquidity support, the restructuring process may be unable to proceed effectively.
- Requires creditor support – Successful restructuring hinges on the cooperation of key creditors. If creditors refuse to engage or disagree with the terms of a proposed arrangement, the restructuring process may fail, leaving liquidation as the only viable option.
- Reputational risks – Entering administration publicly signals financial distress, which can harm a company’s reputation. This may undermine confidence among customers and suppliers and create uncertainty, even if the business ultimately emerges from the process.
What is liquidation?
Liquidation, also known as winding-up, is the process of closing a business and distributing its assets to individuals or entities that have a legal claim to receive payment.
These individuals or groups are referred to as claimants, which typically include creditors (those the company owes money) and shareholders (owners of the company). This usually happens when a company is insolvent, meaning it cannot pay its debts when they are due.
As the company eases operations, its remaining assets are used to pay these claimants in the order of their priority.
A key figure in this process is the liquidator, a person or firm appointed to take control of the company, manage the winding-up process, and ensure that assets are fairly distributed.
The liquidator’s duties include selling company assets, settling claims, recovering money owed to the company, and reporting on the conduct of directors if necessary.
Liquidation may be initiated voluntarily by the company or compulsorily by a court order, typically at the request of creditors. Under the Companies Act, 2019, Act 992 (Companies Act), there are two modes of liquidation: Official Liquidation and Private Liquidation.
Official liquidation commences when a resolution by the shareholders for the winding up of the company is passed or when a winding-up order is granted by the court.
In contrast, private liquidation commences when the company’s shareholders pass a special resolution to wind up the company through private liquidation.
An example of the use of Liquidation is that in March 2018, the Bank of Ghana (BoG), acting under the Banks and Specialised Deposit-Taking Institutions Act, 2016, Act 930 (Specialised Deposit-Taking Law), appointed an official administrator for UniBank Ghana Limited following a determination that the bank was insolvent.
Subsequently, in August 2018, UniBank was consolidated, along with four other banks, into the newly formed Consolidated Bank Ghana Limited, in line with the BoG’s efforts to stabilise the financial sector.
The liquidation process that followed was governed by the Specialised Deposit-Taking Law and the CIRA Act. Under this legal framework, an official receiver was appointed to oversee the realisation and distribution of UniBank’s assets.
This facilitated the distribution of proceeds to secured creditors, preferential creditors, and unsecured creditors. It is on public record that the receiver initiated civil proceedings to recover amounts allegedly lost through transactions prior to the bank’s collapse.
While the liquidation helped ensure regulatory oversight and legal compliance in winding up the bank’s affairs, it also had broader socio-economic implications, with significant job losses.
Now, let us look at some benefits and challenges of Liquidation:
Benefits of liquidation
- Finality and legal closure – Liquidation brings the business to a formal close. It provides legal finality, halts the accumulation of further liabilities, and allows stakeholders to move on with certainty.
- Court supervision and transparency – Where the liquidation process is conducted under court supervision, there is a heightened level of oversight. This is particularly important in cases involving allegations of fraud, director misconduct, or disputes among creditors, and helps to promote transparency and accountability.
- Enforcement of creditor priority – Under Ghana’s insolvency framework, companies undergoing liquidation are required to follow a clear statutory hierarchy when settling their debts. Secured creditors, such as banks or lenders holding collateral over the company’s assets, must be paid first. Following them are preferential creditors, including employees owed salaries and government agencies owed taxes, who are afforded special protection under the law. This prioritization is mandated by the CIRA Act and the Companies Act. These laws ensure that, when a company’s assets are distributed during liquidation, certain creditors, especially employees, are paid before unsecured creditors.
- Efficient asset realisation and distribution – Liquidators are empowered by law to identify, secure, and sell company assets. In some cases, this process may allow for strategic sales that maximize value, rather than rushed disposals that are common during financial distress.
- Opportunity for a fresh start – For company directors and entrepreneurs, liquidation can offer a clean break. It allows them to settle or wipe out old debts the company could not pay, and provides a chance to start a new business without carrying the financial problems of the previous one
Challenges of liquidation
- Cessation of business operations – Liquidation results in the permanent closure of the company. Trading ceases, contracts are terminated, employees are laid off, and intangible assets such as goodwill and brand value are lost.
- Minimal recovery for unsecured creditors – Once secured and preferential creditors are paid, little may remain for unsecured creditors. In most liquidations, creditors are paid in a specific legal order. Secured creditors are paid first from the proceeds of the secured assets. Next in line are preferential creditors, who are granted priority by law, and finally, unsecured creditors, such as suppliers, service providers, and trade partners with no security or statutory priority, who are last to be paid. Often, little or no funds remain for them after higher-ranking creditors are settled.
- Potential directors’ liability – Upon liquidation, directors are removed from office, and their actions may come under scrutiny. If they are found to have engaged in wrongful trading, misconduct, or breaches of fiduciary duty, they may face legal consequences or personal liability.
- Reputational damage – Liquidation can negatively impact the reputation of the company’s principals, particularly in close-knit industries or markets where trust and reliability are essential for future business opportunities.
- Clawback of prior transactions – Liquidators are authorised to investigate and unwind transactions made prior to liquidation, especially where these involve preferential treatment, undervalued asset transfers, or suspected fraud. This process, called clawback, allows the liquidator to recover money or assets for the benefit of all creditors. Directors and people connected to the company may be required to return any benefits they received from such transactions.
Navigating the decision between restructuring and liquidation – choosing the right path in insolvency
The decision between restructuring and liquidation is not a simple one; it requires careful consideration of several interconnected factors:
When to use what?
| No. | Factor | Restructuring | Liquidation |
| 1 | Business Viability | when the core business is sound and the distress is due to temporary factors. | |
| 2 | Severity of Financial Distress | when the company has manageable debt and operational inefficiencies. | when a company has overwhelming liabilities and no clear path to profitability. |
| 3 | Protection of Stakeholder Interest | when a company wishes to protect its stakeholder interest.
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| 4 | Good Governance Protection | when a company wishes to achieve good governance processes to revive its business. | when a company wishes to achieve good governance processes to close its business.
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| 5 | Management Capacity | when a company wishes to implement necessary changes in its existing management team to revive the company. |
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| 7 | Control | when a company wishes to maintain management control partly or wholly. | |
| 8 | Economic Climate | When the economic climate is still favourable towards the business. | When the economic climate is not favourable towards the business. |
| 9 | Availability of Resources | When the company still has access to additional funding and specialized expertise. |
Conclusion
Insolvency marks a critical turning point for any business. The decision to either restructure and attempt a recovery or to proceed with liquidation and bring operations to a close is never taken lightly. It carries significant consequences not only for the company itself but also for employees, creditors, customers, and the wider community.
These choices must be made with care, balancing legal responsibilities with practical realities. While the process can be complex and emotionally taxing, it also presents an opportunity to handle challenges with integrity, protect stakeholder interests, and lay the groundwork for future stability. Whether through a fresh start or an orderly wind-down, how a business navigates insolvency reflects its values and can help shape a more resilient and responsible economic landscape.
>>>the writer is an associate at VINT & Aletheia Attorneys & Consultants
