Companies leave behind several obligations which are unmet in the event that they fold-up or cease to operate. Typically, many who engage with companies on life support do so without any knowledge of the company’s state at the time of engagement. Employees are left jobless; debts remain unpaid; and supply obligations are unmet. In sum, a lot of things hang in the balance.
The Corporate Insolvency and Restructuring Act, 2020 (Act 1015) tries to resolve some of these problems by introducing provisions on insolvent trading. The provisions on insolvent trading are generally aimed at ensuring the company does not engage in trading when it is not in a position to pay its debt as and when they fall due.
Section 119 of Act 1015 makes it clear that directors of companies cannot simply look on and conduct business as usual, especially when they have reasonable grounds to believe the company is insolvent. The law has its way of finding out if, indeed, a director is aware that a company is in a bad place financially, and as a result cannot meet its obligations.
The law, for instance, considers the privileged positions held by directors in the company and the fact that from where they sit, they are required to know the state of the company. After all, remember that directors of the company are primarily responsible for running its affairs.
Therefore, as a part of their obligation is to ensure the company is running efficiently, they must ensure the company does not carry on trading when its financial position does not permit it to pay its debts as and when they fall due. It is not surprising that the law makes them liable personally for insolvent trading. Act 1015 makes insolvent trading an offence, and the directors are liable on summary conviction to a fine of not less than five hundred penalty unity (that is GH¢6,000) or to a term of imprisonment between 2 to 5 years.
Let’s also not forget the Companies Act, 2019 (Act 992) would additionally impose disqualifications prohibiting a director found culpable in these circumstances from acting in any senior management position thereafter.
Additionally, should it come to the attention of a liquidator that business of the company was carried out with an intent to defraud any of its creditors, the liquidator can apply to the courts to make that person (and not the company) personally responsible for any debts that may have been incurred by the company as a result of that trade. Any person found to have been knowingly carrying on the business of a company with the intent to defraud is likewise liable on summary conviction to a fine of five hundred penalty units (GH¢6,000).
The reasoning, in this case, is simple. Third parties dealing with companies generally have little means of knowing the company’s internal workings. They will not know they are engaging with a company that is insolvent or likely to become insolvent unless such information has been made available to them – and they therefore engage in good faith with the company only to wake up shortly afterward to find out it has been forced into liquidation.
Major insolvencies in Ghana prove that directors and management of insolvent companies tend to continue trading and operating despite the company’s insolvency and knowledge that at any point in time things could head south. The new Act attempts to protect the public from such acts by ensuring the directors, management and all persons involved in such activities are personally liable for their actions, and can no longer hide with the excuse of it being ‘the company’ and not they who engaged in the trade.