What formal options exist for restructuring debts for a Ugandan business facing insolvency?

Hello,

Greetings. I hope you're doing well. Formal options for restructuring the debts of a Ugandan business facing insolvency are primarily defined under the Insolvency Act, 2011, and the Companies Act, 2012.

These options are designed to facilitate the rescue of a financially distressed but viable company, or to ensure an orderly, regulated winding-up if rescue is impossible.

Administration (Corporate Rescue Mechanism)

Administration is a formal procedure aimed at giving a company a breathing space to restructure, with the goal of rescuing the company as a going concern.

Key Steps:

1. Application for Appointment: An application is made to the High Court of Uganda by a creditor, the company itself, or the directors for the appointment of an Administrator (a licensed insolvency practitioner).

2. Court Appointment: The Court reviews the application. If satisfied that the company is insolvent or likely to become so, and that Administration is the best option for the company's creditors, it issues an Administration Order.

3. Moratorium: Upon the appointment of the Administrator, a statutory moratorium comes into effect. This stops most legal proceedings and enforcement actions (like winding-up petitions or enforcement of security) against the company, allowing the Administrator to work without interference.

4. Proposal Development: The Administrator takes control of the company, investigates its affairs, and develops a formal Administration Deed (a proposal) for the company's future, which often includes a debt restructuring plan. This Deed must be presented to creditors within eight weeks of the appointment.

5. Creditors' Meeting and Approval: The Administrator convenes a meeting of creditors to vote on the Administration Deed. For the Deed to be approved, a majority in value of the creditors present and voting must approve the proposal.

6. Implementation and Exit: If approved, the Administrator implements the restructuring plan. The Administration process concludes when the objectives are achieved, the company is handed back to its directors, or if rescue fails, the company moves into liquidation.

Estimated Timeframe:

- Initial Appointment: Can be relatively quick, depending on the Court's schedule (potentially within days or weeks of the application).

- Administration Process: While intended to be rapid, the total process can take 6 to 12 months or more, depending on the complexity of the business and negotiations.

Estimated Cost:

- Professional Fees (High): This is the most significant cost. The Administrator's fees (and their legal/accounting teams) are substantial and depend on the company's size, complexity, and the duration of the assignment. These fees are typically paid from the company's assets as a preferential debt.

- Filing Fees (Low): Statutory filing fees for court applications are relatively minimal (e.g., around UGX 6,000 for initial filings).

Administration and Scheme of Arrangement (Part 26, Companies Act and Insolvency Act)

2. Scheme of Arrangement/Compromise (Part 26, Companies Act and Insolvency Act)

A Scheme of Arrangement is a highly flexible, court-sanctioned agreement between a company and its creditors (or a class of creditors) to reorganize its liabilities. It allows a company to bind all creditors, including dissenting minorities, to a restructuring plan.

Key Steps:

1. Proposal Formulation: The company (with legal and financial advisors) drafts a detailed Scheme Proposal that outlines the debt compromise (for example debt-for-equity swaps, payment deferrals, debt write-offs).

2. First Court Application: The company applies to the High Court for an order to convene meetings of the relevant classes of creditors (and/or members) to vote on the Scheme.

3. Creditors' Meetings: The Court orders the meetings to be held. The Scheme must be approved by:
- A majority in number of the creditors (or class of creditors) present and voting.
- Representing at least 75% in value of the creditors (or class of creditors) present and voting.

4. Second Court Application (Sanction): If the requisite majorities approve the Scheme, the company returns to the High Court to seek an order sanctioning the arrangement. The Court must be satisfied that the process was fair and reasonable to all affected parties.

5. Scheme Implementation: Once sanctioned by the Court, the Scheme becomes legally binding on all creditors in the relevant class, including those who voted against it. The company then implements the terms of the arrangement.

Estimated Timeframe:

- Total Process: Due to the two required court hearings, extensive preparation, and creditor negotiations, a Scheme of Arrangement typically takes 4 to 9 months to complete, depending on complexity.

Estimated Cost:

- Professional Fees (Very High): The costs are significant, driven by high legal and financial advisory fees for drafting the complex scheme document, negotiating with multiple creditor classes, preparing explanatory statements, and attending the two court hearings.

- Filing/Statutory Fees (Low to Moderate): Court filing fees are paid at each stage.

Crucial Caveat: While the statutory filing fees are relatively small, the primary barrier to using formal insolvency procedures in Uganda is the high cost of professional fees (lawyers, accountants, and insolvency practitioners) and the lengthy and complex nature of the court process, which often leads businesses to favor informal, out-of-court restructuring and negotiation with creditors.

Hello,

Greetings. I hope you're doing well. Formal options for restructuring the debts of a Ugandan business facing insolvency are primarily defined under the Insolvency Act, 2011, and the Companies Act, 2012.

These options are designed to facilitate the rescue of a financially distressed but viable company, or to ensure an orderly, regulated winding-up if rescue is impossible.

Administration (Corporate Rescue Mechanism)

Administration is a formal procedure aimed at giving a company a "breathing space" to restructure, with the goal of rescuing the company as a going concern.

Key Steps:
1) Application for Appointment: An application is made to the High Court of Uganda by a creditor, the company itself, or the directors for the appointment of an Administrator (a licensed insolvency practitioner).
2) Court Appointment: The Court reviews the application. If satisfied that the company is insolvent or likely to become so, and that Administration is the best option for the company's creditors, it issues an Administration Order.
3) Moratorium: Upon the appointment of the Administrator, a statutory moratorium comes into effect. This stops most legal proceedings and enforcement actions (like winding-up petitions or enforcement of security) against the company, allowing the Administrator to work without interference.
4) Proposal Development: The Administrator takes control of the company, investigates its affairs, and develops a formal Administration Deed (a proposal) for the company's future, which often includes a debt restructuring plan. This Deed must be presented to creditors within eight weeks of the appointment.
5) Creditors' Meeting and Approval: The Administrator convenes a meeting of creditors to vote on the Administration Deed. For the Deed to be approved, a majority in value of the creditors present and voting must approve the proposal.
6) Implementation and Exit: If approved, the Administrator implements the restructuring plan. The Administration process concludes when the objectives are achieved, the company is handed back to its directors, or if rescue fails, the company moves into liquidation.

Estimated Timeframe:
- Initial Appointment: Can be relatively quick, depending on the Court's schedule (potentially within days or weeks of the application).
- Administration Process: While intended to be rapid, the total process can take 6 to 12 months or more, depending on the complexity of the business and negotiations.

Estimated Cost:
- Professional Fees (High): This is the most significant cost. The Administrator's fees (and their legal/accounting teams) are substantial and depend on the company's size, complexity, and the duration of the assignment. These fees are typically paid from the company's assets as a preferential debt.
- Filing Fees (Low): Statutory filing fees for court applications are relatively minimal (e.g., around UGX 6,000 for initial filings).

Administration end.

2. Scheme of Arrangement/Compromise (Part 26, Companies Act & Insolvency Act)
A Scheme of Arrangement is a highly flexible, court-sanctioned agreement between a company and its creditors (or a class of creditors) to reorganize its liabilities. It allows a company to bind all creditors, including dissenting minorities, to a restructuring plan.

Key Steps:
1) Proposal Formulation: The company (with legal and financial advisors) drafts a detailed Scheme Proposal that outlines the debt compromise (e.g., debt-for-equity swaps, payment deferrals, debt write-offs).
2) First Court Application: The company applies to the High Court for an order to convene meetings of the relevant classes of creditors (and/or members) to vote on the Scheme.
3) Creditors' Meetings: The Court orders the meetings to be held. The Scheme must be approved by:
- A majority in number of the creditors (or class of creditors) present and voting.
- Representing at least 75% in value of the creditors (or class of creditors) present and voting.
4) Second Court Application (Sanction): If the requisite majorities approve the Scheme, the company returns to the High Court to seek an order sanctioning the arrangement. The Court must be satisfied that the process was fair and reasonable to all affected parties.
5) Scheme Implementation: Once sanctioned by the Court, the Scheme becomes legally binding on all creditors in the relevant class, including those who voted against it. The company then implements the terms of the arrangement.

Estimated Timeframe:
Total Process: Due to the two required court hearings, extensive preparation, and creditor negotiations, a Scheme of Arrangement typically takes 4 to 9 months to complete, depending on complexity.

Estimated Cost:
- Professional Fees (Very High): The costs are significant, driven by high legal and financial advisory fees for drafting the complex scheme document, negotiating with multiple creditor classes, preparing explanatory statements, and attending the two court hearings.
- Filing/Statutory Fees (Low to Moderate): Court filing fees are paid at each stage.

Crucial Caveat: While the statutory filing fees are relatively small, the primary barrier to using formal insolvency procedures in Uganda is the high cost of professional fees (lawyers, accountants, and insolvency practitioners) and the lengthy and complex nature of the court process, which often leads businesses to favor informal, out-of-court restructuring and negotiation with creditors.