Key Highlights of the Corporate Insolvency and Restructuring Act, 2020 (Act 1015)- Part 1
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Key Highlights of the Corporate Insolvency and Restructuring Act, 2020 (Act 1015)
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An efficient insolvency regime is a powerful tool to sustain viable businesses, promote access to finance, improve creditor recovery and encourage economic growth. In contrast, inadequate insolvency procedures hinder fair debt recovery for creditors and fail to adequately protect debtors. This impacts credit availability and overall economic stability. Efficient corporate insolvency laws aim to allocate risk equitably among market participants, ensures transparency and maximise value for all stakeholders.
This article is the introductory part of a series that discusses the Corporate Insolvency and Restructuring Act, 2020 (Act 1015) as amended by the Corporate Insolvency and Restructuring (Amendment) Act, 2020 (Act 1031) (the CIRA), the primary legislation for insolvency of companies in Ghana. In this article, we will discuss the concept of insolvency under the CIRA, highlight some novel provisions under the Act and examine the obligations of directors of an insolvent company.
Scope of CIRA
The CIRA provides a legal framework of resolution mechanisms available for distressed companies as well as certain key innovations for the corporate insolvency regime in Ghana. The Act applies to all companies and bodies corporate in Ghana except entities engaged in banking business (regulated by the Bank of Ghana under specialised insolvency laws), partnerships and individuals (regulated under the Insolvency Act, 2006 (Act 708)) and any other entity subject to special insolvency legislation.
What is insolvency?
Insolvency is a state of financial distress characterised by an inability to meet financial obligations.
Under the CIRA, the primary trigger for the commencement of business rescue or liquidation procedures is “inability to pay debts”. The CIRA prescribes different definitions for inability to pay debts for business rescue or liquidation purposes. For the purpose of placing a distressed company into administration or restructuring (and liquidation), 2 main tests apply: the cash flow test and the balance sheet test. According to the cash flow test, a company is insolvent if it is unable to pay its debts or current obligations as they fall due, even if its total assets exceed its total liabilities. Therefore, if a company does not have assets in liquid or near liquid form to satisfy its financial obligations on time, it is insolvent. The balance sheet test considers whether the total assets of the company exceed its total liabilities. A company is therefore insolvent if it has a negative net worth.
For the purpose of commencing administration or liquidation proceedings against a company, the CIRA describes what will constitute inability to pay debts as: (i) failure of a company to pay, or make reasonable arrangements to pay a debt exceeding GHS 10,000 within 3 weeks of a written demand by the creditor, (ii) the failure of a company to fully satisfy a judgment debt against it after the completion of an execution process , or (iii) proof to the satisfaction of the Registrar of Companies that the company is unable to pay its debt (taking into account the contingent and prospective liabilities of the company).
New concepts under the CIRA
The CIRA introduces the following novel concepts that seek to advance the insolvency regime of companies in Ghana.
Introduction of an administration and restructuring framework
A key feature of the CIRA is the introduction of a rescue regime for distressed companies through the option of administration and restructuring. Prior to the enactment of the CIRA, only banks and insurance companies had a statutory rescue regime under their respective governing laws. Other distressed companies could only undertake an arrangement or compromise with creditors with court approval under the Companies Act, 2019 (Act 992) (the Companies Act). However, this option required a 75% approval of the creditors and it did not provide protection from enforcement actions by creditors and other claimants that could derail the restructuring efforts.
By the introduction of administration and restructuring, the CIRA provides a framework for the temporary management of a distressed company’s business and affairs by an insolvency practitioner. This process gives the company breathing space to continue operation as a going concern with the objective of returning it to viability for the benefit of creditors and shareholders than would result from its liquidation. To realise the rescue objective, the CIRA provides for the protection of the property of the distressed company by restricting creditor and claimant rights to enforce security over assets, recover leased property used by the distressed company, commence or continue proceedings against the company or enforcement processes against the company or its assets during this period.
Administration commences with the appointment of an administrator and ends with (a) a resolution of the creditors ending the administration, (b) the execution of a restructuring agreement, (c) the appointment of a liquidator by creditors, or (d) by an order of the court for administration to end or appointing a liquidator.
Establishment of an Insolvency Services Division
The CIRA provides for the establishment of an Insolvency Services Division (the ISD) at the Office of the Registrar of Companies to be run by the Registrar of Companies. The responsibilities of the ISD include maintaining a register of insolvency practitioners and regulating insolvency practice, overseeing the resolution of companies and other bodies corporate, reviewing and making recommendations on insolvency laws in Ghana and acting as liaison with international insolvency bodies.
Licensing of insolvency practitioners
The CIRA also introduces a licensing requirement for insolvency practitioners and prescribes qualification and conduct standards for insolvency practitioners. An insolvency practitioner is a receiver or a manager under the Companies Act, an administrator, a restructuring officer, or a trustee in bankruptcy under the Insolvency Act, 2006 (Act 708). Subject to licensing, a person is qualified to act as an insolvency practitioner in Ghana if that person is a chartered accountant, a lawyer or a banker in good standing with the relevant professional association, and has security or professional indemnity for proper performance of his/her duties as an insolvency practitioner.
A person who acts as an insolvency practitioner without qualification commits an offence and may be liable to imprisonment (of between 2 to 5 years) and/or a fine of up to GHS12,000.
Establishment of the Ghana Association of Restructuring and Insolvency Advisors as a statutory body
The CIRA mandates the Minister of Justice to establish the Ghana Association of Restructuring and Insolvency Advisors (GARIA) by an Act of Parliament within 2 years of the coming into force of the CIRA. On 26 July 2024, the Chartered Institute of Restructuring and Insolvency Practitioners, Ghana Act (Act 1117) was passed, establishing the Chartered Institute of Restructuring and Insolvency Practitioners, Ghana (CIRIP Ghana). This institute is now responsible for training and certifying insolvency practitioners and promoting the study of insolvency practices.
Prior to the establishment of CIRIP Ghana, GARIA was tasked with assisting the Registrar of Companies with the training and licensing of existing insolvency practitioners. As of the date of this article, the Office of the Registrar of Companies, with GARIA’s assistance, has successfully licensed two cohorts of insolvency practitioners.
Enforcement of netting agreements
Under CIRA, a netting agreement under a qualified financial contract is enforceable against an insolvent party and a guarantor of (or other person who provided security for) the insolvent party in accordance with the terms of the contract. A netting agreement is an agreement that allows the parties to set off their financial obligations towards each other resulting in only the payment of the balance by the party with the outstanding obligation. It is a risk mitigation tool for managing exposure and is of significant importance for financial transactions with high counterparty or market risk such as derivatives, repurchase agreements and securities lending transactions.
Pursuant to the CIRA, enforcement of the netting arrangements under qualified financial contracts cannot be stayed, avoided or limited by the action of a liquidator, other laws relating to insolvency or other enactment applicable to an insolvent party. Further, a netting agreement shall not be regarded as a creditor claim and must not affect the ranking of claims or distributions of dividends to creditors during insolvency.
Cross-border Insolvency
The CIRA also provides a framework for cross-border insolvency proceedings with the aim of promoting co-operation between Ghana and foreign competent authorities, protecting and preserving investments and providing for fair and efficient insolvencies of companies in and outside Ghana. Pursuant to the CIRA, a foreign representative (an insolvency practitioner or other person appointed to act as a representative of foreign proceedings) may apply directly to a court in Ghana to commence or participate in an insolvency proceeding in Ghana regarding a debtor or creditor. A Ghanaian insolvency practitioner is also permitted to act in a foreign state on behalf of Ghana in an insolvency proceeding, as permitted by the applicable foreign law.
Obligations and liabilities of a director of an insolvent company
A significant issue in corporate insolvency is the obligations and liabilities of directors of an insolvent company.
Directors have a general fiduciary duty to act in the best interest of the company to preserve its assets and advance its business in a manner that a faithful, diligent, careful and ordinarily skillful director would act.
In the context of actual or imminent insolvency, this duty extends beyond the interests of shareholders to encompass the interests of creditors. In Kinsela v Russell Kinsela[1], it was held that where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company are under the management of the directors, pending either liquidation, return to solvency or the imposition of some alternative administration[2].
The UNCITRAL Legislative Guide on Insolvency Law also recognises that there is an obligation on any person formally appointed as a director and any other person exercising factual control and performing the functions of a director to have due regard to the interests of creditors and to take reasonable steps to avoid insolvency and, where insolvency is unavoidable, to minimise the extent of insolvency. The reasonable steps include evaluating and being independently informed as to the current and ongoing financial situation of the company, seeking professional advice, holding discussions with auditors, protecting the assets of the company to maximise value, analysing the structure and functions of the business to examine viability and reduce expenditure, continuing to trade in circumstances where it is appropriate to do so to maximise going concern value, and holding negotiations with creditors or initiating other informal procedures.
Although there is no express statutory duty (or liability for directors) under Ghanaian law on directors to take reasonable steps to avoid insolvency or to commence insolvency proceedings when a company is insolvent, the CIRA provides an opportunity for the company (acting through the directors) to appoint an administrator for the insolvent company.
The CIRA imposes a duty on directors to avoid insolvent trading. Insolvent trading refers to a company engaging in business or incurring debt where there are reasonable grounds to believe that the company is insolvent or would become insolvent as the case may be.
Any director who causes a company to engage in insolvent trading commits an offence and may be liable to a term of imprisonment (of between 2 to 5 years) and/or a fine of up to GHS 12,000.
Directors may also be held personally liable, without limitation to liability, by the courts if they knowingly conducted business with the intention to defraud creditors, other individuals or for a fraudulent purpose and may be disqualified from any subsequent appointment as directors.
Conclusion
The key objective of insolvency law is to provide struggling companies the opportunity to turn around their affairs where it is probable that this will produce overall benefits and, where it is not probable, to end the life of the company efficiently and fairly. The enactment of the CIRA, among other things, fulfils this objective. The enactment of the CIRA is significant step in bringing the corporate insolvency framework of Ghana up to speed with international best practices and it reflects the principles of an effective corporate insolvency regime.
In the second part to this series, we will examine the administration and restructuring framework under the CIRA and conclude our series in a third part that deep-dives into the liquidation process, some challenges with the CIRA and recommendations for the future.
[1] (1986) 10 ACLR 395
[2] (1986) 10 ACLR 395 at 402
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