The virus and insolvency, restructuring

Due to the coronavirus (COVID-19)’s staggering impact on the global economy, the vast majority of businesses will become debt-laden that is, financially distressed. Given this, it is very important to remain open to devising and implementing good-faith and creative solutions, including considering the possibility of grace periods for payments amid the pandemic.

This would allow time to develop comprehensive restructurings for the months of September-December 2020 when forecasting may well be undertaken with enhanced degree of certainty.

As liquidity conditions tighten further, businesses in Tanzania would do good to engage, where possible, with their bank creditors and other financiers, including suppliers of goods and services in an effort to negotiate a modification of the terms and conditions of existing contracts or agreements given the unprecedented existential threat posed by the coronavirus crisis.

With projected revenues and profits dipping as a consequence of quarantines, crippling travel restrictions and investor panic, it is advisable for businesses to consider revolving credit facilities as one of the ways to alleviate the unforeseen cash-flow shortages. Ardent readers of The Citizen will recall the 30-part article series on corporate insolvency, recovery and banking litigation. The fifteenth part of the series considered the legal duties of directors of companies under the Tanzanian Companies Act, 2002 where a company is in financial distress.

Before highlighting the options available to address corporate insolvency in Tanzania during these extraordinary times of COVID-19, it paramount to mention here that directors need to be heedful of their legal duties to the company, and if the company goes burst, to its creditors.

Those duties are codified under the Companies Act and they include the duty to act in good faith and in the best interests of the company (Section 182), the duty to have regard to the interests of employees (Section 183), the duty to exercise powers for proper purposes (Section 184), the duty of care, skill and diligence (Section 185), the duty to avoid conflict of interest (Section 209). Breach of these duties may lead to personal liability, or disqualification as a director.

In order to address corporate insolvency, there are a number of options set out under the Companies Act. These are ‘schemes of arrangements’, receivership, administration, company voluntary arrangement and, in the worst-case scenario, liquidation—also known as winding up.

The lesser-known of these options is the scheme of arrangement (SOA); basically, a mechanism approved by both the court and the meetings of the relevant classes of creditors and or shareholders allowing a financially-distressed company to enter into a compromise or arrangement with its shareholders or creditors. Its major objective is to seek the approval and implementation of a rescue scheme for the company.

An SOA includes a reorganization of the company’s share capital by consolidating shares of different classes or by dividing shares into shares of different classes or by both. It may be used to reconstruct one or more companies or amalgamate any two or more companies. However, the SOA is not an insolvency or bankruptcy process.

The need to act proactively to engage with creditors, financiers, and suppliers during these difficult times cannot be overemphasized as the peril of insolvency looms large—particularly for businesses that are impacted by government measures to contain the spread of the virus, leading to a fall in demand for their ‘non-essential’ products. No one knows how long COVID-19 and the business disruption it is causing will last.

Against this bleak milieu, some countries have enacted or are in the process of enacting legislation to bail out companies, but such help may not be readily available for businesses in developing countries with low revenue outturns. Moreover, many in-house lawyers in Tanzania may not be accustomed to dealing with crises within their companies of the magnitude being faced during the coronavirus snare, which has left many employees hit with reduced working hours or layoffs.

Liaising with external lawyers who frequently assist their clients to navigate the corporate insolvency and restructuring landscape in Tanzania, in-house lawyers can assist their companies to proactively weigh the situation, assess the risks involved in the various restructuring options, and advise boards of directors on the best possible option.

Granted, good faith is an abstract concept, but its existence and importance in seeking a negotiated interim solution as a precursor to the more drastic restructuring options is undeniable in these times of the pandemic.

Paul Kibuuka ([email protected]), a High Court of Tanzania advocate, is the chief executive of Isidora & Company and the executive director of the Taxation and Development Research Bureau.