Friday, July 27, 2012
The Appropriateness of the Draft Insolvency Regulations in Actuating the Intentions of the Uganda Insolvency Act of 2011
By Bakampa Brian Baryaguma
[Dip. Law (First Class)–LDC; Cert. PELD–NALI-K; Cert. Oil & Gas–Mak; LLB Student–Mak]
The term insolvency is neither defined in The Insolvency Act, 2011 (hereafter ‘the Act’) nor in the draft Insolvency Regulations, 2011 (hereafter ‘the Regulations’). Under S. 2 of the Act, it is provided that insolvency includes bankruptcy, but bankruptcy is not meaningfully defined either. Thus, regard must be had to other aids of interpretation for possible assistance.
Literary, insolvency is a state of being insolvent which, according to the Oxford Advanced Learner’s Dictionary of Current English, is akin to debtors, denoting inability to pay debts.  This dictionary defines a bankrupt individual as a, ‘person judged by a law court to be unable to pay his debts in full, his property being distributed for the benefit of his creditors.’ 
Technically, Osborne’s Concise Law Dictionary defines insolvency as, ‘The inability to pay debts in full’ and insolvent as, ‘A person who is unable to pay his debts as they become due.  Further, Osborne defines bankruptcy as, ‘The process by which an insolvent individual is made bankrupt and his estate administered for the benefit of his creditors’ while a bankrupt is, ‘A person who has had a bankruptcy order made against him and whose estate is administered by a trustee in bankruptcy for the benefit of the bankrupt’s creditors.’ 
The Oxford Dictionary of Law defines bankruptcy as, ‘The state of a person who has been adjudged by a court to be insolvent.’  It explains that, ‘The court orders the compulsory administration of a bankrupt's affairs so that his assets can be fairly distributed among his creditors.’ 
It is notable that scholars have treated the two concepts–bankruptcy and insolvency–as one, at least for definition purposes, as does the Act, in so far as it categorizes insolvency into individual and corporate insolvency. It follows therefore, that insolvency may be defined as the compulsory administration of a debtor’s estate for the benefit of his or her creditors.  In the case of Re Tweeds Garages Ltd,  insolvency was defined in a commercial sense to mean a situation where a company is unable to meet current demands upon it.
The law of insolvency however, is traditionally divided into two segments i.e. bankruptcy and insolvency–the former refers to a natural person while the latter relates to a corporate entities especially, companies.
2.0. The Appropriateness of the Regulations in Actuating the Act’s Intentions
The intentions of the Act may be diverse and multi-pronged. The starting point however, in deciphering these intentions, is looking at the Act’s long title, which provides inter alia that it is, ‘An Act to provide for receivership, administration, liquidation, arrangements, bankruptcy, the regulation of insolvency practitioners and cross border insolvency ...’. Regulation 2(1) of the Regulations provides that, ‘The objective of these Regulations is to set out the detailed procedure for the conduct of all corporate and individual insolvency proceedings in Uganda under the Insolvency Act, 2011 and to generally give effect to the Insolvency Act, 2011.’ These Regulations are in many respects appropriate or suitable in actuating the Act’s intentions, as the following discussion shows.
S. 20(2) of the Act empowers creditors to petition for bankruptcy, the aim being to ensure certainty and fairness to avoid embarrassing and hijacking the suspected bankrupt with bogus and unfounded claims. The intention is to ensure that indeed the debtor failed to pay his or her debts when they became due and demanded. It was long stated in the case of Re Lympne Investments Ltd,  that, ‘There can be no neglect to pay a sum demanded until the demand has been made ...’. Further, this is in tandem with the overall scheme of the Act to overcome the stigma associated with bankruptcy matters, as evidenced by experience under The Bankruptcy Act  which reveals that few bankruptcy cases have been registered and moreover hardly litigated.  This intention is actuated by Regulation 37 which provides for form and content of creditor’s petitions whereof Paragraphs (c) and (d) are instructive. The former requires that the amount of the debt, its consideration, the fact that it is owed to the petitioning creditor and when it was incurred or became due, be stated while the latter requires that any charges or interest attaching to the debt and previously unknown to the debtor be disclosed too.
Section 100 concerns the general duties of the liquidator. Paragraph (c) in particular, requires the liquidator to, ‘keep company money separate from other money held by or under the control of the liquidator.’ The intention is to effectively managing the liquidation process by avoiding instances in the past where liquidators looted money belonging to companies in liquidation by mixing company money with their personal money. Liquidation processes had become some sort of loot bonanzas. This is actuated by Regulation 205 which requires the liquidator to have a special bank account into which to pay all monies received by him or her.
Closely related to the above is the requirement for insolvency practitioners to have security or professional indemnity under S. 204(1)(b) of the Act, as a prerequisite to serve as such. Clearly, the intention is to regulate insolvency practitioners by curbing impunity where the practitioner may get away with outright negligence and theft of an insolvent estate’s assets. This intention is actuated under Regulation 336 which provides that a person is not qualified to act as an insolvency practitioner unless he or she has security or professional indemnity necessary for the proper performance of his or her duties; Regulation 337 which provides for removal of a practitioner who fails to give or keep up his or her security; and Regulation 338 which provides for insurance of security as well as joint and several liability for losses caused to the insolvent.
Further, S. 204(1)(a) of the Act restricts the category of insolvency practitioners to lawyers, accountants and chartered secretaries, who are members of registered professional bodies. The intention is to professionalize insolvency practice through ‘enhancement of skills and integrity of insolvency practitioners, in order to protect the value of insolvent estates for the benefit of the general body of creditors,’  to avoid situations in the past where anybody could handle sensitive insolvency matters who, more often than not, were careless and money minded auctioneers.
Section 94 of the Act provides for appointment of a provisional liquidator, purposely for the preservation of the value of the assets owned or managed by the company in liquidation. He or she has powers to sell or dispose of perishables and other goods whose value may diminish. The purpose is to make sure that as much money and assets of the estate are kept intact to settle creditors’ claims and if possible leave the insolvent company with some money to make a fresh start thereafter. This section is generally actuated by Regulation 141. Sub-regulation (3) thereof provides for payment of the provisional liquidator’s properly incurred costs, charges and expenses out of company property in situations where no winding up order is made upon petition, the winding up order is rescinded or all proceedings are stayed. This added incentive in the Regulations is a sort of indemnity, serving to eliminate possible worries of incurring irremediable losses, thereby attracting competent personnel to insolvency practice.
The Act provides for the liquidator’s appointment of a special manager of a company under S. 98, who must be ‘... a suitable person ...’ in any case where it appears to the liquidator that the nature of the company’s business or creditor’s interests require so. Once again, the intention is to maximize chances of attracting competent and skilled people to oversee the process of insolvency to the benefit of both debtors and creditors. This intention is actuated by Regulations 152 concerning appointment of a special manager and 153 on accounting of the same to the liquidator, by statutory declaration.
It is submitted that the Act’s and Regulations’ establishment of the offices of provisional liquidator and special manager is part of the overall scheme of introducing corporate rescue as a new phenomenon in Uganda’s insolvency law. Also known as business rescue, corporate rescue means attempts aimed at facilitating the rehabilitation of a financially distressed corporation, by inter alia providing for its temporary business supervision and property management.  It marks a fundamental departure from the traditional no choice state of affairs, characteristic of The Bankruptcy Act. Contemporary national and international developments have demonstrated that everything possible must be done to save companies from going under due to the disastrous after-effects, like losing valuable investments and employment opportunities, thus the introduction of corporate rescue which is not provided for under The Bankruptcy Act, but which of late was illegally done by President Museveni, trying to save businessman Hassan Basajjabalaba’s collapsing companies.
S. 25 of the Act provides for appointment of trustee by creditors on their first meeting and vesting of the bankrupt’s estate in him or her. Under S. 26, the appointed trustee is obliged to give public notice of his or her full names, physical office address, daytime telephone number, electronic address like email and the date of commencement of the bankruptcy, within five working days after his or her appointment. The intention again is to regulate insolvency practitioners so as to avoid embarrassing situations where hardly known and unscrupulous people take over the administration of insolvency proceedings and mismanage the process, to the extent of even swindling money from the estate and disappearing in thin air! This intention is actuated by the Regulations under Regulation 75 which inter alia requires the appointed trustee to prove to the chairperson of the creditors’ meeting that he or she is an, ‘... insolvency practitioner, duly qualified under the Act to act as trustee in relation to the bankrupt; and that he or she consents to act as trustee.’ The Regulation makes it clear that it is not enough to be a qualified insolvency practitioner but that the candidate accepts to undertake the task before hand. This is important because there are arguably onerous duties involved like the duty of account. Furthermore, Regulation 76 concerns advertisement of the trustee’s appointment, ‘... in a newspaper of wide circulation in
...’ under Regulation 76(2). This additional
requirement is meant to give an opportunity to as many people interested in the
bankruptcy proceedings as possible to turn up and make their claims to a
clearly ascertained person. Uganda
Section 3 of the Act provides for debtors’ inability to pay debts where there is non-compliance with a statutory demand, partial or total non-satisfaction of a judgment debt upon issuance of execution and where all or substantially all of the debtor’s property is in possession or control of a receiver or some other person enforcing a charge over it. Inability to pay debts is the essence of insolvency proceedings and in the case of Mann and Another v Goldstein and Another,  Court stated that establishing a creditor’s debt is mandatory for presentation of an insolvency petition, for where there is no debt, it naturally follows that there is no creditor. Thus, in Re Hoima Ginneries Ltd (No. 2),  a winding up petition was dismissed for failure to prove the debt’s existence and the company’s liability to the insolvency petitioner. The intention of S. 3 is not only to demonstrate that the debtor is incapable of managing and satisfying his or her financial affairs but to protect the alleged bankrupt from frivolous and vexatious claims too. This intention is actuated by Regulation 12 on proving debts. Sub-regulation (4) gives what a creditor must prove before embarking on recovering his or her debt including, his or her name and address or company registration number and the total amount indebted as at the date of insolvency. These particulars enhance debtors’ protection from indeterminate liability.
3.0. Material Loopholes in the Regulations
Suffice to say however, that the Regulations are not without flaws and contradictions, thereby failing to actuate the intentions of the Act in some instances. As the ensuing discussion reveals, there are some material loopholes in the Regulations which militate against the rationale embedded in the Act.
The Act, under S. 4(2)(d), demands personal service of a statutory demand on the debtor. Due to the sensitivity and special nature of insolvency matters, the intention is to ensure that the debtor gets actual and undisputed notice of pending claims against him or her first hand. The Regulations however, deviate from this important requirement by allowing agency service under Regulation 8(2) which states that, ‘If personal service of the demand on the debtor is not possible, the statutory demand shall be served on the debtor at the registered office, if any, of the debtor, and if there is no registered office, at the principal or usual place of residence of the debtor, by leaving a copy with a person who normally resides at the residence of the debtor.’ This is not only contrary to the spirit and intent of the Act but also to established practice because in the election petition case of Jude Mbabali Vs Kiwanuka Ssekandi, it was held that where a statute specifically requires personal service, then personal service must be effected.
Where there is need to ascertain any amount of claim and interest based on a debt denominated in foreign currency, the Act under S. 6(3) states that it shall be converted into Uganda Shillings at the exchange rate prevailing on the date of commencement of the liquidation or bankruptcy or if there is more than one exchange rate on that date, then at their average. The intention is to strike a fair deal for both the debtor and his or creditors by leaving the actual amount owed to be independently verified by financial market forces. The Regulations clog this by providing that, ‘For the purpose of proving a debt incurred or payable in a currency other than Uganda shillings, the amount of the debt shall be converted into Uganda shillings at the official exchange rate prevailing on the date of insolvency,’ under Regulation 28. This is a material departure from the provisions of the Act which inevitably negates its fairness zeal because depending on the prevailing official exchange rate, either the debtor or creditors stand to lose in ascertaining the debt. Assuming the debt is in US dollars, if the official exchange rate is low, the debtor stands to benefit at the expense of the creditors; if the rate is high, the creditors stand to gain to the debtor’s detriment.
It is clear from the foregoing discussion that indeed the Regulations are appropriate in actuating the intentions of the Act because they respond to and in many cases, expound on the Act’s provisions. Although there may be some material inconsistencies here and there as shown above, it is submitted that these loopholes do not, on the whole, fundamentally compromise or invalidate the Regulations’ appropriateness in actuating the Act’s intentions.
Notes and References
1. A.S. Hornby, A.P. Cowie and A.C. Gimson, Oxford Advanced Learner’s Dictionary of Current English (1983), at 449.
2. Ibid., at 61.
3. Osborne, A Concise Law Dictionary (8th Edition), at 180.
4. Ibid., at 42.
5. Elizabeth A. Martin (Ed.), A Dictionary of Law (2003), at 44.
7. Christopher Madrama, J., ‘The Role Played by the Courts in Insolvency’ (2012), at 4.
8.  1 All ER 121, 122.
9.  2 All ER 385, 387.
10. Cap. 67, Laws of
11. Christopher Madrama, J., supra note 7, at 3.
12. Kabiito Karamagi, ‘Modern Trends in Insolvency Practice’ at 3.
13. Faisal Mukasa, ‘Protection and Enforcement of Clients’ Rights: Corporate Rescue Vis-a-vis Liquidation’ (2012), at 2.
14.  2 All ER 769, 773.
15.  EA 439.