In March 2022, the Uganda Registration Services Bureau (URSB) hosted the fifth Annual Insolvency conference under the theme “Emerging Trends in Corporate Restructuring in Uganda: What to expect and how to prepare “. This conference was timely given the negative financial impact occasioned by the national lockdowns arising from the Covid-19 pandemic in 2020 and 2021. A number of businesses (large, medium and small) struggled to meet their financial obligations at the agreed timelines. For example, some businesses that had borrowed from banks failed to make their monthly repayments as per the signed loan agreements. This called for the borrower (debtor) and the bank (creditor) to agree on restructuring of the loan. Organizations like Uganda Revenue Authority (URA) and the National Social Security Fund (NSSF) also agreed to defer the payments. Therefore, the business had to restructure their cash flows to make ends meet.
This article focuses on the business restructuring component which most people may not be aware of. In accounting terminology, inability to pay debts may arise where the current assets of a business are lower than the current liabilities. For example, having current assets valued at say UGX 100million (USD 28,000) yet current liabilities stand at UGX 300million (USD 84,000); yet all these creditors urgently need their money. Technical insolvency is a worse condition (business ailment) where the business has negative shareholders’ (owners’) wealth. Owners of business should not allow their companies to reach technical insolvency; hence the need for continuous business restructuring when the volumes, figures and ratios indicate a deteriorating “financial health”
The Insolvency Act, 2011, Section 204 stipulates the people who qualify to be insolvency practitioners. These are lawyers, professional accountants or chartered secretaries who must be registered members of a professional body. These practitioners are licensed and regulated by URSB. These practitioners formed the Association of Insolvency and Business Restructuring Practitioners of Uganda (AIBRP Uganda). The Association is multi-professional and seeks to advise, offer training and management for the improvement of services offered by insolvency and business restructuring practitioners in Uganda. It is voluntary, non-partisan, non-governmental and without any religious affiliation.
A licensed professional accountant (CPA) typically helps the Receiver Manager (RM) to ascertain the reasons for the sickness of the business and diagnose whether such causes can be remedied. Secondly, establish whether the business can be resuscitated based on its historical market participation, its historical financial capacity and performance. Thirdly, if deemed savable, advise the RM on what financial, operational and corporate governance interventions are required to revitalize the business. For example, if the business is choking on bank loans, a possibility of new equity partners or listing on stock exchange could be options on the table. But, if deemed a lost cause, the CPA advises the Receiver Manager on available sale options or a “break-up” liquidation scenario including an adjusted Net Book Value (NBV) valuation. Based on the results of such work, advise the RM on the optimized resolution of the creditor(s).