As established in the landmark case Salomon v. Salomon, when a company is incorporated, it becomes a separate legal entity with perpetual succession. This means the company continues to exist even if its members or officers leave, due to death or other reasons. However, companies can face challenges and may need assistance to recover and grow, which is where corporate restructuring comes in.
This article will discuss corporate restructuring in Ghana, some different methods of corporate restructuring under Ghanaian law, and the role played by the Board of Directors in the process.
- What is Corporate Restructuring:
Corporate Restructuring is making major adjustments to a company’s financial and operational structure, often in response to financial difficulties. This may include making positive adjustments to the company’s debt, operations, or organizational setup, aimed at minimizing financial risk and improving business performance.
When a company encounters financial troubles or becomes insolvent, it may look to restructure as a way to recover, regain solvency, and prevent liquidation. The main objectives are to lower debt, boost cash flow, and ensure the company can continue functioning in a financially stable manner. Below are some of the ways a company can restructure in order to be solvent.
- Restructuring Methods:
Administration:
A restructuring officer or a licensed insolvency practitioner is appointed as an administrator to operate under an approved restructuring agreementto take over the business and assets of a company that is insolvent or has a negative net worth, to manage and restructure the business for the company to become solvent and have a positive net worth.
The Corporate Insolvency and Restructuring Act, 2020 (Act 1015), (“CIRA”), is a crucial law in Ghana that addresses insolvency and restructuring. It provides distressed companies with the option to rescue their businesses instead of resorting to liquidation or receivership. Under CIRA, companies can remain operational as a going concern while undergoing restructuring, with oversight from a designated administrator or restructuring officer. This approach temporarily halts creditors’ actions, allowing for the development of a restructuring plan that may offer better outcomes for all parties compared to immediate liquidation. It is important to point out that this rescue provision does not apply to banks, insurance companies or any other business with special legislation.
The process of administration commences when a licensed Insolvency Practitioner is appointed. The administrator’s duty is to take control of the company’s business, assets, and affairs, investigate its operations, and seek ways to rescue the business in the best interests of creditors, employees, and shareholders. The administrator is responsible for managing the business, and preserving its value, and may choose to sell or terminate parts of the business and dispose of company property. The administrator also has the authority to exercise any powers or perform any duties that the company or its officers could perform if it were not in administration.
Mergers:
A merger occurs when one company is absorbed by another company or when two or more companies join to form a new company. In this process, all assets, liabilities, and operations of the merging companies are transferred to the receiving company or the newly formed
entity. In return, shareholders of the merging companies typically receive shares in the receiving company, sometimes along with additional cash payments.
In Ghana, specific steps must be followed for a merger to take effect:
- Board Approval: The directors of the merging companies must confirm that the merger serves the company’s best interest and that the transferee company will remain solvent after the merger. They must sign a certificate to this effect.
- Merger Proposal: A detailed merger proposal, along with relevant documents, must be shared with shareholders and creditors at least 28 days before the merger takes effect.
The proposal must be approved by at least 75% of each group (members, creditors, and other relevant stakeholders).
- Registration: The approved merger proposal and supporting documents must be submitted to the Registrar at the Office of the Registrar of Companies for official registration.
The essence of a merger is to create a stronger, more competitive business entity by combining resources and expertise, allowing companies to overcome limitations and achieve long-term success.
Arrangements:
An Arrangement is the reorganizing of a company’s structure or shares, such as consolidating or dividing shares, by an appointed restructuring officer (in this case, an insolvency practitioner) such as an Administrator or a Liquidator (in the case of a company being wound up) to improve its financial position. It is usually done when a company faces financial difficulties, such as needing to restructure. The purpose of an arrangement is to find a solution that benefits both the company and its creditors or members, helping the company avoid insolvency or liquidation and continue its operations.
The company first proposes an arrangement to its creditors or members. The company or other interested parties then apply to the Court which may order a meeting of the relevant groups of members and creditors to be held in the manner the Court directs. For the arrangement to proceed, at least 75% of creditors or members must approve it. If approved, the Registrar may appoint an insolvency practitioner to assess its fairness. After the investigation, the Court reviews the arrangement and the report before confirming it, making the arrangement legally binding on all parties. Once confirmed, the company must implement the changes, and if the arrangement involves asset transfers, the Court may give its approval. If the company fails to follow the required steps, it will face penalties.
- The Role of the Board in Corporate Restructuring
The Board of Directors plays a crucial role in corporate restructuring and below are their roles and responsibilities in the various corporate restructuring techniques:
In an Administration proceeding, Directors hold the following roles and responsibilities:
- They appoint an administrator if they believe the company is insolvent or likely to become insolvent. This decision is made by passing a board resolution, which must contain the grounds for insolvency or the likelihood of insolvency.
- They are required to assist the administrator, provide necessary information, and comply with their decision to help salvage the business for the benefit of creditors, employees, and shareholders.
- While they remain in office during administration, their powers to manage the affairs of the company are limited and they can only act with the administrator’s approval.
During a Merger transaction, Directors and required to do the following:
- They must ensure that the merger is in the best interest of the company and that the new company will be solvent post-merger, and they are required to provide a certificate to this effect.
- They are also responsible for sending merger proposals and relevant documents to members and creditors before the merger takes effect.
- They must ensure that all legal requirements have been complied with, including submitting necessary documents to the Registrar of Companies for approval and registration of the merger.
When a company undertakes an Arrangement, the Directors are responsible for the following:
- Applying to the Court for an order for a meeting between the shareholders and creditors to discuss and approve the proposed arrangement. The Court however provides the rules to be followed by all parties for this meeting.
- They must ensure the company follows the Court’s orders, such as providing required information by all parties and executing the necessary actions to implement the arrangement. Should they fail to do this, they will be required to pay a penalty, along with all officers of the company
- Conclusion:
In conclusion, corporate restructuring is more than just a lifeline for companies in financial distress; it is a powerful opportunity to reinvent and stabilize a business. Whether through administration, mergers, or arrangements, restructuring offers a path to reduce debt, revamp operations, and return to profitability. The Board of Directors plays a pivotal role in this transformative process, making key decisions, ensuring legal compliance, and collaborating with administrators to steer the company toward recovery. With strategic leadership and careful planning, restructuring can not only save a company but also position it for future growth and success in an ever-evolving business landscape.
By: Ewurama Osam Tawiah
Senior Associate
VINT & Aletheia Attorneys & Consultants