A robust insolvency system functions as a filter, ensuring the survival of economically efficient companies and reallocating the resources of inefficient ones. Fast and cheap insolvency proceedings result in the speedy return of businesses to normal operation and increase returns to creditors. According to the World Bank, by improving the expectations of creditors and debtors about the outcome of insolvency proceedings, well-functioning insolvency systems can facilitate access to finance, save more viable businesses and improve growth and sustainability in the economy overall.
Malawi, like all countries, is competing for capital, investment and trade flows. On the World Bank’s Doing Business Index 2015, Malawi is ranked number 166 out of the 189 countries rated. Against this backdrop, the significance of having a fine insolvency regime cannot be over-emphasised as economies with better insolvency laws tend to have more credit available to the private sector.
The current insolvency regime is outdated and governed by multiple statutes, making it difficult to have transparent, cost-effective and streamlined insolvency procedures. Individual insolvencies are governed by the Bankruptcy Act 1928 while corporate insolvencies are governed by the Companies Act 1984. Insolvencies under this regime have been hard to achieve due to, among other reasons, lengthy court procedures and weak enforcement mechanisms. This leads to low credit rating for Malawi. Indeed, no investor wants to come to a country where it is virtually impossible to deal with insolvency situations.
Hail the Insolvency Bill! This bill consolidates all written laws relating to insolvency under one piece of legislation.
First and foremost, the Bill establishes the new office of the Director of the Insolvency, who will act as the regulator of insolvencies. The directorate will be located within the Ministry of Industry and Trade. My suggestion is to establish an independent office to avoid conflict of interest as government is invariably an interested party in insolvencies.
The High Court will now be empowered to grant a company reorganisation order rather than proceed with immediate liquidation. ‘Company reorganisation’ has the advantage of saving a financially viable company that is in distress or in the alternative ensuring that the best possible result for the creditors will be obtained through liquidation.
In relation to receivership, the provisions in the bill are modified versions of what currently appears in the Companies Act 1984. The main change relates to the removal of the concept of fixed and floating charges. Security interests will shortly be regulated by the provisions of the Personal Property Security Act 2013 (which was already passed by Parliament and awaits operationalisation).
Hitherto, the practice of receivers and liquidators has not been regulated. Traditionally, legal practitioners and Certified Public Accountants have anyhow been appointed as such. The Bill seeks to sanitize the situation by introducing insolvency practitioners and their qualifications.
A company may still be wound up by the High Court or voluntarily, and the voluntary procedure still makes provision for a distinction between the winding-up of solvent and insolvent companies. The bill speaks to the new Companies Act 2013 (which was already passed by Parliament and awaits operationalisation).
New individual bankruptcy provisions are shorter than the current Bankruptcy Act 1928. An alternative to bankruptcy has been included in the bill—Individual Voluntary Arrangement. This is where a debtor enters into an arrangement with his creditors on a voluntary basis, thereby avoiding the disadvantages of being declared formally bankrupt which include disqualification from standing for public office and holding positions of a director, trustee and senior manager in a financial institution. The procedure is also quick and inexpensive and, considering the procedure’s inherent simplicity, I am of the view that it has a very good chance of succeeding.
Lastly, the bill deals with cross-border insolvency. These provisions are modelled on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. This will surely enhance our international credit rating.
The bill is due to be passed into law and considering the benefits outlined above, and the fact that the new Companies Act 2013 can only be operationalised after the bill passes, a call goes to our parliamentarians to prioritise the same so that the cost and ease of doing business in Malawi may be significantly enhanced.