1. Insolvency Law
1.1. Purpose of Insolvency Law
Insolvency law is the branch of law that regulates what happens to companies and individuals who are in financial distress and are unable to meet their financial obligations. It provides a system of dealing fairly with the assets of the insolvent and the claims of creditors (i.e. those to whom the insolvent owes money).

The underlying philosophy of the legislation is that creditors’ rights are equally protected in the event of a company or individual formally entering into an insolvency process and that there is an equitable distribution of any assets realised (net of the costs of doing so). The process aims to ensure an orderly collection and realisation of the assets and an orderly distribution of the net realisation of those assets to creditors in accordance with a defined statutory regime.

The intention is that the law should prevent individual creditors from acting in their own interest once the company or individual has entered a formal insolvency process, as such action may be to the detriment of the other creditors. Given that the company or individual is unable to pay all creditors in full, all creditors are prejudiced by the insolvency. Insolvency law, therefore, attempts to make an unfair situation as fair as possible.

As such, the objectives of insolvency law are threefold:

1. 1. Maximise the return to creditors and ensure the law aids this objective by providing those tasked with the winding up process the power to realise assets and challenge transactions entered into prior to the insolvency.
   2. Establish a fair and equitable system for ranking of claims of creditors and distribution of realised pooled assets in accordance with that ranking.
   3. Provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement be held accountable and potentially be required to contribute to the losses of creditors (and in case of companies may be prevented from managing other companies for a period in the future).

To achieve these objectives, the legal infrastructure of insolvency is both robust and powerful.

In the first instance the law places the entity (company or individual) and their assets in the control of a third party (a ‘liquidator’ for a company and a ‘trustee’ for an individual). This is to safeguard the assets against dissipation and to allow the third party to realise them for the benefit of all creditors.

The primary duty of that third party is to act in the interests of the body of creditors and not individual creditors. The law affords the third-party significant powers to fulfil this mandate which includes the right to apply to court to undo or void transactions entered by the company or individual prior to insolvency. The liquidator/trustee has the power to take action to set aside pre-liquidation transactions entered into by the company which may be improper, prefer one creditor over the body of creditors or be fraudulent.

Secondly, the rights and remedies of the creditors to pursue the money due to them are suspended and creditors’ claims are equalised against the insolvent. Their rights are replaced by a collective debt collection and asset realisation process undertaken by the appointed third party on the creditors’ behalf. The law prevents the company or individual from acting to prefer a particular creditor over the general body of creditors (and any such action can be undone).

The liquidator/trustee also has the power to terminate or repudiate contracts that are deemed not in the interest of creditors. That being said, insolvency law does seek to protect contractual obligations entered into by the company prior to liquidation. Those creditors with security may still enforce their security and creditors have a legal protection of their claims for monies due as of the date the formal insolvency procedure commenced or for a claim for damages arising from breach of contract as a result of the insolvency. These claims are enforceable against the company or individual.

Finally, the law also aims to hold those found responsible for the insolvency to account and as a result, there is a statutory requirement for a liquidator/trustee to investigate the reasons for insolvency and to explore options for any recoveries in addition to the disposal of the assets. There are also provisions that directors of a company may be held personally liable for the debts of the company. Further, the law allows for civil and criminal sanction against an individual and, in the case of a liquidated company, disqualification of a director from acting as a director in the future for a set period of time.

Insolvency law must balance the protection of creditors who have lost money against the rights of companies and individuals to contract freely which comes with an inherent risk that not all obligations will be honoured. It must also hold to account those that act recklessly or fraudulently and who contribute to, or are responsible for, the losses and debts but it also must not be too punitive against those companies or individuals that due to circumstances beyond their control (such as changing market conditions) find themselves insolvent but have taken sensible and prudent steps to avoid losses.

While the law must also deal with what happens to the individual or company following the insolvency it must also be flexible and have built in mechanisms to ensure that there are non-terminal insolvency processes as well as terminal ones. Avoiding insolvency is better for all concerned.

Botswana insolvency law focuses on the protection of the interests of the creditors (as opposed to the insolvent) and does not (as is the case in other jurisdictions) aim to consider the wider community or public good, such as the rights of the debtor, protections of the employment or environment in the statutory regime.

1.2. Terms of Insolvency
The process whereby the assets of a company are collected and realised, and the proceeds distributed to discharge the debts of companies, in accordance with the relevant legislation, is called ‘liquidation’. For an individual, the term is ‘sequestration’ . The terminology used can often be confusing. Liquidation and ‘winding up’ are terms that can be used inter-changeably. Liquidation is the process of winding up the affairs of the company and removing its physical and legal existence. Liquidation leads, ultimately to a company’s dissolution and removal from the register. Liquidation is not equivalent to insolvency. Insolvency is the status of an entity (company or individual) and its inability to meet its financial obligations.

For an individual, their estate is placed in sequestration and wound up whereas it is the company that is placed in winding up. An individual, obviously, cannot be physically and legally dissolved at the end of the sequestration process and so the law provides a mechanism for rehabilitation of the insolvent.

Insolvency is not always a necessary condition for liquidation. A company can be insolvent but not be in liquidation (the process to have it placed in liquidation may not have happened yet or alternatively some other process (formal or informal) to change its status may occur instead).

Perhaps more surprisingly companies can be liquidated that are not insolvent. There is a specific process for a company to liquidate itself (called members’ voluntary liquidation) and the conditions for it to follow that process are that the company is not insolvent. A company may also be wound up by the court for reasons other than the company is insolvent (although that is by far the most common reason).

There are three types of liquidation processes:

• • compulsory liquidation (winding up by the court)
  • creditors’ voluntary liquidation
  • members’ voluntary liquidation (this applies to solvent companies only but is regulated by the same legislation as the two procedures above).

The most common descriptions of insolvency are that the company or individual cannot pay its debts when they become due.

Liquidations can be expensive and offer a poor return to creditors generally so most jurisdictions, including Botswana, have other mechanisms to avoid liquidations.

The company may come to some form of arrangement with its creditors (informally or formally; a formal arrangement is called a” Scheme of Compromise”) or it may be put in the hands of an independent person to try to trade out (often called ‘business rescue’). In Botswana the legal term for the latter is called Judicial Management. The success of judicial management is variable and depends on the type of business, the state it was in when it entered judicial management and who the judicial manager is who is appointed, and their turnaround skills.

It is not the objective of liquidation to rehabilitate the company. The final act in the insolvency process is for the company to be finally dissolved and formally removed from the register of companies. That being said, it is possible for a company to be placed in liquidation, which has the effect of staying the legal proceedings, halting interest payments, while attempts are made to re-capitalise the company or dispose of the business as a going concern following a formal compromise or restructuring of debt. While not common there are instances where this has been done successfully in Botswana. Where a company, being a legal construct, can be formed and dissolved through a legal process this is obviously not so for an individual who will continue to exist following the imposition of a formal insolvency process. For individuals, this is not possible. An individual’s route out of insolvency is rehabilitation.

How and when a company is liquidated and how effective the administration of that process affects the ease and cost of doing business in an economy. It is important that corporate law deals with the administration of insolvent companies and makes provisions for these issues. Having a well-administered and clearly defined process for companies that are insolvent provides a strong foundation for trade and the economy as a whole as creditors and debtors are aware of their rights and responsibilities, and have faith in the enforceability and protection of same.

Given the severity of a company or individual finding itself insolvent and being placed under a formal insolvency process, it is important that third parties are aware that a company is under a formal insolvency process. As a result, any company that is in liquidation should disclose this and amend its letterhead, website, and other corporate documentation accordingly. The name of the company must reflect the status and the descriptor will be, for example, ‘Company ABC (Proprietary) Limited – In Liquidation’ or alternatively Company ABC (Proprietary) Limited (In liquidation) as opposed to just the company name. Likewise, a company in judicial should use ‘Company ABC (Proprietary) Limited – In Judicial Management or Company ABC (Proprietary) Limited (In Judicial Management).

1.3. Legislative Framework for Companies
There are three principal sets of primary and subordinate legislation governing the insolvency regime in Botswana. Specialised industries such as banks, non-bank financial institutions (and other regulated) companies, and mines also have specific insolvency legislation that is considered in the event one of these types of institutions becomes insolvent. However, for the majority of companies, the following are relevant:

1. 1. Companies Act [CAP 42:01], as amended. This is the main enactment dealing with corporate insolvency. This Act also regulates the appointment of judicial managers and the conduct of judicial management as well as Compromises with Creditors (sometimes known as Schemes of Compromise).
   2. Companies Act Regulations (the ‘Winding Up Rules’). These detail procedural matters that underpin the winding up sections of the Companies Act. However, these are limited and only deal with a limited number of procedural matters notably the application process and meetings of creditors.
   3. Insolvency Act [CAP 42:01], as amended. This is the main enactment dealing with insolvent individuals and is cross-referenced from the Companies Act in specific matters that affect companies.
      The Employment Act [CAP 47:01], as amended, is another critical piece of legislation. The law was amended in 2003 to alter the basis on which the claims of employees of a company that has entered insolvency are calculated.

The winding up or judicial management of companies fall within the jurisdiction of the Master of the High Court. The Master is in control of the process of administration and liquidation of insolvent estates, an important part of which consists of the oversight she or he exercises over the liquidators/trustees in the performance of their functions as mandated by the Companies and Insolvency Act. However, the Master’s role is not to involve her/himself in the day-to-day liquidation nor to be involved in the commercial or practical steps involved in winding up the estate. This is the liquidator’s/trustee’s role.

The structure of Botswana insolvency legislation is not easy to understand and the Companies Act is not particularly clear in its organisation to non-practitioners. One might expect the primary legislation governing insolvency, including for companies, to be the Insolvency Act rather than the Companies Act but this is not the case. The governing legislation for companies is the Companies Act with specific references being made to sections and processes in the Insolvency Act. The Insolvency Act governs the proof of claims. There is no provision in the Companies Act that incorporates the Insolvency Act in circumstances whereby the matter is not dealt with in the Companies Act (unlike, for instance, in South Africa), although in practice many liquidators draw upon sections in the Insolvency Act that speak to the common law principles of insolvency. This lack of one act dealing with personal and corporate insolvency is not ideal and reform in this area would be welcome.

The insolvency sections of the Companies Act itself can be difficult to understand for anyone who does not already have knowledge of the different winding-up regimes (winding up by the court and voluntary winding up either as a members’ voluntary winding up or a creditors’ voluntary winding up). It takes a good understanding of insolvency practice and legislative purpose to be able to follow Part XXVI of the Companies Act.