There are alternatives to company being placed in liquidation if it finds itself to be insolvent. There are formal and informal options available and the most appropriate options for dealing with insolvency will depend on whether the causes of insolvency can be addressed. There are many causes of insolvency for a company, such as over-trading, change of market conditions, over-leveraging, under-capitalisation, failure of management, poor financial controls, and sometimes fraud, or a combination of these.

If a company experiences financial difficulties, there are steps that can be taken by the owners and the managers to try to reverse the fortunes and rescue the company. In almost all instances it is preferable for all stakeholders of the business (or at least part of it) to be rescued rather than be liquidated.

A company facing financial problems, even temporarily, should consider seeking advice from a professional adviser, an attorney, a qualified accountant or an insolvency practitioner at an early stage. While there will be an associated cost with seeking such advice the failure of not taking action can be serious both for the company but also for the directors personally.

Broadly, an insolvent company has four options outside of entering liquidation:

i) Trade out of difficulties (although consideration must be given to circumstances where the company continues to trade whilst in an insolvent position as this may have serious implications for the directors)
ii) Compromise with creditors (The compromise could be formal or informal. A formal compromise would be legally binding on creditors and involves the court; an informal one would not be. While an informal option is often the cheaper option there is always a risk that a creditor will take independent action for recovery of their debt)
iii) Disposal of some or all of the assets or business (although there are risks associated with this course of action if the company is subsequently wound up as such disposals can be unwound if determined not in the interest of the body of creditors)
iv) Judicial management (Appointment of a third party by the court to manage the business, return it to profitability, and thereafter return the company to its directors).

An alternative is that the company may seek to appoint a specialist to assist with the stabilisation of the business in the short-term and the development of a longer-term rescue plan. (This is not the same as judicial management which is a court-imposed process). In the short term the aim of this would be to:

• • Stabilise the finances and business operations, ensure adequate funds are available to pay the short-term debts, and meet the immediate obligations to allow the continued operations
  • Diagnose the fundamental problems affecting the profitability and functioning of the business
  • Develop and implement a plan to turn around or rescue the company in the medium to longer term including the options for longer-term financing.

Critical to the success of any business turnaround is the relations with key stakeholders notably banks, creditors, shareholders/investors, employees, regulators, suppliers and customers. Without the support of most, if not all, of these stakeholders the likelihood of the company being able to change its fortunes is limited. It is important that key stakeholders are engaged, understand, and hopefully support, the steps being undertaken as well as understand the potential downside and consequences to them if the business is not turned around. Critical to the business turnaround is often the support of the company’s bankers (or secured lenders) as companies will often require funding and/or refinancing.

Another critical factor for business turnaround to be successful is reliable and up-to-date financial and other relevant information. This is often lacking for a company in distress and one of the key factors that inhibit a third party from being able to assist, develop and implement a plan for turnaround or rescue.

Directors need to be cautious during the period when a company is in financial distress and is potentially insolvent. Their duties during this period sometimes referred to as the ‘twilight’ period, shifts from being to the shareholders to being towards the creditors and protecting them. The actions of directors during this period will be investigated by the liquidator and failure by directors to act in accordance with their fiduciary duties is an offence in terms of the Companies Act and directors run the risk of being made personally liable for the debts of the company. Therefore, it is important that directors document decisions taken during this period that explain the reasoning behind any actions or decisions, so as to demonstrate any dealings were in the interests of the general body of creditors and do not have the effect of preferring one creditor over another.

If it is determined that there is no possibility of turning around the business the directors should take formal steps to protect the interests of the creditors which may include placing the company in liquidation.

2.1. Compromises with Creditors
Compromises can be made with creditors on a formal and informal basis. An informal compromise is seeking agreement from creditors as to the terms, quantum, or time period over which the debts may be settled but which is not legally binding on the creditors. As a result, a creditor, notwithstanding it may have agreed to the informal compromise, may take independent action for the recovery of its debt. An informal compromise has certain advantages – it is often quicker and is likely cheaper than a formal compromise. It also does not necessarily require any external expertise to develop and implement and can be negotiated and administered by the company.

A formal compromise, on the other hand, is a legally binding compromise on defined terms between a company and its creditors (or any class of them). In Botswana, a formal compromise is generally undertaken under Parts XV and XVI of the Companies Act and is known as a ‘Scheme of Compromise’.

Key to any scheme is the determination of classes that are necessary and, if so, what are the classes of creditors. There is no legal definition of ‘class’ and classes vary depending on the scheme. A class of creditors is creditors that are grouped together because they have similar interests. For example, if there are secured creditors there may be a separate class of creditors in a scheme of compromise. It is important that the necessary financial and legal advice is sought in determining creditor classes.

A Scheme of Compromise is proposed by a proponent (who may also fund the scheme). The Scheme must be authorised and sanctioned by the High Court and the creditors of the company must approve the scheme at a formally convened meeting of creditors. A Scheme can be proposed by the board of directors of a company, a liquidator (if the company has been wound up by the court), and, with leave of the court, the shareholders of the company or a creditor. It cannot be proposed by a judicial manager.

The proponent of the scheme must submit a proposal to the creditors, in advance of the meeting of creditors to vote on, detailing the major terms of the scheme as well as the consequences for the company if such scheme is not accepted. (Creditors that are unaffected by the Scheme or who are due to be paid in full do not get ordinarily get a vote). The proposal must include:

• • Why, in the proponent’s opinion, the Scheme is recommended and supported;
  • Why the Scheme offers a better outcome for creditors than an alternative, including liquidation;
  • Details of the company business and its history
  • Details of the scheme and the assets available.

The creditors of a Scheme of Compromise should believe they are better off than without a Scheme. It is important that the proposal demonstrates this to creditors. It is also critical that the Scheme is achievable and realistic, and will have the necessary creditor support.

How a Scheme is structured is flexible and varies according to the levels of debt, type of company and its status. A Scheme can involve the cancellation of all or part of the debt of the company or vary the rights of the creditors in terms of the debt. Proposed compromises may include, for example, share in future profits of restructured business, ownership rights over the restructured business by way of a debt-to-equity swap or defined rights over assets.

The Scheme must be approved by >75% of the creditors (of each class) in number and the majority in value (>50%). If the Scheme has classes then the different classes of creditors vote separately. The scheme must be approved by each class of creditors at a separate meeting for each class. If the compromise is approved by the creditors or a class of creditors it is binding on all creditors. If there is more than one class, it is binding on all creditors of that class (providing notice was given of the meeting). In the case of a compromise with several classes of creditors the assumption is that the approval of the compromise by each class is conditional on the approval by all classes, including any amendment. However, it is possible for this not to be the case if expressly stated in the resolution for approval put before the classes of creditors to vote on. An amendment to the Scheme may be proposed by creditors (or class) for consideration at the meeting.

The advantage of a Scheme of Compromise is that once approved by the court it is binding on all creditors (or each class of creditor) even those creditors that voted against or did not participate in the scheme. For the court to sanction the scheme it must be satisfied that the procedural requirements as laid down in the Companies Act have been adhered to. It must also, importantly, be satisfied that is it fair to the creditors generally.

The major disadvantage is that a Scheme of Compromise, undertaken in terms of Part XV and XVI, is it is an expensive, often complex, process as it requires two applications to court as well as the convening of meeting(s) of creditors. Applications to court must be made to:

1. 1. convene the meeting(s) of creditors (at which the scheme is voted upon to approve the scheme), and
   2. to sanction the decision(s) made at the meeting(s).

Devising and implementing a Scheme requires legal and often financial advice. Often lawyers and financial advisors will be involved with the drafting of the proposal on behalf of the proponent.

A successful compromise is one in which the company fulfills its obligations in accordance with the terms of the Scheme and therefore restructures its debt. As a consequence, all things being equal, the company should be able to continue having restructured its debt or being relieved of some of its debt burden.

A Scheme of Compromise is not itself an insolvency procedure but a Scheme of Compromise may be undertaken by an insolvent estate, or as a formal procedure to avoid insolvency. Typically, it is the company that proposes a Scheme of Compromise, but a liquidator may propose a scheme for a company wound up by the court as a means to discharge the liquidation order.

When a Scheme of Compromise is made in respect of a company that is facing financial distress it is important to consider the attitudes of creditors and whether they will accept the Scheme and support the restructured business going forward rather than trying to exercise their rights independently to recover the monies due to them. Timing and transparency with creditors as to the state of the company and the benefits of a formal scheme need to be made in order to secure support. It is important before embarking on a Scheme to undertake an assessment of its viability. Any proponent of a Scheme should be reasonably certain it will be able to secure the votes of the creditors (both in terms of numbers and value) in order for the resolution(s) accepting the Scheme to pass.

2.2. Judicial Management
Judicial management is administered in terms of Part XXVI of the Companies Act. It is the process under which an independent third party is appointed by the court to manage the business of a company.

A company may be placed in judicial management due to mismanagement or some other cause. The court is also under an obligation to consider whether judicial management is more apt for any application to wind up a company whether due to its inability to pay its debts or on just and equitable grounds.

A company is placed in judicial management by order of the High Court following an application to court and a judicial manager is appointed on terms set out in the court order. Judicial Management is an insolvency process but it is intended to be non-terminal (as opposed to liquidation which is terminal).

The objective of judicial management is to rescue the company and return it to profitability, and thereafter return the company to its directors. The primary purpose it is undertaken is for a company to avoid liquidation if there is a considered belief that the company can be rescued if it is placed under temporary, independent management. (A company can also be placed into judicial management if the company has been mismanaged but is not insolvent). The process is not “liquidation lite”. It is fundamentally a different process with a different objective. A judicial manager, unlike a liquidator, must be concerned with the members (shareholders) as well as the creditors and must act in the interests of both.

In order for the High Court to grant the petition for judicial management it should be demonstrated that there is a viable and feasible business plan to operate the company as a going concern and that it will be able to settle its debts as and when they become due. Judicial management is meant to last for a limited period while this is undertaken. If and when the judicial manager holds the view that it will not be possible for the company to trade out of its difficulties and that it is fatally insolvent, he/she should make an application to court to wind up the company. If and when the company has returned to profitability and the judicial manager’s mandate has been satisfied then the judicial management order should be discharged.

The day-to-day regulatory functions of the company continue in judicial management. The company needs to be audited if it was audited prior to judicial management order and the annual general meeting needs to be held. The judicial manager is required to report regularly to creditors, at least every three months. The judicial manager is not entitled to dispose of assets unless in the ordinary course of business. There is no set requirement for the number of meetings of creditors under judicial management (unlike for liquidation). This is determined by the Master of the High Court.

Creditors may be invited to submit a claim against the company in judicial management in order to entitle them to vote on certain matters relating to the judicial management. There is no expectation of a “liquidation dividend” distribution being made when a company is in judicial management, in contrast to liquidation, so there is no necessity for a creditor to submit a claim for that purpose.

2.3. Insolvency Appointments
A liquidator (and judicial manager) is appointed in his/her individual capacity. It is not the company or practice for whom he/she may work that is appointed. As a result of this there is a considerable amount of responsibility and weight to the position. In order to be appointed as a provisional/final liquidator or judicial manager must provide security to the satisfaction of the Master. The reason liquidators and judicial managers are required to provide security to the Master is to protect the creditors should the appointee fail to perform his or her duties to the detriment of the creditors. While there are no specific requirements as to what form the security will take ordinarily the Master will accept a bank guaranteed cheque or cash, a bond of security or professional indemnity insurance if it is in the name of the individual not the company he/she is employed by and/or an insurance policy. The quantum will depend on the size of the estate.

In other jurisdictions, given the responsibility and duties of the roles, individuals who act are formally regulated and often will need to have passed a specific examination. In Botswana there are no specific qualifications to act as a liquidator/judicial manager. However in order to be appointed an individual must not be disqualified from acting. Liquidators and judicial management appointees are generally accountants and, less commonly, attorneys. Any accountant or attorney appointed must be a member of the Botswana Institute of Chartered Accountants or the Law Society, respectively. Any other person appointed must be declared fit and proper by the Master of the High Court. Legal oversight of liquidators and judicial managers rests with the Master of the High Court. Although accountants and attorneys are governed ethically and professionally by their regulatory bodies, they have not historically had any specific oversight as regards any specific insolvency appointments (unlike in other jurisdictions).

Certain individuals are disqualified from acting as a liquidator or judicial manager (or trustee for insolvent individuals). This includes an insolvent, a minor, person with legal disability or a director that has been disqualified as acting as a director. Further the person is normally required to be resident in Botswana and for any person not resident the Master of the High Court has to declare them fit and proper.

Given the level of responsibility of a liquidator, who acts as an agent of the company but with the interests of creditors as the governing priority and the requirements of the Act, the position is a serious one. The office is one of trust toward creditors and the insolvent, and also toward the Master. Liquidators and judicial managers need to act with the highest level of integrity and ethics. They must ensure they are independent prior to taking an appointment and during the period they are appointed. They must also be suitably qualified with enough experience and resources to accept an appointment. They must have no interest in the fate of the insolvent or the insolvent estate or any bias in favour of or against any of the creditors of the estate.

A liquidator/judicial manager can be disqualified from office if he/she acts dishonestly. Such acts include (but not limited to) if he/she is acted in a manner to influence the vote for his/her appointment or agreed with a person to not investigate a particular transaction.

The Master has the discretion to appoint a provisional liquidator prior to the first meeting of creditors if one is not named in the winding-up order but must appoint the provisional liquidator named by the court following the provision of adequate security by the named provisional liquidator. Any provisional liquidator named in the court order will ordinarily have had to submit a letter of willingness to act to the court in the petition.

However, the Master’s power to appoint a final liquidator is limited. It is the creditors that determine who is elected as the final liquidator. The nomination is done at the first meeting of creditors and it is those creditors with a proven claim that have the power to vote. Again, a final liquidator being considered for nomination at a meeting of creditors will normally have to have submitted a letter of willingness to act if appointed.

The Master cannot unilaterally remove a liquidator but must make an application to court to do so.

If a liquidator resigns the Master may set conditions upon which the liquidator may leave office. The Master may also require a meeting of creditors be held in order for the creditors to decide if they accept the resignation. In order for a final liquidator to be replaced, following a resignation, a meeting of creditors should be called and the creditors asked to vote. The Master assumes control and custody of all assets of the company if no private sector provisional liquidator/liquidator is appointed. This procedure would also be followed in the event of a final liquidator’s death. (If a provisional liquidator dies that Master may appoint one as detailed above).