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. 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.

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 under 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 under 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.

A company is wound up in terms of Part XXVI of the Companies Act. There are two methods of winding up a company. The first is by the court (‘compulsory liquidation’) and the second is voluntary. The primary purpose in both is the same for there to be a fair and orderly procedure to handle the affairs of a company in liquidation. This is done by appointing an independent liquidator to secure and realise the assets of the company thereafter distributing the liquidated funds to the correct parties in accordance with insolvency law. The distribution is transparent, and follows the production and confirmation of an account made publicly available. After payment the company is legally dissolved. In Botswana the most common form for winding up a company is compulsory liquidation.

Compulsory liquidation is a court process. It occurs when a company is wound up by an order of the High Court. The winding up commences upon presentation of a petition.

The consequences of a winding up order are immediate.

The main consequence of a winding up order is that it operates in favour of all the creditors and of all the shareholders of the company as if the petition had been presented by all creditors and shareholders jointly. The winding up order ‘fixes’ the insolvent’s position as at the date when the petition was issued, and the rights of the general body of creditors, and not individual creditors, must thereafter be taken into consideration. This ensures the distribution of assets to creditors in a proper order of preference as at the date the liquidation commences, being the date of the presentation of the petition. Nothing may be done after the issuance of the winding up order by any of the creditors to alter the rights of it or the other creditors. No transaction can thereafter be entered in to by a single creditor to the prejudice of the general body.

The powers of the directors cease and the provisional liquidator (or if one is not appointed the Master of the High Court) takes custody or control of the company and its assets. The provisional liquidator will remain in control until such time as a final liquidator is appointed (at the first meeting of creditors) after the final order has been made.

Any disposition of the company property after the presentation of the petition is void, unless the court orders otherwise. Therefore, any attachment or execution put in force against the assets of the company after the presentation of the petition are also void. Should any assets be sold following the presentation of the petition these funds are assets of the company in liquidation and must be handed over to the liquidator for the benefit of the body of creditors. The creditor who sold the assets would have a claim against the estate and would need to follow the ordinary procedure of submitting a claim and being paid a dividend if one was payable. Should the creditor fail to do so the liquidator is entitled to take action to recover these funds in full from the creditor.

Any legal action against the company is stayed, except with leave (i.e. permission) of the court. In addition, no new legal proceedings may be bought against the company without leave of the court.

The Companies Act provides that the assets of the company in liquidation shall be applied in payment of the costs, charges and expenses incurred in the winding up and of the claims of creditors, as they would under the law relating to insolvency i.e. as determined by the Insolvency Act. The fees for a liquidator (and provisional liquidator) are paid from the assets of the estate as a cost of administration prior to the payment of any claims of creditors. Once all the assets have been realised and if there are sufficient funds available the liquidator may declare a ‘dividend’. The dividend will be a percentage (Thebe in the Pula) of each creditor’s total admitted claim, based on the cash available for distribution to proven creditors and the total of the creditors’ claims.

Any person or business owed money by the company that has been wound up is a creditor of the company and has a claim against the company. This claim is legally protected. However, the value of the claim in all likelihood will not be equivalent to the amount eventually realised and in fact may be worth little.

In order for a creditor to participate in a liquidation process he/she must establish his/her right to do so. Any claim submitted will either by “proven” (i.e. admitted against the estate) or rejected. The method for doing so is for a creditor to submit a claim form and for it to be proven in accordance with the requirements of the Companies Act.

Creditors have two main opportunities to submit a claim against an estate for a company wound up by the court and that is at the first and second meetings of creditors.

Payment to creditors at the end of the liquidation process is done in strict order based on priority of payment of creditors. In simple terms creditors are paid in the following order secured (up to the value of security), preferred (employees followed by monies due in respect of taxation on income or profit) followed by concurrent creditors (ordinary trade and other creditors).

The liquidator is required by law to prepare a report for creditors which he or she is required to submit at a meeting of creditors (if there are contributories a report would also be prepared for contributories). In practice the liquidator normally sends this report to creditors in advance of any meeting of creditors and then summarises at the meeting of creditors and presents any update as to actions and developments in the period since the date of the report and the date of the meeting.

Liquidators are required to investigate the affairs of the company. This investigation includes the formation, promotion and management of the company as well as whether proper books and records have been maintained. The liquidator must report to creditors on the outcome of these investigations and whether these investigations have or will lead to potential recoveries for the benefit of the estate.

The duties of the directors cease upon the granting of a winding up order for a compulsory winding up or upon the special resolution. They are replaced by the liquidator and they are removed from the management of the company. However, directors continue to have obligations under the Companies Act after the company is in liquidation but retain only vestigial powers.

The Companies Act makes provision for the liquidator (and others including the Master) to make an application to court for an order to disqualify the directors either as a result of inter alia being guilty of fraud or for acting in a reckless or incompetent manner. Any director that is disqualified may not take part in the management of a company for a period of five years. Perhaps more importantly, for those companies that are in liquidation if the directors are found guilty of an offence then in addition to the penalties the directors may be held liable for the debts of the company. The court may find the directors liable for the debts of the company even if an application for disqualification is not sought.

Compulsory liquidation is a court process. It occurs when a company is wound up by an order of the High Court. The winding up commences upon presentation of a petition.

The consequences of a winding up order are immediate.

The main consequence of a winding up order is that it operates in favour of all the creditors and of all the shareholders of the company as if the petition had been presented by all creditors and shareholders jointly. The winding up order ‘fixes’ the insolvent’s position as at the date when the petition was issued, and the rights of the general body of creditors, and not individual creditors, must thereafter be taken into consideration. This ensures the distribution of assets to creditors in a proper order of preference as at the date the liquidation commences, being the date of the presentation of the petition. Nothing may be done after the issuance of the winding up order by any of the creditors to alter the rights of it or the other creditors. No transaction can thereafter be entered in to by a single creditor to the prejudice of the general body.

The powers of the directors cease and the provisional liquidator (or if one is not appointed the Master of the High Court) takes custody or control of the company and its assets. The provisional liquidator will remain in control until such time as a final liquidator is appointed (at the first meeting of creditors) after the final order has been made.

Any disposition of the company property after the presentation of the petition is void, unless the court orders otherwise. Therefore, any attachment or execution put in force against the assets of the company after the presentation of the petition are also void. Should any assets be sold following the presentation of the petition these funds are assets of the company in liquidation and must be handed over to the liquidator for the benefit of the body of creditors. The creditor who sold the assets would have a claim against the estate and would need to follow the ordinary procedure of submitting a claim and being paid a dividend if one was payable. Should the creditor fail to do so the liquidator is entitled to take action to recover these funds in full from the creditor.

Any legal action against the company is stayed, except with leave (i.e. permission) of the court. In addition, no new legal proceedings may be bought against the company without leave of the court.

The Companies Act provides that the assets of the company in liquidation shall be applied in payment of the costs, charges and expenses incurred in the winding up and of the claims of creditors, as they would under the law relating to insolvency i.e. as determined by the Insolvency Act. The fees for a liquidator (and provisional liquidator) are paid from the assets of the estate as a cost of administration prior to the payment of any claims of creditors. Once all the assets have been realised and if there are sufficient funds available the liquidator may declare a ‘dividend’. The dividend will be a percentage (Thebe in the Pula) of each creditor’s total admitted claim, based on the cash available for distribution to proven creditors and the total of the creditors’ claims.

Any person or business owed money by the company that has been wound up is a creditor of the company and has a claim against the company. This claim is legally protected. However, the value of the claim in all likelihood will not be equivalent to the amount eventually realised and in fact may be worth little.

In order for a creditor to participate in a liquidation process he/she must establish his/her right to do so. Any claim submitted will either by “proven” (i.e. admitted against the estate) or rejected. The method for doing so is for a creditor to submit a claim form and for it to be proven in accordance with the requirements of the Companies Act.

Creditors have two main opportunities to submit a claim against an estate for a company wound up by the court and that is at the first and second meetings of creditors.

Payment to creditors at the end of the liquidation process is done in strict order based on priority of payment of creditors. In simple terms creditors are paid in the following order secured (up to the value of security), preferred (employees followed by monies due in respect of taxation on income or profit) followed by concurrent creditors (ordinary trade and other creditors).

The liquidator is required by law to prepare a report for creditors which he or she is required to submit at a meeting of creditors (if there are contributories a report would also be prepared for contributories). In practice the liquidator normally sends this report to creditors in advance of any meeting of creditors and then summarises at the meeting of creditors and presents any update as to actions and developments in the period since the date of the report and the date of the meeting.

Liquidators are required to investigate the affairs of the company. This investigation includes the formation, promotion and management of the company as well as whether proper books and records have been maintained. The liquidator must report to creditors on the outcome of these investigations and whether these investigations have or will lead to potential recoveries for the benefit of the estate.

The duties of the directors cease upon the granting of a winding up order for a compulsory winding up or upon the special resolution. They are replaced by the liquidator and they are removed from the management of the company. However, directors continue to have obligations under the Companies Act after the company is in liquidation but retain only vestigial powers.

The Companies Act makes provision for the liquidator (and others including the Master) to make an application to court for an order to disqualify the directors either as a result of inter alia being guilty of fraud or for acting in a reckless or incompetent manner. Any director that is disqualified may not take part in the management of a company for a period of five years. Perhaps more importantly, for those companies that are in liquidation if the directors are found guilty of an offence then in addition to the penalties the directors may be held liable for the debts of the company. The court may find the directors liable for the debts of the company even if an application for disqualification is not sought.

 

Members’ Voluntary Liquidation

A members’ voluntary winding up is a liquidation where the company is solvent and the directors are in a position to swear the company has no liabilities (and provide a certificate from the auditors confirming same) or provide security to the satisfaction of the Master of the High Court that all debts will be settled within 12 months of liquidation. The furnishing of security or the sworn statement must be made before the passing of the resolution to wind up. The statement should include a statement of the company’s assets and liabilities as at the latest practicable date. A director making such a sworn statement without having reasonable grounds for doing so may be guilty of an offence. If security is neither provided nor dispensed with then the winding up following the passing of the special resolution is classified as a CVL even if the company intended it to be an MVL.

 

Creditors’ Voluntary Liquidation

A creditors’ voluntary winding up is a liquidation where the company is insolvent and the company resolves by special resolution to wind itself up.

In a CVL the appointment of the liquidator is ultimately controlled by the creditors as they are likely not be paid in full (or within a period of 12 months) therefore they are directly affected by the liquidation. As a consequence a meeting of creditors must be convened by the company. This is required to be on the day or the day after the meeting of the members at which the resolution is taken to wind up the company. Members, after taking the special resolution to wind up the company, appoint a liquidator. If there is a difference between the liquidator appointed by the members and the one appointed by the creditors at the meeting of creditors then the creditors appointment stands.