Business liquidation: why is it expensive to close business in Uganda?

 

When you are young, so many ideas are flying in your head and you see opportunities everywhere you turn. To take advantage of the envisaged opportunities, you open a business, book a company name and register, obtain a Tax Identification Number (TIN), get a KCCA trading license, and open for business feeling happy about formalizing the business.

In these Coronavirus times, many businesses are struggling. Some leaders are taking the honourable decision to close the business to avoid accumulating further obligations and costs. Some business lines are just not good around these tough times. When the business owners decide to wind up voluntarily due to poor growth prospects, it should be supported by all involved.

However, the Insolvency Act, 2011, laws of Uganda, makes the process of voluntary winding up so expensive. In Uganda, there are both voluntary and involuntary procedures for winding up a company.

  1. voluntary liquidation;
  2. creditors’ voluntary liquidation;
  3. members’ and creditors’ voluntary liquidation;
  4. liquidation subject to supervision by the court;
  5. liquidation by the court;
  6. provisional administration;
  7. compromise or arrangement with creditors;
  8. reconstruction or amalgamation;
  9. voluntary winding-up;
  10. administration; and
  11. corporate receivership

Regardless of any of the types of procedures for winding up, a liquidator must be appointed. Only licensed and approved liquidators must be appointed.

Below is an extract from a detailed article about the topic, explaining the voluntary winding up:

Voluntary Winding-up

Voluntary winding-up of a company can take place when a company is not insolvent or unable to pay its debts but decides of its own volition to wind up and cease to operate as a going concern.

Voluntary winding-up commences when the board of directors resolves the following at a board meeting:

  • to make a declaration of solvency that the directors, having made a full inquiry into the affairs of the company, have formed the opinion that the company will only be able to pay its debts in full within a period not exceeding 12 months from the commencement of the liquidation; and
  • to make a statement of the company’s assets and liabilities at the latest practicable date before making the declaration of solvency.

The company then delivers a declaration of solvency and a statement of its assets and liabilities to the Registrar of Companies and a copy is given to the Official Receiver for registration (Section 271(2)(b) of the Companies Act, 2012).

Thirty days from the date of registration of the declaration of solvency and statement of the company’s assets and liabilities has been given to the Registrar of Companies, the company shall call an extraordinary general meeting to pass a special resolution for voluntary winding-up, the appointment of a liquidator and fixing the remuneration of the liquidator (Section 268(1) of the Companies Act, 2012).

Seven days after the passing of the special resolution for voluntary winding-up, the company shall register the resolution for voluntary winding-up with the Registrar of Companies and give a copy to the Official Receiver (Section 269(2) of the Companies Act, 2012).

Within 14 days of passing the resolution for voluntary winding-up, the company shall issue a notice of the resolution in the Gazette and a newspaper with wide national circulation (Section 269(1) of the Companies Act, 2012).

The appointed liquidator shall then call a general meeting of the company to present an account of the liquidation, showing how the liquidation was conducted and how the property of the company was disposed of, and to give any required explanation (Section 67(1)(a) & (b) of the Insolvency Act, 2011).

The notice calling the aforementioned general meeting shall be published in the Gazette and a newspaper of wide circulation stating the time, place, and the object of the meeting at least 30 days before the meeting (Section 67(2) of the Insolvency Act, 2011).

Thirty days or more from the publication of the notice to call the general meeting, the liquidator shall hold the meeting.

Within 14 days of the general meeting, the liquidator shall:

  • send a copy of the account to the Registrar of Companies; and
  • make a return of the general meeting and its date to the Registrar of Companies.

The Registrar of Companies shall then register a copy of the account and returns (Section 67(5) of the Insolvency Act, 2011).

Three months from the date of registration of a return, the company shall be taken to be dissolved (Section 67(6) of the Insolvency Act, 2011).

This process can be completed within six months.

The process is similar to the other types of winding up.

To download the detailed process from URSB, Members Voluntary Winding breakdown (1 download)

Just to involve the liquidator in the process, would cost Ugx. 6,000,000 (the US $1,650) professional fees payable to the liquidator, and another disbursement fees, Ugx. 4,580,000 (US $1,254). That is a total of over US $2,894. The procedure has more hidden costs.

Many small and medium-sized businesses could find it difficult to wind-up and close business. This means, they will continue receiving notifications to submit tax returns to Uganda Revenue Authority, and notifications to pay operating license fees to city authority, yet the companies ceased operations.

Why does the government make the process of winding up expensive and cumbersome? Why not define the categories of the companies in terms of size, type of industry, and the minimum procedures to follow that are adequate? Why require a small SME to go through the same compulsory process as a highly regulated bank?

When laws provide for impractical provisions many people tend to cut corners. And it never good for all concerned.

I know the liquidation procedure is there to protect creditors and other shareholders against loss. Whereby no company should voluntarily wind up without the knowledge of the creditors and other stakeholders. In that case, providing for the publishing of the board of directors resolution to voluntarily wind up, and requiring anyone with a claim on the company to report to the registrar of the same within a defined timeline, would make the office more practical and relevant, and help earn some fees to the government coffers.

There is no law that is cast in stone and good regulatory regimes are always up-to-date with the times. A simpler and low-cost process to encourage SMEs to close businesses well would help clean a bloated registry and tax records. Failing to make the process affordable and swift risks having many people abandon businesses instead of officially closing them.

Copyright Mustapha B Mugisa, 2020. All rights reserved.

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