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Ideas & Debate

Why new insolvency law should comfort investors

ARM cement
ARM cement has been placed under administration. FILE PHOTO | NMG 

ARM Cement Plc #ticker:ARM now becomes the second-high profile administration case under the current Insolvency Act, 2015, which came into force on January 18, 2016. ARM Cement was placed under the administration of PricewaterhouseCoopers (PwC) on August 17, 2018 by its lenders.

It now joins Nakumatt Supermarkets, the first high profile company to have fallen into the Act’s jurisdiction.

However, ARM’s case is unique given that it is a public company. Indeed, trading on the company’s stock has since been suspended. Obviously. However, for investors, who have probably been spooked by the suspension, there are certain interesting facets of the relatively new Act worth taking into consideration.

First, unlike its predecessor, the Companies Act, it is quite progressive and its pronouncement on a company doesn’t automatically imply a call for hammer on the company’s assets. Instead, the main objective of the Act is to maintain a company as a going concern. Consequently, at the core of it, resuscitating a business is main deliverable of the administrator.

To support this objective, the Act has done away with the office of the receiver and replaced it with the office of the administrator. As set out in Section 522(1) of the Act, the administrator has three objectives: (i) maintain the company as a going concern; (ii) achieve a better outcome for the company’s creditors as a whole, than would likely to be the case if the company were liquidated (without first being under administration); and (iii) to realise the property of the company in order to make a distribution to one or more secured or preferential creditors (and this is only applicable in the event that the business resuscitation is unsuccessful.

Secondly, the Act offers some form of protection to a company. Section 560(1) (a) provides that in the administration period, a security over the company’s properties is only enforceable with the consent of the Administrator or approval of the Court.

Essentially, if a creditor had registered a charge on a company’s properties — both moveable and immovable, realising such a charge requires some pre-approval.

Additionally, during the business resuscitation period, which is initialed at 12 months, with the option of extending for a further six months (at the Court’s behest), the debtor is handed a reprieve from having to immediately honour creditors’ demand notices. For ARM Cement especially, this means that the company’s core business of producing and selling cement remains unencumbered.

Thirdly, the Act envisions that the Administrator(s), while primarily representing the interest of the creditor(s), will act in good faith to the company. Speculatively, the Act immerses the administrative receiver’s skin into the game—akin to having an equitable share. Consequently, the administrator, in the course of retooling a company’s operations, is largely expected to exercise due care.

For investors, this is probably the most progressive insolvency regime as it offers protection to a company by not automatically calling the bell on its assets. Further, a company’s going concern is preserved. However, this calls for grit, focus, good faith and reasonable care on the part of the administrator.

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