How addressing insolvency is key to improving Ghana’s business environment

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Following the passage of the Companies Act 2019 (Act 992), Ghana is stepping up efforts to pass a new insolvency law by the end of the year, as part of measures to further improve the business environment.

The Corporate Restructuring and Insolvency Bill is currently before parliament. If approved, it would provide a framework for the regulation of insolvency practitioners, facilitating more efficient and impartial insolvency proceedings as well as introducing a rescue culture through provisions regarding administration and restructuring.

In addition, it is expected to reduce the burden of insolvency by enabling a more equitable distribution of a failed company’s assets to creditors, along with providing a more structured framework for creditor participation in the insolvency process.

Highlighting the importance of the proposal, in August President Nana Akufo-Addo urged lawmakers to pass the bill before the end of the year, saying that it is key to the country’s business reform agenda.

The bill is seen as a counterpart to the Companies Act 2019, ratified into law in August, which replaced the previous version, from 1963. The new legislation aims to improve the business environment through an updated regulatory and governance framework, and is also expected to reduce the cost of business compliance.

See also: The Report – Ghana 2019

Improving the business environment

The measures form part of a broader attempt to address existing weaknesses in the business climate, and improve the country’s ease of doing business ranking in the World Bank’s “Doing Business” report.

Ghana was placed 118th out of 190 countries in the 2020 edition of the report, down four places on 2019. Highlighting the need to update insolvency legislation, the country was ranked 161st in the resolving insolvency metric, its lowest individual ranking.

In its analysis the World Bank calculated that creditors had an average recovery rate of 24 cents to the dollar at the end of insolvency proceedings. While this was above the sub-Saharan average of 20.5, it was well below the OECD high income average of 70.2.

In addition, Ghana was given a score of four out of 16 for the strength of its insolvency framework index, below the sub-Saharan average of 6.5.

“When the bill is passed and implemented, Ghana will leapfrog from our position as one of the weakest insolvency regimes to having one of the most modern and flexible insolvency and restructuring mechanisms in the world in the World, following the integration of international best practices,” Felix Addo, president of the Ghana Association of Restructuring and Insolvency Advisors, told OBG. 

Furthermore, Addo said that by providing flexible restructuring avenues for companies in financial trouble, the legislative proposals should help prevent some from collapsing. “Where other countries have settled on a maximum time for a business to be classified as undergoing restructuring, we found that the Ghanaian business environment is in need of a more open-ended approach to ensure the creation of a rescue culture.”

Complementing this, industry figures are hopeful that preventative measures should further strengthen businesses and improve confidence.

“Part of the insolvency division’s work would be to identify companies that are at risk of insolvency, and engage them before this occurs,” Audrey Kotey, managing partner of legal and professional services firm AudreyGrey, told OBG. “This preventive aspect will make the whole economy healthier and improve the business environment.”

Financial sector clean-up

The improved Companies Act and insolvency bills also coincide with ongoing efforts to clean up the country’s financial sector.

In mid-August the Bank of Ghana (BoG) announced that it had undertaken a fresh round of closures of financial institution, revoking the licences of 23 savings and loans companies that had been operating while insolvent.

Since launching its clean-up of the financial sector in August 2017, designed to address longstanding structural weaknesses in the market, the BoG has revoked the licences of around 420 institutions, including banks, microfinance institutions, finance houses and other non-bank financial institutions.

In addition, the central bank has implemented a series of measures to try to stabilise the sector.

In September 2017 it raised the minimum capital requirement for commercial banks from GHS120m ($21.7m) to GHS400m ($72.5m), while in August this year officials from the Securities and Exchange Commission outlined plans to increase the minimum capital requirement for fund managers by an order of 20, from GHS100,000 ($18,100) to GHS2m ($362,300).

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