DOING BUSINESS REFORMS
RDB Intensifies Campaign on Closing Business, Insolvency Law
Rwanda, one of the World’s best reformers in terms of creating a conducive Doing Business environment, according to the annual World Bank Doing Business rankings now looks at consolidating the achievements as she fixes other areas it falls short. In Africa, it is only Mauritius and South Africa that come ahead of Rwanda in terms of being a safe haven for Doing Business. Thanks to the Rwanda Development Board (RDB), specifically the Doing Business Unit for the tireless efforts vested in keeping the ear on ground, across all economic sectors of the economy to provide innovative business solutions that aptly respond to indicators of various World Bank rankings.
However, in the WB Doing Business 2012 report, released late last year, Rwanda did not perform well on “Closing Business” indicator—was ranked 165th out of the 183 economies of the world. This is in spite of the fact that the Insolvency Law was passed in 2009.
The Insolvency Law empowers the Office of Registrar General to oversee the filing of insolvency cases. As such, Ms Louise Kanyonga, the Registrar General is also the Chief Administrator of the informal proceedings in handling of Insolvency cases in Rwanda. But, the commercial courts are constitutionally mandated to handle insolvency cases.
Ms Kanyonga said it is important to; first of all, distinguish between closing a business and insolvency. “Whereas closing a business is voluntary, where the owner decides to stop due to personal reasons like conflict of interest or not having enough time or passion or experience in doing a particular business, Insolvency is when the owner MUST close business because he/she is no longer able to pay his debts-a situation where liabilities far exceed assets,” she clarified during a recent interview with Hope magazine. She said that even the World Bank has just revised this indicator of Closing Business to now “Resolving Insolvency” because contextually, Closing Business is much wider as opposed to Insolvency which can easily be managed through a company audit.
INSOLVENCY: Procedures & Responsibility
Mr. Karim Tushabe, the Legal Consultant Doing Business Unit explains that the procedure of filing for Insolvency starts by making a formal application to the courts of law (commercial court).
Not anybody can file for insolvency. The law allows for four categories of people to do so, namely; Creditors, Debtors, Member of Board and Registrar General. In principles of law, parties to any case must have interest in it. Thus, the Registrar General protects the interest of the state. Creditors or debtors protect their own interests, whereas the Board Members protect the interests of the company.
Mr. Karim observes that when some companies close informally, it is to their disadvantage because Tax authorities will still keep them in the systems as operating entities. “Tax obligations and penalties will continue to accumulate yet closing a company formerly is simple and free”, he sensitized. For instance, if the company has bank loans, interests will continue to accumulate, thinking that the company is still in operation.
To creditors or suppliers, closing the business formerly helps (the supplier) to stop supplying to a dying company to avoid incurring more losses. Again, a creditor will find it easier to recover his/her money basing on the order/directive issued by the commercial court.
Often, people think of the negative aspects of winding up the company, yet according to Mr. Karim there are numerous benefits to it. He explains: “The law provides for reorganization or restructuring the company, as an alternative to insolvency. The company can be structurally weak but financially viable”.
When a company is declared insolvent, liquidation will ensue and this will stop it (company) from accumulating losses.
At Policy Level
In an interview Mrs. Kaliza Karuretwa, the Director General of Trade and Investment Climate at the Ministry of Trade and Industry (Minicom) she explained that the Insolvency Law was developed in a consultative manner.
She explained that the law is the best in the region because it incorporates a number of modern concepts.
Rwanda’s Insolvency law incorporates some of the best practices, compared to the ones in the region. In practice, when a company files for insolvency, an Administrator is appointed to go and look at the company affairs—the creditors, management and shareholders. The unique good thing about the law is that it provides for two options; either liquidation or restructuring. In the later option, which is more ideal, the administrator goes ahead to propose the company restructuring plan to bring the company back to life again—which is now a modern practice of handling insolvency globally.
Kaliza said that Minicom is now engaged in an aggressive sensitization campaign intended to popularize the law. “We are targeting legal practitioners like Judges and Bar Association. We’re now going beyond that to reach out to the business community at district level”. This, the ministry does together with other commercial laws.
In doing so, Mrs. Kaliza observes that: “People are generally shy about filing for insolvency…because, understandably, it is a new concept. It is a mindset issue; they relate it to committing crime” she said. She believes that creating more awareness will improve people’s perception about the law.
At the moment Mr. Karim explains that the number of insolvency cases filed in commercial courts is increasing steadily. In fact, in 2010-2011 about 14 insolvency cases were filed and so far about four cases this year, confirms Mr. Karim. “We continue to register increasing enquiries about the law is, an indication that people have began to appreciate the law,” he observed.
The President of Supreme Court, Justice Johnston Busingye confirms that Rwanda’s court system has enough capacity to handle cases of all nature, including Insolvency (cases).
The issue at hand is; the culture of filing for insolvency among companies needs to be developed.
Notably, Registrar Louise believes there is need to do an empirical study to establish why insolvency is not a common business practice among the corporate fraternity in Rwanda. But, she generally observes: “It has some cultural stigma attached to it. I think it is one of the significant reasons”.
Besides, being a new law, there is need for more sensitization and capacity building for people to appreciate that filing for insolvency or closing a business formerly is beneficial to their businesses. The Office of Registrar aims to reinforce the system by establishing a mechanism that encourages businesses to file for insolvency.
Under the insolvency law, and specifically in the company’s act, it is an obligation on the part of Directors to as soon as they realize that the company is running insolvent to report it, and dock trading. Failure, it imposes liabilities on them (Directors) and there are penalties as determined by court.
According to the law, failure to declare insolvency tantamount to violation of the law.
Aggressive Awareness Campaign in Offing
Louise says a comprehensive communication strategy on has been developed by RDB intended to sensitize the masses to appreciate the benefits of formerly closing the company or filing for insolvency.
The strategy brings on board all stakeholders; including ministry of trade and industry (Minicom), representative of the private sector, ministry of justice and the lawyers association (Bar). A steering committee has been established to elaborate the strategy. Evidently, it is now a priority of RDB’s Communications Unit and very soon there is going to be a series of various media engagements on insolvency. Among other initiatives involved (in the communication strategy) are; the establishment of an Information Desk at the RDB Business registration One Stop Centre, and the dissemination of a toolkit to assist companies in filing insolvency cases.
RDB is the chief implementer of most of the commercial laws, including insolvency law. As such, the institution is directly involved in the A-Z of handling insolvency, especially the informal proceedings. And, the Office of Registrar General is a point of reference. To effectively serve, the office of Registrar General will surely need reinforcement in terms of human capacity so it juggles it well, alongside other chores Minicom, the custodians of commercial laws, policies and strategies—is also a strong partner in sensitizing and promoting application of insolvency law in Rwanda. In case of any amendments in the law, policy or regulatory framework, Mincom’s interventions will be handy.
In the thick of chores, the Office of Registrar General also nominates private practitioners (lawyers) and recommends a list to the Ministry of Justice for approval. Handling insolvency is highly technical, thus it requires specialized legal skills and expertise. We anticipate some support, especially from development partners to build capacity of practitioners.
Justice Busingye has no worries on whether or not Insolvency Law will work. He however observes: “The only issue would be managing arbitration, which is a legal option open to companies and individuals. Otherwise, anything to be handled within the court system, we’re more than ready to serve”.
Preparations by Private Sector Federation (PSF) are in high gear and all is set for the official lunch of the first ever international arbitration centre—dubbed Kigali International Arbitration Centre (KIAC). The Centre aims to promote arbitration and other alternative modes of commercial dispute Resolution as viable options to state- run national courts, for obvious reasons, such as; reduced costs and time, confidentiality and preservation of relationship of the disputants. Mrs. Yvette Mukarwema, the Chief Operations Officer at PSF commends RDB for the efforts to encourage businesses file for insolvency and closing the businesses formerly.
Stimulating Good Corporate Governance Concurrently, RDB is elaborating a project on Corporate Governance aimed at encouraging companies to comply to the Company Act. In 2010, PSF also launched the code of business ethics which is intended to encourage businesses operate professionally. Under the Corporate Governance Project, Louise says that RDB will encourage companies to file periodical reports as stipulated in the Companies Act.
That way, RDB will be able to monitor compliance on Good Corporate Governance. “We do not expect companies to feel they are being policed, because at the end of the day such efforts benefit them. Who doesn’t want to operate a sustainable business on earth?”
In elaborating the RDB Corporate Governance project, Louise confirms they will be working closely with the 30 Business Development Services (BDS) centers in all districts of Rwanda.
This is to ensure that information reaches out to a wider part of business community. To this end, BDS Centres will soon take the lead in providing Good Corporate Governance Advisory services. Additionally, enough copies of a Handbook on Corporate Governance (in both English and Kinyarwanda) will be disseminated by RDB’s communications unit through BDS centers. BDS centers are currently being privatized and one of the conditions in the contract is to offer business registration services.