Legal education: Voluntary winding up and reorganisation |25 May 2020

How businesses could survive COVID-19

Many companies and individuals are wondering what happens if they can’t meet their expenses over the coming months. The only way to answer that is to explain what options are available under the law.

When you can meet your expenses, you are referred to as ‘Solvent’ and when you reach the point where this is no longer the case then you are referred to as ‘Insolvent’. The most important point in this exercise is to look at your income compared to your expenses to see where you stand.

If this is at all a concern the first step is to look at your expenses and to see where you can make some reductions. The main expenses are usually rental expenses, mortgage and charge repayments and payroll.

Rental expenses can be reduced by mutual agreement by negotiating with your landlord to see whether any agreement can be reached. If the rental is still too high then a tough decision will need to be made to give notice to terminate the lease and either give up renting for the time being or downsize to a cheaper rental.

If bank repayments are also a large part of your expenses, do not default on payments. Go and speak to your bank – make it the first thing you do! There are a number of ways the banks can assist you and they will be more willing to assist if you have come to them before defaulting. Your mortgage repayments can be extended, if you took out a loan for 10 years, this can be extended to 15 years as an example, so that your monthly repayments are less. Another example is to ask for a grace period on your repayments or even take out another loan at a much lower interest which will be offered soon by commercial banks to assist with payments to the Seychelles Revenue Commission (SRC), payroll etc.

If another one of your main expenses are payroll, prioritise Seychellois jobs. Encourage workers to take their annual leave or even unpaid leave if possible. Both these options must be mutually agreed and not forced on the employees. The Employment (Amendment) Bill No.19 of 2020 as proposed and as amended allows for employers to apply for the redundancy of the employment contracts of non-Seychellois workers.

If you feel you have a good business, then approach private investors to see whether they are willing to invest in your business in the form of a loan or in exchange for shares or both.

You need to decide whether you have a short term cashflow issue of a few months or a longer-term problem. If your short-term problem cannot be resolved or if you have a longer term cashflow problem you need to decide whether you will inevitably become Insolvent.

If you are looking at Insolvency, the law has set out a few ways that can assist. One way is to file for voluntary winding up of companies, which is when the company decides that there is about to be no money to carry on. What happens is that the courts form a protective ring around the company so that no creditors can seize any assets and there is an organised and predetermined way for payments to be made from the sale of company assets. The laws set out who gets paid first and in what order. If the company doesn’t choose this option, a creditor (someone to whom you owe money) can apply to the court for this to happen. The creditor will then be able to control how the proceedings start off. The same principles apply to a person who cannot pay his debts, this process is then called Bankruptcy.

Another often overlooked option is Company Reorganisation; this is used when your business still has value and could carry on but with reduced debt. The aim is to reduce your debt so that your business can survive. Using this procedure affords your company protection from creditors until you can put together rescue plan that your creditors agree with. Generally, it will involve all of the cost reducing options discussed plus additional incentive for your creditors to agree. This can be in the form of exchanging part of your debt for shares, extending your repayment term in exchange for a higher interest, refinancing your existing loans, supplying your creditors with extra security on assets... Remember, the biggest incentive is that most creditors will be paid more with this option than with the alternative of Winding Up. With Reorganisation the business carries on and can keep on generating more money whereas with Winding Up/Bankruptcy that is the end of the road. The company will no longer exist afterwards.

Don’t run your business or your personal finances into the ground, save in the short term to make a comeback in the long run. You have a legal responsibility as a person, a business owner or a director to stop trading before you become insolvent. Look at your options, speak to legal, accounting and auditing professionals equipped to help you.

A word of caution – the above are very general guidelines, each of your circumstances are different and even small differences often lead to different conclusions. It is therefore a MUST for each person to seek legal advice in any law related matter before making any decisions.

Send us your questions about this topic or any other topic and we will look for answers.

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