Navigating financial services insolvency: Insights from Corporate Insolvency, Restructuring ACT, 2020 (ACT 1015)

 

By  Yaw SOMPA

This paper examines Ghana’s Corporate Insolvency and Restructuring Act, 2020 (Act 1015), analyzing its interaction with the Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930), and the Insurance Act, 2021 (Act 1061). It reviews the legal framework for addressing distressed financial institutions, focusing on the roles of administrators, receivers, and liquidators. The paper addresses some challenges faced by Ghana’s financial services sector, particularly in the banking and insurance industries, in navigating insolvency.

Additionally, the paper emphasizes the significance of netting agreements in managing counterparty risk during insolvency, especially for complex financial instruments like derivatives and swaps. It argues that restructuring typically presents a more cost-effective alternative to liquidation. The paper concludes with recommendations for practitioners and policymakers to prioritize restructuring and administration as strategic tools to strengthen the resilience of Ghana’s financial sector.

Following Ghana’s 2017-2019 Financial Sector Crisis and the series of financial services resolutions, it has become evident that financial services are not indeed too big or too safe to fail.

The events of 14^th August 2017 which was initially thought of as an isolated ‘failure’ of two banks evolved to become a story of 420 financial institutions regulated by the Bank of Ghana, with an estimated resolution cost of GH¢26.05 billion—around 7.45% of GDP.[1] This estimate excludes the closure of 50 Fund Management Companies regulated by the Securities and Exchange Commission, which accounted for an additional claim value of GH¢10.83 billion.[2]

It has often been suggested that in financial markets the cost of bankruptcy is often grossly overestimated because assets of failed institutions do not vanish—they simply change hands, but the reality remains that in the complex world of financial services, insolvency poses significant challenges the economy and the financial market in general.

Financial services insolvency occurs when a financial institution, such as a bank or an insurance company, is unable to meet its obligations. The impact of such insolvencies can be far-reaching, affecting not only the institution itself but also the customers, employees, and the broader economy.

This article explores key legal frameworks in search for insights from financial services resolutions and how they align with the provisions of the Corporate Insolvency and Restructuring Act, 2020 (Act 1015) of Ghana. The paper hopes to offer a comprehensive understanding of financial services insolvency and resolution pathways as set out within the law.

Ghana’s Legal Framework

The Corporate Insolvency and Restructuring Act, 2020 (Act 1015) is the primary legislation that provides for administration and official winding-up of companies. Section 1 of Act 1015 provides that, ‘The purpose of this Act is to provide a legal regime for a distressed company in a manner that provides an opportunity for the company to as much as possible continue in existence as a going concern.’[3]

The law further provides for ‘the temporary management of the affairs, business and property of a distressed company’[4], ‘the development and implementation of a restructuring plan which results in a better return for the creditors and shareholders of the company that would result from the immediate winding-up of a distressed company’[5] and ‘the official liquidation of a body corporate’[6] amongst other things.

The Act 1015 however in defining the scope of applicability provides that, ‘Subsection (1) does not apply to companies carrying on the business of banking, insurance or any other business which is subject to special legislation, except where the special legislation does not provide for a rescue provision’.[7]

To therefore, fully appreciate the scope of the legal regime for financial sector insolvency, we will have to resort to the specific laws the guide the individual industries in the financial sector.

Banks and Specialised Deposit Taking Institutions

The Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) is the law that regulates the business of banking and deposit-taking in Ghana. Sections 107 to 122 of Act 930 provide for ‘Official Administration’ of a bank or Specialised Deposit-Taking Institution whiles Sections 123 to 139 provide for ‘Receivership and Liquidation’ of Institutions licensed under Act 930. The Insolvency Regime for Banks and Specialised Deposit-Taking Institutions therefore provides for both Official Administration and Receivership.

Administration within Banks and Deposit-Taking Institutions

Section 107 of Act 930 provides that,

The Bank of Ghana may appoint an official administrator for a bank or a specialised deposit-taking institution where,

• the Bank of Ghana determines that that bank or specialised institution

  • contravened a provision of this Act, the Regulations,

  • engaged in any unsafe or unsound practice, in a manner as to weaken the condition of the bank or

  • seriously jeopardised the interest of depositors or dissipated assets of the bank or specialised deposit-taking institution.[8]

The Administration regime in banking may therefore be originated by the Bank of Ghana who is empowered to make the appointment of the official administrator. This position is contrasted with the law under the Act 1015, ‘An administrator may be appointed by (a) the company; (b) the liquidator, where the company is in liquidation; (c) a person holding a charge over the whole or substantially the whole of the property of the company or the receiver appointed by the person; or the Court.’[9]

Unlike the general insolvency regime where ‘a company may appoint an administrator where the directors resolve that the company is insolvent or is likely to become insolvent in the opinion of the directors voting for the resolution’[10], under the banking insolvency regime, the Bank of Ghana appears to be given the exclusive mandate to appoint the administrator with a mandate to inform the bank.[11]

The more difficult legal question that arises is ‘can a bank or specialised deposit institution make a decision to submit to administration without the Bank of Ghana?’. The authors answers in the negative and says if an institution is inclined to submit to administration, it may require an approval from the Bank of Ghana, but in a circumstance where the process for administration is initiated by the Bank of Ghana, the law obligates the Bank of Ghana to inform the said institution justifying the decision with reasons.

It is also noteworthy that the duration of an administration under Act 930 is fixed under law. ‘A bank or specialised deposit-taking institution may remain in official administration for a period of six months in the first instance; and for two consecutive periods of three months each.’[12]

The powers and functions of the administrator as provided under Section 108(1) of Act 930[13] mandates the administrator to act as shareholders, directors, and key management and may request that shareholders, directors, and key management carry any activity in accordance with law, although the administrator remains accountable to the Bank of Ghana.

Where the Bank of Ghana appoints an administrator, he shall have the obligation to ‘secure the properties, offices, assets, books and records of the bank or specialised deposit-taking institution involved’[14] and ‘shall have unrestricted access to, and control over the properties, offices, assets and the books of account and other records of the bank or specialised deposit-taking institution’[15].

The Official Administrator has the obligation ‘not later than thirty days after the appointment of that official administrator, prepare and deliver to the Bank of Ghana an inventory of the assets and liabilities of the bank or specialised deposit taking institution involved.’[16]

The Official Administrator is also mandated to take actions to increase capital by existing shareholders[17] or recapitalise the institution by new shareholders[18]. Finally, subject to the approval of the Bank of Ghana, the Official Administrator may carry out ‘a merger of banks or specialised deposit-taking institutions; or a transfer, in whole or in part, of the assets and liabilities of the bank or specialised deposit-taking institution.’[19] The Administrator also has authority to mandatorily ‘restructure the liabilities of a bank or specialised deposit-taking institution in accordance with this section without the approval of creditors or shareholders concerned’[20], of course with approval of the Bank of Ghana.

The option to restructure liabilities by the Administrator provides a very interesting and effective route for bank resolutions considering the research by Samuel Antill[21] which concludes ‘hasty liquidations cost creditors billions of dollars a year.’

The research by Antill used case information from Bankruptcydata.com, Bloomberg Law, Moody’s Investors Service, and the Federal Reserve Bank of St. Louis, Antill studied 503 nonfinancial companies, each carrying more than $50 million in debt at the time of default between 1987 and 2018.

The conclusion of the Antill’s study is significant, he concludes that ‘Restructuring is less costly. Rushing the process may be short-sighted for companies and creditors, costing both parties more in the long run’[22]

According to Antill’s analysis, ‘creditors would gain a potential 52 cents on each dollar owed when a company is restructured instead of liquidated.’[23] This means that 60 percent of the liquidations Antill studied cost creditors more than restructuring would have cost. ‘Over time, the missed opportunities add up, with inefficient liquidations and acquisitions costing creditors more than $2 billion per year.’[24]

Receivership within Banks and Deposit-Taking Institutions

The law provides that

where the Bank of Ghana determines that the bank or specialised deposit-taking institution is insolvent or is likely to become insolvent within the next sixty days, the Bank of Ghana shall revoke the licence of that bank or specialised deposit- taking institution. The Bank of Ghana shall appoint a receiver at the effective time of revocation of the licence and the receiver appointed shall take possession and control of the assets and liabilities of the bank or specialised deposit-taking institution.[25]

The general power of the Receiver is to be the ‘sole legal representative of the bank or specialised deposit-taking institution and shall succeed the rights and powers of the shareholders, the directors and the key management personnel of the bank or specialised deposit-taking institution.’[26]

Once a receiver is appointed for a bank or specialised deposit-taking institution, creditors’ claims are impacted by the suspension of claims, suspension of increase in the institution’s liabilities, stay of proceedings against the institution, stay of enforcement actions against the institution under Section 128 of the Act 930. The priority in payment of claims under the Act 930 is set out under Section 135(1):

1. Secured claims (extent of realisation or delivery of the asset)

2. Expenses of the receiver and the Bank of Ghana

• Payments made by the responsible institution under the Ghana Deposit Protection Act, 2016 (Act 931)

1. Credit granted by the Bank of Ghana until the appointment of the receiver.

2. Statutory amounts owed to the Government or to a municipality.

3. Employees’ wages or salaries

• Credits extended after the appointment of the receiver.

• Deposits not covered by payments from the responsible institution under Act 931

1. Compensation of employees not covered under earlier employees’ wages or salaries claim.

2. Unsecured credits extended before appointment of the receiver.

3. Subordinated debt

The discussions of secured claims and netting off is covered under the final subsection, it is however important to note that Section 13 of the Ghana Deposit Protection Act, 2016 (Act 931) provides for insurable deposits that are protected under liquidation scenarios by the Scheme set under Section 2 of Act 931.

Legal Framework under Insurance Act, 2021 (Act 1061)

A key insight for Insurance sector resolution in Ghana is that although the Act 1015 suggest the scope of applicability does not cover the insurance industry, the Insurance Act[27] allows for the application of Act 1015 to the extent not modified by the Insurance Act. The legal framework for liquidation in the insurance industry therefore must be read to include the Corporate Insolvency and Restructuring Act, 2020 (Act 1015), except to the extent varied by the Insurance Act.

For the purposes of Winding up an Insurer or Reinsurer, the law recommends a Petition to the Court as a legitimate avenue. A Special Resolution passed by the company itself to appoint a Liquidator shall be void[28] unless a petition is made to a court with service on the Commission[29].

Section 94(1) of Act 1061[30] provides that the process of liquidation must be preceded by an order by a court through the filing of a petition before the National Insurance Commission can liquidate an insurer or reinsurer. Although the Insurance Act uses the permissive word ‘may’, no other powers to appoint a liquidator is given to the National Insurance Commission and it appears a Petition to a Court to liquidate a licensed Insurer or Reinsure is the Regulator’s only legitimate route for appointment of a liquidator.

The Court is granted the mandate in equity to restructure insurance contracts where during the hearing of the petition for liquidation the court comes to the conclusion that the Insurer is insolvent.[31] Upon the appointment of the liquidator, the liquidator of a long-term insurance business may agree to the variation of the insurance contracts, but it may not effect any new contracts.[32]

For purposes of priority during the liquidation process, the Insurance Act[33] indicates that, after payment of the properly incurred costs and expenses of liquidation, priority must be given to all other claims in satisfying the liabilities of the company under insurance contracts. It appears that, the liquidator is only mandated to pay any other of liability only after satisfying insurance contracts. If assets available exceeds the liabilities after priority is given to insurance contracts, then the distribution shall be in accordance with the Corporate Insolvency and Restructuring Act, 2020 (Act 1015).[34]

The National Insurance Commission may however appoint a ‘Statutory Manager’ under Sections 99 to 108 of the Insurance Act. The Statutory Manager shall have the authority to ‘prevent or limit the risk that the failure of the licensed insurer or licensed reinsurer will cause to the financial system’.[35]

Finally, ‘during the period of statutory management, the statutory manager has control of, and shall manage, in whole or in part, the business, assets, liabilities and affairs of the licensed insurer or licensed reinsurer as the Commission shall determine.’.[36]

Netting Agreements and the Corporate Insolvency and Restructuring Act

Finally, Sections 165 and 166 of the Corporate Insolvency and Restructuring Act, 2020 (Act 1015) provide for the recognition and enforcement of Qualified Financial Contract with netting agreements[37]. Qualified Financial Contracts are defined to include a ‘financial agreement, contract or transaction which provides for a term or condition incorporated into the agreement by reference to another contract or transaction, pursuant to which payment or delivery or obligations are due to be performed at a certain time or within a certain period of time’[38] such as swaps, forwards, derivatives, etc.

The law provides that, ‘where a qualified financial contract contains provisions of a netting agreement, the netting agreement is enforceable in accordance with the terms of the contract including enforcement against an insolvent party and where applicable, enforcement against a guarantor or any other person who provided security for the insolvent party.’[39]

The protection afforded netting agreement under the Act 1015 is so strong that it shall not be stayed or avoided or even limited by ‘an action of a liquidator, any other enactment relating to bankruptcy, re-organisation, composition with creditor, receivership or any other insolvency proceedings that the insolvent party may be subject to; or any other enactment that may be applicable to the insolvent party.’[40]

The recognition of netting agreements by the Act 1015 has become a useful tool during liquidation of financial services companies. Netting agreements allows for the consolidation of multiple mutual obligations into a single net balance. This simplifies the process by reducing the number of transactions that need to be settled individually and helps offset mutual debts.

Netting reduces the overall exposure to credit risk during a liquidation process. This is particularly important in a liquidation scenario where the financial stability of the parties involved may be uncertain. Netting is widely used financial services agreement, including securities or currency trading, inter-company transactions and in International Swaps and Derivatives Association (ISDA) Master Agreement.

The International Swaps and Derivatives Association (ISDA) Master Agreement is a standard document used to govern over-the-counter derivatives transactions. It includes provisions for netting, which are crucial for managing counterparty risk.

The Bank of Ghana through its Guideline for Repos in Ghana[41] adopts the Global Master Repurchase Agreement[42]. Repurchase Agreements therefore according to Bank of Ghana must have at the minimum provisions for ‘events of default and consequential rights and obligations of the parties to the transactions including provision on close- out netting and full close-out netting of claims between the parties to the transaction in an event of default.’

Conclusion

The paper was premised on the legal proposition that the Corporate Insolvency and Restructuring Act, 2020 (Act 1015) provides in scope to exclude companies carrying on the business of banking, insurance or any other business which is subject to special legislation. After a careful examination of the legal framework governing financial services resolution both under Act 930 and Act 1061, one cannot wholly conclude the legal premise of this paper to be true.

The importance and sanctity of the financial and banking sector are considered in the Corporate Insolvency and Restructuring Act, 2020 (Act 1015) by the recognition of netting agreements and other qualified financial instruments such as swaps, derivatives, and spot agreements thus allowing them to be ringfenced and fundamentally protected from insolvency or restructuring proceedings.

The Act 1015 has therefore not wholly removed the impact financial services agreements during liquidations from its scope, it appears to have consolidated it. By recognising Netting Agreements, certain creditors have been given priority over others by allowing them to offset mutual obligations before the remaining assets are distributed.

Finally, the legal framework for financial services resolution provides for administration or statutory management as well as it may provide for liquidation or receivership. This paper has established that the choice for administration and restructuring may at all times be a better approach than liquidation, it is therefore recommended that practitioners and policy makers to emphasize administration and restructuring as the more effective resolution pathway to advance the health of Ghana’s financial services industry.

Yaw is an  Insolvency Practitioner and Member of the Chartered Institute of Restructuring and Insolvency Practitioners (CIRIP) Ghana

[1] Ministry of Finance (2022), ‘Short-term consultant to support Bank of Ghana Resolutions Office’, accessed at < https://mofep.gov.gh/adverts/2022-09-27/request-for-expressions-of-interest-gh-mof-fsd-315018-cs-indv#:~:text=The Banking Sector Clean-up,in a state of distress.> on 24 August 2024.

[2] Security and Exchanges Commission Press Release on Fund Manager Revocation and Bailout.

[3] Corporate Insolvency and Restructuring Act, 2020 (Act 1015) CIRA 2020, s 1(1)(a).

[4] CIRA 2020, s 1(1)(b).

[5] CIRA 2020, s 1(1)(d).

[6] CIRA 2020, s 1(1)(e).

[7] CIRA 2020, s 1(3).

[8] Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) (BSDTIA 2016), s 107 (1) (a)(i), (ii), (iii).

[9] CIRA 2020, s 3(5).

[10] CIRA 2020, s 3(7).

[11] BSDTIA 2016, s 107(2) ‘Where the Bank of Ghana takes a decision to appoint an official administrator for a bank or specialised deposit-taking institution, the Bank of Ghana shall, by notice in writing setting out the reasons for the decision, inform that bank or specialised deposit-taking institution of the decision.’

[12] BSDTIA 2016, s 107(3).

[13] ‘The powers, functions and responsibilities of the shareholders, directors, and key management personnel of a bank or specialised deposit-taking institution shall be vested in the official administrator.’

[14] BSDTIA 2016, s 113(1).

[15] BSDTIA 2016, s 113(2).

[16] BSDTIA 2016, s 114(1).

[17] BSDTIA 2016, s 115.

[18] BSDTIA 2016, s 116.

[19] BSDTIA 2016, s 117(1)(a)(b).

[20] BSDTIA 2016, s 118(1).

[21] Racheal Layne, ‘Bankruptcy Spells Death for Too Many Businesses’, July 2021, Harvard Business School, accessed at < https://hbswk.hbs.edu/item/why-bankruptcy-spells-death-for-too-many-businesses> on 26^th August 2024

[22] ibid

[23] Ibid.

[24] Ibid.

[25] BSDTIA 2016, s 123 (1)(2)(3).

[26] BSDTIA 2016, s 127.

[27] Insurance Act 2021 (Act 1061) (IA), s 92.

[28] IA 2021, s 93.

[29] IA 2021, s 95.

[30] The Commission may present a petition to the Court in accordance with the Corporate Insolvency and Restructuring Act, 2020 (Act 1015) for the official liquidation of a (a) licensed insurer, (b) licensed reinsurer, or (c) company that is carrying on or that has carried on unlicensed insurance business.

[31] IA 2021, s 96.

[32] IA 2021, s 97.

[33] IA 2021, s 98.

[34] IA 2021, s 98(3).

[35] IA 2021, s 99(1)(b)(i).

[36] IA 2021, s 99(4).

[37] CIRA 2020, s 165(1):

Section 165(1)- Parties to a qualified financial contract shall, where a party becomes insolvent, treat the qualified financial contract in accordance with this Act, the Securities Industry Act, 2016 (Act 929) and the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) or any other applicable enactment. (2) Subsection (1) does not apply to a qualified financial contract where the qualified financial contract contains a netting agreement. (3) A netting agreement shall not (a) be regarded as a creditor claim; and (b) affect the ranking of claims or distribution of dividends to creditors during insolvency.

^[38]  CIRA 2020, s 166(3).

^[39] CIRA 2020, s 166(1).

[40] CIRA 2020, s 166(2).

[41] Bank of Ghana, 2019, ‘Guideline for Repos in Ghana’ accessed at < Global-Master-Repurchase-Agreement-Document-1.pdf (bog.gov.gh)> on 26^th August 2024.

[42] The Global Master Repurchase Agreement (2011 version) (‘GMRA’) shall be the Master Agreement that shall govern the trading of repos in Ghana in its unamended form.  All the directives contained in these guidelines are binding on eligible counterparties and serve as regulatory guidance for repo activity trading in Ghana.

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