Insolvency occurs when a business cannot pay its debts on time or when its liabilities exceed its assets. This can arise due to poor financial management, changes in the business environment, or global economic challenges. When a company faces insolvency, it often turns to corporate restructuring as a solution. For more understanding on what insolvency is, kindly refer to our previous article on The Role of Insolvency Practitioners in Business Recovery.
In this article, we take a conversational approach to unpack the concept of Cross-Border Insolvency Proceedings, a topic that is becoming increasingly important in today’s global economy. Here are 10 straightforward questions and answers that explain cross-border insolvency proceedings:
Question 1: What is cross-border insolvency?
Answer: In simple terms, cross-border insolvency arises when a company or business with operations or assets in multiple countries becomes unable to pay its debts. In Ghana, Insolvency proceedings are regulated by the Corporate Insolvency and Restructuring Act, 2020 (Act 1015)(“CIRA”).
CIRA provides a framework for managing cross-border insolvency. The objective is to ensure that insolvency proceedings involving foreign companies are handled efficiently, fairly, and in a way that maintains legal certainty and investor confidence.
In line with this, cross-border insolvency proceedings apply in the following situations:
1. When a foreign representative or court seeks assistance in Ghana with a foreign proceeding; or
2. When a Ghanaian court or insolvency representative requires cooperation from a foreign country in connection with Ghanaian insolvency proceedings; or
3. Where parallel proceedings are happening in Ghana and a foreign country regarding the same company; or
4. When foreign creditors or stakeholders wish to initiate or participate in proceedings in Ghana tied to foreign insolvency actions.
Question 2: Is Ghana’s CIRA aligned with global standards?
Answer: Yes, Ghana took a significant step forward by codifying cross-border insolvency rules under Sections 101 to 116 of CIRA, largely inspired by the UNCITRAL Model Law on Cross-Border Insolvency. Therefore, CIRA recognizes insolvency proceedings in Ghana and cooperation between Ghanaian courts and courts in foreign jurisdictions.
Question 3: What happens if a foreign company with assets in Ghana goes insolvent?
Answer: The foreign company, through a foreign insolvency practitioner, can apply directly to a Ghanaian court. However, this restricts the court to the issues specifically raised in that application.
The two main options available to a foreign representative seeking assistance from the Ghanaian courts are:
1. Initiating Insolvency Proceedings in Ghana- The foreign representative may apply to commence insolvency proceedings, provided the requirements under Ghanaian law are met.
2. Seeking Recognition of a Foreign Proceeding- The foreign representative is required to be an insolvency practitioner from another country applying to the Ghanaian court for recognition of the foreign proceeding.
Once recognition is granted as a foreign main proceeding, the court can grant reliefs such as staying execution against the assets of the debtor, preservation of assets, and repatriation of assets abroad.
Question 4: What happens when a Ghanaian court recognizes a foreign insolvency proceeding as a “foreign main proceeding”?
Answer: A foreign main proceeding is a foreign proceeding taking place in the country where the debtor mainly operates his or her business. For companies, this is usually the registered office or headquarters, and for individuals, this is usually their residence.
Once a Ghanaian court grants recognition to a foreign main proceeding, the following automatic protections immediately take effect:
1. Any ongoing or new legal action against the debtor’s assets or obligations is immediately put on hold.
2. Creditors are barred from executing judgments or seizing the debtor’s property.
3. The debtor is prohibited from selling, transferring, or encumbering their assets during this time.
It is important to note that even though the above actions take effect, a creditor is entitled to start an individual legal action if it is necessary to preserve a claim against the debtor.
Furthermore, the recognition of a foreign main proceeding does not prevent a creditor from applying to start a new insolvency process in Ghana or from filing claims in any such local proceeding.
Question 5: Are the above restrictions absolute?
Answer: They are not, because there is room for flexibility. A creditor or any other interested party can apply to the court in Ghana to lift or modify the stay or suspension for a particular matter. The court has the discretion to grant such relief if it deems it appropriate, subject to any conditions it may impose.
Question 6: Is Ghana open to collaborating with foreign courts?
Answer: Yes, we are. Under CIRA, Ghanaian courts are mandated to ensure maximum cooperation with foreign courts and practitioners, either directly or through an insolvency practitioner. The Ghanaian courts can directly communicate with or request information or assistance directly from foreign courts or foreign representatives. This shows the progressiveness of CIRA and speaks to the increasing globalization of business.
Question 7: What if a foreign proceeding conflicts with Ghana’s public policy?
Answer: Ghanaian courts do not recognize or enforce foreign proceedings that conflict with Ghana’s public policy, such as our fundamental laws, values, or interests. This is the public policy exception under CIRA.. An example is if a foreign representative seeks recognition to enforce contracts involving narcotics, the court will apply this exception because it is against Ghanaian law. This safeguard ensures that our sovereignty and legal principles are still respected.
Question 8: How does the law safeguard the interests of Ghanaian creditors when a foreign insolvency proceeding is recognized in Ghana?
Answer: CIRA is careful to strike a balance between fostering international cooperation and safeguarding the rights of Ghanaian creditors. When a Ghanaian court recognizes a foreign insolvency proceeding, local creditors are not left disadvantaged. Ghanaian creditors are entitled to the following:
1. Equal Notification: Just like foreign creditors, Ghanaian creditors must be informed of the recognition of foreign proceedings and any related actions. This ensures they are aware of the legal process and can participate effectively.
2. Fair Treatment: In accordance with Article 17 of the 1992 Constitution of Ghana, which guarantees equality before the law, Ghanaian creditors must be treated equitably.
3. Participation in Local Proceedings: Even after the recognition of a foreign proceeding, Ghanaian creditors retain the right to initiate local insolvency proceedings or file claims in such proceedings. This is particularly important where local interests may not be adequately addressed in the foreign process.
Furthermore, CIRA specifically mandates that the interests of all parties in an insolvency proceeding are protected, such as the creditors, the debtors, and other interested parties.. In line with this, Ghanaian courts are empowered to impose conditions on the reliefs granted to ensure such protection.
For instance, if a stay of proceedings or asset freeze is granted under a recognized foreign proceeding, any Ghanaian creditor or affected party may apply to have that relief
modified or lifted, especially where it could unfairly impact their rights. This flexibility is key to maintaining fairness and ensuring local stakeholders are not prejudiced by foreign processes.
Moreover, foreign representatives may only initiate actions (such as setting aside voidable transactions) in Ghana if such actions align with what a local insolvency practitioner would be entitled to do. This ensures that no foreign party can override Ghana’s legal principles, especially those protecting creditors from transactions that may be considered detrimental or fraudulent under Ghanaian law.
Question 9: What happens if a creditor has already received some payment in a foreign insolvency case? Can they still claim in Ghana?
Answer: Under Ghana’s CIRA, there is a clear rule to promote fairness among creditors. If a creditor has already received a partial payment for a claim in a foreign insolvency proceeding involving the same debtor, they cannot receive a disproportionate payment in Ghana.
The law ensures that all creditors of the same class are treated equally. So, for example, if a creditor gets 60% of their money in a foreign proceeding, and creditors in Ghana are only receiving 40%, that creditor cannot demand their outstanding 40% in Ghana to make their recovery 100%. This is because other creditors in Ghana only got 40%.
The only exception to the fair treatment rule is where secured claims or rights in rem (which relate to specific property) apply. Secured creditors are treated differently because they have a legal right over a specific asset, such as land or a car. For example, if a bank gives the company a loan and, as security, takes a mortgage on the company’s office building in Accra.
Even if unsecured creditors are only recovering 40% of their money, the bank can still go ahead and sell the office building to recover the remainder of the loan, because the bank’s claim is secured by that specific property.
Question 10: What is the relevance of cross-border insolvency proceedings?
Answer: The importance of cross- border insolvency proceedings are as follows:
1. Promotion of cooperation between Ghanaian courts and foreign authorities in cross-border insolvency cases.
2. Provision of legal certainty to encourage trade and investment by creating predictable insolvency outcomes.
3. Ensuring fair and efficient administration of cross-border cases, safeguarding the rights of creditors, debtors, and other stakeholders.
4. Protection of the value of the debtor’s assets, preventing misuse or depletion during insolvency.
5. Preservation of investments and jobs, especially when companies operate in sectors vital to economic stability.
In conclusion, Cross-border insolvency may once have felt like a distant concept, but as Ghanaian businesses expand their operations and international creditors engage more actively with Ghana’s market, these proceedings are becoming increasingly relevant. From understanding how foreign insolvency proceedings are recognized in Ghana to the protections available for local creditors and the balancing of rights across jurisdictions, one thing is abundantly clear: Ghana’s approach is not only aligned with international best practices but also firmly rooted in safeguarding national interests.
WRITTEN BY VERISSA ODAME-KORANTENG (JUNIOR ASSOCIATE, VINT & ALETHEIA ATTORNEYS & CONSULTANTS)
