Member Article

The recent administration of heavily indebted Uganda Telecom Limited (“UTL”) aims to achieve the best outcome for creditors and shareholders. Below, we unpack the implications of the administration for UTL’s creditors and other stakeholders.

According to media reports, UTL’s troubles started as far back as 2011, with its performance characterised by heavy indebtedness, decline in market share, losses due to inadequate investment, competitive pressures, a dilapidated network and governance challenges. This was further exacerbated by the Libyan crisis, which saw its majority shareholder being sanctioned by the United Nations. Following unsuccessful negotiations between the Ugandan government and the majority shareholders of UTL (the majority shareholder declined to avail further funding), UTL passed a special resolution agreeing to make a settlement with its creditors, appointed a provisional administrator and applied for an interim protection order from the court. These actions effectively placed UTL under provisional administration. UTL’s provisional administration was the first of its kind under the Insolvency Act, 2011 and presents a good opportunity to test looming insolvencies.

When a company enters provisional administration, a provisional administrator is appointed to take over control and custody of the company’s assets. This is in order to achieve one of his/her statutory duties, namely the survival of the company and the whole or part of its undertaking as a going concern, the approval of the administration deed or a more advantageous realisation of the company’s assets than would be achieved in a liquidation. The provisional administrator is required to prepare, and present to the creditors for their consideration and decision, a proposal on how to conduct the administration. The creditors must then decide to either execute an administration deed (in which case the company goes into administration), liquidate the company or end the administration (in which case the company transitions to liquidation). Regardless of the creditors’ decision at this meeting, the provisional administration terminates at that point. At UTL’s creditors’ meeting, which was called to consider the provisional administrator’s proposals, the majority of its creditors voted in favour of placing UTL under administration. UTL executed its administration deed on 22 May 2017, which, in effect, placed UTL in administration.

Administration has different implications for different stakeholders. The prime advantage is that it affords the company some breathing space during which the administrator can perform his/her duties. A moratorium is provided for under the Insolvency Act in which creditors and other stakeholders are prohibited from initiating or pursuing legal proceedings against the company while in administration. The moratorium also prevents the commencement of alternative insolvency proceedings in respect of the company. A creditor, whether secured or unsecured, should submit details of its claim(s) to the administrator and wait for the administrator to assess it and for payment as provided under the administration deed. In contrast to a secured creditor of a company under liquidation, a secured creditor who voted in favour of the resolution for the execution of the administration deed cannot take steps to enforce a security that it holds over any of the company’s assets. It is common for parties to a contract to agree that the appointment of an administrator to take over the control of the affairs of a counterparty will result in an event of default and the immediate termination of the agreement. The counterparty would terminate the agreement but can only be paid as provided for under the administration deed.

What the UTL case demonstrates is that the payment of sums immediately due and payable to a counterparty under the contract is prolonged (to cover itself, the counterparty should have negotiated the inclusion of provisions dealing with default payments in the contract). The powers of directors of a company that goes into administration are curtailed. A director and secretary cannot exercise any powers, functions or duties without the administrator’s approval. The directors must give all assistance reasonably required by the administrator in carrying out his/her functions.

From a regulatory perspective, the Uganda Communications Commission reserved the right under UTL’s telecommunications licence to suspend or revoke the licence should UTL enter liquidation or equivalent proceedings or makes a general assignment for the benefit of creditors. This, by far, is the greatest risk faced by UTL’s administrator. However, since UTL continues to operate, the assumption is that the risk has been managed by the administrator and other relevant stakeholders. The Insolvency Act does not provide for what happens to employees once the company goes into administration, although it does make provision for the status of employees of a company under provisional administration. When a company is under provisional administration, the provisional administrator is required to adopt contracts of employment and is liable for salaries under such adopted contracts and in respect of services rendered after the adoption of the contract. The Act does not give further guidance on what the provisional administrator must do to effectively adopt the employment contracts.

The logical conclusion is that unless expressly terminated (as was the case for UTL’s managing director and company secretary), then it is business as usual for employees. Since an administration usually flows from a provisional administration, the assumption is that the status of employees during provisional administration will continue as is when the company transitions to administration. The administrator is required to give the creditors a progress report every six months showing, inter alia, details of receipts and payments during that period and details of the assets that are still to be realised. When the administrator intends to pay a creditor’s claim, he/she must notify the creditor of this intention, stating whether the payment is the sole, final or first payment.

UTL’s administration is expected to last six months, unless the creditors extend the period. Within the six months, the administrator expects to pay off a percentage of UTL’s creditors’ claims and return UTL to profitability. As with recently enacted laws, unanswered questions remain about the precise steps and mechanisms required to give full effect to the law. The application of the law, such as in the UTL case, assists in clarifying the grey areas and we will continue to monitor the developments. For more information or assistance, please contact:

Phillip Karugaba
Head of ENSafrica Advocates Uganda [email protected] cell: +256 772 785 332

Rehema Nakirya Ssemyalo
ENSafrica Advocates Uganda partner [email protected] cell: +256 772 506 802