State now drafts law to unlock funding to bankrupt companies

New loans advanced to firms in distress will be cleared ahead of other obligations, new Bill proposes, as the State moves to encourage lending to insolvent firms.

The Statute Law (Miscellaneous Amendment) Bill 2019 wants debts contracted during the time a troubled company is under administration to be treated as priority payment ahead of pre-existing liabilities.

It seeks to include loans procured by an administrator of a distressed firm among liabilities which should be cleared ahead of others after his term ends.

The proposed amendments will see “amount payable in respect of a debt or liability arising out of a contract entered into by the former administrator” extended to a “loan or other credit or finance facility for the benefit of the company and continuation of any business of the company”.

The Industry and Trade ministry is seeking the changes through proposed amendment to Section 615(4) of the Insolvency Act 2015 now before the National Assembly.

The proposal could boost the confidence of commercial banks and other creditors in supporting recovery strategy of an insolvent company under administration.

The Insolvency Act, 2015 gives financially-distressed firms a chance to be rescued as they continue to operate as opposed to the earlier practice of abruptly killing them under the previous legal regime.

The law cushions such firms from other legal processes from creditors and others such as landlords unless they obtain consent from administrators and approval from the court.

The law has already come to the rescue of debt-laden retailer Nakumatt Holdings and ARM Cement by shielding them from creditors with liquidation now coming as a last resort after all recovery options have been exhausted.

The board of cash-strapped fashion retailer Deacons last November also resolved to put the publicly-traded firm under administration subject to complying with the provisions of the Insolvency Act.