Business rescue finance gaps in Ghana identified

Ghana has given distressed businesses a legal route back to life. It must now build the financial bridge that allows viable companies to use it.

When a company gets into financial difficulty, our traditional response in Ghana has too often been predictable: creditors demand payment, banks tighten their exposure, suppliers withdraw credit, workers become anxious, assets are attached and, eventually, what may once have been a viable enterprise collapses.

Yet financial distress does not necessarily mean that a business is economically dead.

A company may possess valuable assets, a viable market, skilled employees, established customers, intellectual property, contracts and considerable future earning potential, while simultaneously being unable to meet its immediate obligations. What such a company may require is restructuring, competent management intervention and, critically, fresh working capital.

This is where Post-Commencement Financing (PCF) becomes indispensable.

Ghana took an important step with the enactment of the Corporate Insolvency and Restructuring Act, 2020 (Act 1015). The legislation shifted our insolvency framework beyond the traditional emphasis on liquidation and created mechanisms for administration and restructuring of financially distressed companies.

The philosophy behind business rescue is straightforward: where a business can reasonably be saved, restructuring it may create greater economic value than dismantling it.

But there is a fundamental problem.

A company cannot be rescued with legislation alone.

It requires money.

What is Post-Commencement Financing?

Post-Commencement Financing is broadly the new financing made available to a financially distressed company after formal administration or restructuring proceedings have commenced.

Section 169 of Act 1015 defines Post-Commencement Financing to include financing obtained by a company, including trade financing and venture capital, during administration or restructuring proceedings. It also covers certain employment-related amounts becoming due during the proceedings.

This fresh funding can become the financial oxygen that keeps a distressed but viable company operating while its affairs are being reorganised.

• It may finance raw materials.
• It may pay critical suppliers.
• It may keep electricity running.
• It may fund production.
• It may preserve employment.
• It may allow unfinished contracts to be completed.
• It may finance logistics and distribution.
• It may provide working capital necessary to restore revenue.

In short, PCF provides the liquidity required to turn a restructuring plan from a document into an operating reality.

Without it, an administrator may prepare an excellent turnaround strategy while watching the underlying business deteriorate because there is no money to implement it.

Ghana’s Law Already Recognises Its Importance

Perhaps the strongest indication of the importance Parliament attached to PCF can be found in section 107 of Act 1015.

The Act classifies debt relating to Post-Commencement Financing as Class A debt, giving it priority over other creditor claims, including secured and preferential claims, in the statutory ranking applicable upon liquidation.

That is an extraordinarily important protection.

The principle is understandable. Why would an investor put fresh money into an already distressed company if that investor simply joined the back of the queue alongside existing creditors?

The law therefore attempts to reduce that risk by giving PCF exceptionally strong priority.

Furthermore, section 44 of Act 1015 requires a restructuring agreement to include Post-Commencement Financing.

Ghana therefore does not suffer from a complete absence of legal recognition of rescue financing. What appears to be missing is a sufficiently developed market and institutional architecture capable of supplying it.

That is the conversation Ghana must now have.

The Financing Paradox

Consider the position of a commercial bank.

A company approaches the bank for funding because it is under administration. Its balance sheet may already be impaired. Existing facilities may be in default. Cash flow is weak. Some assets may already be encumbered. Its credit history may be deteriorating.

From the conventional credit-risk perspective, almost every warning light is flashing.

The bank therefore does what conventional banking logic suggests: it declines additional exposure.

But herein lies the paradox.

The company needs financing precisely because it is distressed, while the very fact that it is distressed makes conventional financiers reluctant to provide the financing necessary for its recovery.

That creates what might appropriately be called Ghana’s business-rescue financing gap.

Unless we deliberately bridge that gap, companies may continue entering distress without having a realistic financial pathway towards rehabilitation.

Business Rescue Must Not Become a Waiting Room for Liquidation

This should concern policymakers.

A rescue regime without rescue financing can unintentionally become little more than a procedural waiting room before liquidation.

Businesses do not operate on court orders and restructuring agreements alone.

They operate on cash flow.

Once suppliers stop supplying, workers leave, customers migrate, machinery stops operating and productive capacity deteriorates, the value that restructuring was intended to preserve begins disappearing.

Time is therefore one of the most important variables in business rescue.

The longer a viable distressed company remains without working capital, the lower its probability of successful recovery.

This is why PCF should not be regarded merely as another lending product. It should be considered an important component of Ghana’s broader economic infrastructure.

Should the Bank of Ghana Establish a PCF Fund?

I believe Ghana should seriously examine the establishment of a dedicated framework for financing viable businesses undergoing formal rescue.

That does not necessarily mean the Bank of Ghana itself must become a direct lender to distressed companies.

Indeed, there are sound reasons for maintaining a clear distinction between the central bank’s regulatory and monetary-policy responsibilities and commercial credit allocation.

A better solution may be a regulated Post-Commencement Financing ecosystem involving the Bank of Ghana, Government, commercial banks, Development Bank Ghana and other development finance institutions, pension and institutional capital where appropriate, private credit funds, private equity and venture capital investors.

The Bank of Ghana can play an important catalytic role.

It can initiate consultations with the banking industry, CIRIP-GHANA, the Office of the Registrar of Companies, Ministry of Finance, Ghana Association of Banks, Development Bank Ghana, Securities and Exchange Commission and private investment institutions to determine what regulatory obstacles presently discourage PCF.

The objective should be simple:

Make it commercially possible to finance viable distressed companies without compromising financial stability. 

A Ghana Business Rescue Fund

Ghana should consider establishing a specialised Business Rescue and Post-Commencement Financing Fund.

Such a fund should not become another avenue for politically connected companies to obtain cheap money. Neither should it become a dumping ground for hopeless businesses.

It must operate commercially, professionally and independently.

Funding could potentially be mobilised from participating financial institutions, development finance institutions, institutional investors, private capital and carefully structured Government risk-sharing mechanisms.

Rather than Government carrying the entire credit risk, public resources could provide limited guarantees, first-loss protection or co-financing arrangements capable of attracting significantly larger amounts of private capital.

The objective should be to crowd private capital into business rescue rather than crowd it out.

Let Private Capital Enter the Rescue Market

There is also an opportunity to develop an entirely new investment class in Ghana.

The Bank of Ghana, Securities and Exchange Commission and other appropriate regulators should consider creating a framework under which professionally managed private distressed-business and turnaround funds can operate.

Such funds could raise capital specifically to invest in viable businesses undergoing restructuring.

The investment need not always be conventional debt.

It could include:

• senior rescue loans;
• revolving working-capital facilities;
• trade finance;
• invoice and receivables financing;
• asset-backed rescue financing;
• convertible debt;
• preferred equity;
• venture capital;
• debtor-in-possession-style facilities; and
• strategic equity investment.

Different businesses require different rescue instruments.

The regulatory architecture must therefore permit innovation while ensuring transparency and investor protection.

Banks Need Regulatory Clarity

One of the greatest contributions the Bank of Ghana could make would be to examine the prudential treatment of properly structured PCF exposures.

Banks understandably worry about asset classification, provisioning, capital requirements and the possibility of worsening their non-performing loan positions.

Those concerns cannot simply be dismissed.

The answer is not to instruct banks to lend recklessly to insolvent companies.

Instead, the Bank of Ghana could develop specific prudential guidance for PCF, clearly establishing the conditions under which a facility qualifies as genuine rescue financing and how such exposure should be treated for supervisory purposes.

Any special treatment must be consistent with sound banking principles and applicable accounting standards, including IFRS 9. PCF should never become a mechanism for hiding existing non-performing loans or engaging in regulatory forbearance.

But neither should regulatory uncertainty prevent banks from financing credible turnarounds.

Not Every Distressed Business Deserves Rescue

This point is fundamental.

Post-Commencement Financing must never become an entitlement.

Some businesses should be liquidated.

Where the business model is fundamentally unviable, where fraud has occurred, where management cannot account for company assets, where there is no realistic market, or where projected cash flows cannot support recovery, throwing additional money at the company merely transfers losses from old creditors to new ones.

Eligibility for PCF should therefore be rigorous.

Before financing is approved, an independent assessment should establish that the underlying business is viable and that additional financing materially improves the probability of recovery.

There should be a credible restructuring plan, reliable cash-flow projections, identifiable repayment sources, competent management or turnaround professionals, strong financial controls and continuous reporting.

Where existing management contributed materially to the company’s collapse through misconduct or gross incompetence, PCF providers should have the ability to demand governance changes as a condition for funding.

This is where corporate governance and business rescue intersect.

Fresh money without governance reform can merely finance the continuation of old mistakes.

The Administrator Must Become Central to the Financing Decision

Licensed insolvency practitioners should play an important gatekeeping role.

An administrator seeking PCF should provide prospective financiers with a credible rescue-financing memorandum setting out, among other things, the cause of distress, current financial position, immediate liquidity requirement, use of funds, restructuring measures, projected cash flows, creditor position, security structure, governance changes and repayment strategy.

The administrator should periodically certify how PCF funds are being utilised.

This would provide financiers with something distressed companies often lack: credible independent oversight.

Technology can strengthen this further. PCF-funded businesses could be required to operate controlled collection accounts and digital monitoring systems allowing financiers and administrators to track cash inflows, expenditures and agreed financial covenants.

Ghana Can Learn from International Practice

Post-commencement or rescue financing is not an exotic idea.

International insolvency practice recognises that fresh financing can be essential to successful restructuring.

The UNCITRAL Legislative Guide on Insolvency Law identifies post-commencement finance as one of the core components of an effective insolvency regime. The Guide recognises the need for rules governing new financing, its security and its priority because financiers will naturally be reluctant to advance fresh capital into an insolvency process without adequate protection.

The broader international lesson is important.

A successful rescue regime requires more than legislation providing for restructuring. It requires an ecosystem comprising courts, insolvency practitioners, creditors, regulators, investors and specialised financiers.

Ghana has already built an important part of that architecture through Act 1015.

The next stage should be developing the financing market that makes the legislation economically effective.

Ghana Already Has a Rescue Story: The United Steel Experience

Ghana does not have to look entirely outside its borders to understand the economic value that can be preserved through an effective corporate insolvency and restructuring process. The experience of United Steel Company Limited provides an important domestic case study.

United Steel had fallen into severe financial distress. Reports at the time indicated that the company owed substantial amounts to the Ghana Revenue Authority, nine banks and other creditors and had consequently entered administration. A team of administrators chaired by respected corporate recovery and restructuring practitioner Dr Felix E. Addo, former Country Senior Partner of PwC Ghana, and the current President of the Governing Council of the Chartered Institute of Restructuring and Insolvency Practitioners, Ghana (CIRIP-GHANA) assumed responsibility for the process under Ghana’s corporate insolvency and restructuring framework.

The eventual outcome is instructive.

Following the administration process and competitive bidding, B5 Plus Limited acquired United Steel and embarked upon a substantial programme to rehabilitate the industrial facility. The Ghana Revenue Authority subsequently described the revamped company as an example of how distressed businesses could be returned to productive economic activity rather than simply allowed to disappear.

According to reports following the acquisition, B5 Plus invested more than US$35 million in revamping the factory, with plans for further investment. More than 400 workers were engaged at the facility, while outstanding tax liabilities were addressed. The then Commissioner-General of the GRA indicated that the revived operation was expected to generate more than GH¢100 million annually in taxes when operational.

There is an important lesson here.

The success should not be interpreted to mean that every distressed business must necessarily be preserved under its existing ownership structure. Sometimes the best rescue outcome may involve restructuring; sometimes it may require new capital, new management or a strategic investor; and in other cases, the preservation of the underlying productive enterprise may be achieved through a sale.

What matters economically is the preservation of enterprise value.

Factories, machinery, skilled employees, supplier relationships, productive capacity and future tax revenues should not be destroyed unnecessarily merely because the corporate entity owning them has encountered financial distress.

The United Steel experience therefore strengthens the argument for developing a proper Post-Commencement Financing market in Ghana.

Imagine how many more viable distressed companies could potentially be preserved if administrators did not have to wait for a strategic buyer before meaningful capital became available. A functioning PCF market could provide the bridge between the commencement of administration and the implementation of a restructuring plan, strategic investment or eventual sale.

United Steel demonstrates that distressed industrial assets in Ghana can regain economic life when professional administration is combined with credible investors and fresh capital.

The policy challenge is therefore to institutionalise that possibility rather than leave successful rescue outcomes to exceptional circumstances.

Ghana should build a system in which the next United Steel does not have to depend on fortune to find its B5 Plus.

The Economic Case Goes Beyond Saving Shareholders

Business rescue is sometimes misunderstood as protecting owners who have failed.

That is too narrow a perspective.

When a viable company collapses, the consequences spread far beyond its shareholders.

Employees lose their livelihoods.

Banks may crystallise losses.

Suppliers lose customers and unpaid receivables.

Government loses taxes.

SSNIT contributions disappear.

Landlords lose tenants.

Communities lose economic activity.

Contractors lose business.

The country’s productive capacity contracts.

Successful restructuring, therefore, can protect an entire economic ecosystem.

There will certainly be cases where liquidation produces the best economic outcome. But destroying a fundamentally viable enterprise merely because temporary liquidity cannot be found is an avoidable economic loss.

From a Culture of Liquidation to a Culture of Rescue

Ghana’s Corporate Insolvency and Restructuring Act represents an important philosophical shift.

It recognises that corporate failure should not automatically lead to corporate death.

But legislation alone cannot create a rescue culture.

Capital must follow the law.

I therefore propose a national policy dialogue towards establishing a Ghana Post-Commencement Financing Framework, built around five pillars:

• First, regulatory guidance from the Bank of Ghana on the prudential treatment of PCF by regulated lenders.
• Second, establishment of a professionally managed Business Rescue/PCF Fund or risk-sharing facility capable of mobilising public, development and private capital.
• Third, creation of a regulatory pathway for private distressed-debt, turnaround and rescue-financing funds.
• Fourth, rigorous viability, governance and transparency requirements to ensure that PCF goes only to businesses capable of rehabilitation.
• Fifth, development of standard PCF documentation, monitoring mechanisms and reporting requirements involving insolvency practitioners, financiers and regulators.

These measures would not guarantee that every distressed company survives.

Nor should they.

They would, however, ensure that a company capable of being saved does not die simply because Ghana has created a legal rescue mechanism without developing a corresponding rescue-financing market.

Missing Piece

The passage of Act 1015 was an important beginning.

The next frontier is financing.

Ghana must create an environment where banks, development finance institutions and private investors can confidently say:

“This company is distressed, but it is viable. The law protects fresh financing. The restructuring plan is credible. The governance arrangements are sound. The risks are measurable. We can finance its recovery.”

When that market develops, business rescue will cease to be merely a legal procedure and become a genuine instrument of economic renewal.

For every viable company rescued, jobs may be preserved, creditors may recover more, banks may ultimately reduce losses, productive assets may remain in operation and Government may continue receiving taxes.

The challenge before Ghana, therefore, is no longer simply whether our law permits business rescue.

It does.

The more important question is: 

Who will finance the rescue?

Until we answer that question decisively, Post-Commencement Financing will remain the missing link between the promise of corporate restructuring and the reality of successful business turnaround in Ghana.

References

1. Corporate Insolvency and Restructuring Act, 2020 (Act 1015), particularly sections 44, 107 and 169.
2. Corporate Insolvency and Restructuring Act, 2020 (Act 1015).
3. United Nations Commission on International Trade Law (UNCITRAL), Legislative Guide on Insolvency Law, Parts One and Two.
4. UNCITRAL, Legislative Recommendations on Insolvency of Micro- and Small Enterprises (2021).
5. Borrowers and Lenders Act, 2020 (Act 1052).
6. International Financial Reporting Standard IFRS 9 – Financial Instruments, International Accounting Standards Board.
7. Ghana Insolvency and Restructuring Journal, 2^nd Edition 2024

 

By Divine Akotia
Chartered Governance Auditor

 

About the Author:
Divine Akotia is the West African Regional Director, Community Services & Development at IHRPS. He is a Certified Governance Auditor. He was formally the COO and Corporate Governance Lead at the Chartered Institute of Restructuring and Insolvency Practitioners, Ghana (CIRIP-GHANA).

He is the Director of Projects and Infrastructure at KYC NATIONS

Email: divineakotia2014@gmail.com