Protecting debtors under administration in Uganda from legal proceedings by their creditors
The case of Uganda Telecom Limited v Ondama Sammuel t/a Alaka & Co (Miscellaneous Application No. 12 of 2018) presented the Ugandan courts with an opportunity to test the provisions of the Insolvency Act, 2011 in the context of an ongoing company administration process. The case shows how the Ugandan legal system operates to protect a debtor under administration from legal proceedings by its creditors.
Uganda Telecom Limited (“UTL”) has been under administration since May 2017. It filed an application in the High Court against its lawyers Ondoma Sammuel t/a Alaka and Company Advocates (“Alaka & Co.”) seeking to set aside a garnishee order that was obtained by Alaka & Co to recover legal fees against UTL. A garnishee order is one in which the debts owed or accruing from a third party to a judgment debtor are attached to answer to an order relating to debts owed or accruing from a judgment debtor to a judgment creditor.
The facts giving rise to the dispute were that UTL instructed Alaka & Co. to represent it in certain legal proceedings in November 2015. The lawyers duly discharged their duty, performing most of the work in December 2015 and July 2017. UTL, however, did not pay the lawyers’ fees which prompted them to cause the taxation of a client-advocate bill of costs. The lawyers were awarded professional fees by the taxing officer, following which they instituted proceedings for recovery and obtained a garnishee order against UTL in February 2018.
UTL sought protection against the garnishee proceedings and a declaration that the lawyers were bound by the administration deed. Alaka & Co. argued that they were not bound by the administration deed since their claim arose long after the deed was executed.
The issue before the court was whether UTL being in administration was a bar to the garnishee proceedings by Alaka & Co. This turned on whether Alaka & Co. fell under the category of creditors that were bound by UTL’s administration deed.
Category of persons bound by an administration deed
The court held that the following category of persons are bound by an administration deed:
- all the company’s creditors in relation to claims arising on or before the day specified in the deed (which include all claims against the company whether present or future, certain or contingent, ascertained or sounding only in damages);
- all members; and
- any secured creditors who consent to be bound, having had notice of the meeting which was called to consider the proposals of the administration deed and being entitled to vote at the meeting.
The court held that creditors bound by an administration deed may not commence or continue execution proceedings or other legal process or levy distress against the company or its property, except with the leave of court. The rights of the creditor who was bound by the administration deed can be found in the deed and nowhere else.
What kind of claims were deemed to have arisen on or before the day specified in the administration deed?
It was held that for a claim to be caught by an administration deed, the court had to determine whether the circumstance giving rise to the claim occurred before the company went into administration. If all the elements of a claim existed prior to a company entering an administration deed, that claim was provable even if there had not been a formal adjudication of the claim by a court or arbitrator. The court also had to examine whether the legal obligation giving rise to the claim arose prior to the company going into administration or not. If the company had bound itself by contract or committed a wrong before the commencement of the administration deed, then, in the eyes of the law, it had already incurred a liability. For example, future liabilities for rent payable under a lease entered into by a company before it went into administration is considered a debt incurred before the administration commences. If the company entered into an administration deed, the landlord could prove for the full amount of rent due for the full term of the lease.
In contrast, a creditor whose claim results from a court/arbitral order for costs sought is not a creditor with a provable claim if that court/arbitral order was not made prior to the administration deed commencing. For example, the court referred to an Australian case which involved an employee who initiated proceedings against her employer seeking damages for unfair termination. Before her case was heard, the employer went into administration. In answer to the issue whether the employee’s claim was caught by the administration deed, the Australian court held that while her claim under the labour laws entitled her to apply for an order, it did not entitle her to recover the amounts from her employer unless the order had been made in her favour. Therefore, as there was no existing legal obligation on the part of the employer towards the employee, the employee did not have a provable claim.
The court held that the circumstances giving rise to the claim by Alaka & Co. occurred before the date of the administration deed. The court reasoned that from the moment UTL instructed Alaka & Co., UTL placed itself under an existing obligation to pay the lawyer’s fees. The legal fee in the circumstances was a contingent claim that was in existence at the date of the administration deed. Therefore, since the lawyer’s claim occurred before the date of the administration deed, it was bound by UTL’s administration deed. In order to recover their legal fees, the lawyers had to prove the debt with the administrator.
Administration as an alternative option to liquidation was introduced by the Insolvency Act, 2011. It is intended to give distressed companies a chance at survival. As with recently enacted laws, the Insolvency Act, 2011 left unanswered questions as to the precise steps and mechanisms to give full effect to the law. The case of UTL v Ondama Sammuel t/a Alaka & Co demonstrates that it is from the application of the law through practice and by the courts that grey areas can be cleared up. This case clarified the provisions of the Insolvency Act, 2011 with respect to the nature of claims which are provable in administration, specifically in the context of future, contingent and unascertained claims.
The UTL administration, being the first of its kind in Uganda, will continue to be useful in the development of jurisprudence in this area.
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