Closing a Business
Economic development – and the accompanying start-up and growth of privately owned businesses – carries with it a corresponding risk of failure. That is, freedom to succeed in an environment in which enterprises are free to prosper carries with it the freedom to fail. Accordingly, an advanced commercial legal system must not only provide the framework for success but must also contain a working mechanism to deal with the consequences of the inevitable failures. These business failures typically result when businesses are not able to meet their financial obligations as they become due for a myriad of reasons ranging from mismanagement to a change in the marketplace.
When these failures occur, efficient legal systems must provide for the orderly liquidation of assets to pay the claims of creditors. The absence of an efficient system to close a business can inevitably result in conflicting claims of creditors competing for a debtor’s limited assets. Moreover, inefficient or nonexistent bankruptcy systems prevent the redistribution of income-producing assets and employees, with an overall negative impact on the local communities in which previously solvent businesses once operated.
While there are provisions of existing law in Rwanda that deal with insolvency and the dissolution of business enterprises, they are little used. In practice, bankruptcy is almost nonexistent as a viable method of dealing with insolvency in Rwanda. In the World Bank Doing Business survey, Rwanda shared the lowest ranking in the world – “No practice” – in the bankruptcy category with Afghanistan, Albania, Bhutan, Burundi, Cambodia, Cape Verde, Chad, Comoros, Dominica, Equatorial Guinea, Eritrea, Grenada, Guinea-Bissau, Iraq, Kiribati, Lao PDR, Madagascar, Sao Tome and Principe, Seychelles, St. Kitts and Nevis, St. Vincent and the Grenadines, Sudan, Timor-Leste, Trinidad and Tobago, and West Bank and Gaza.
As current reform efforts are implemented and basic commercial laws such as those dealing with contracts, negotiable instruments, and secured transactions become law, commercial credit will become more available. This will inevitably result in an increase in business failures with a resulting need for an efficient insolvency system. In this regard, included among Rwanda’s commercial law legislative priorities is a comprehensive law dealing with insolvency. Passage of the law, however, will only be a first step in the creation of a working insolvency system. Without a corresponding effort to develop the institutions to support such a system as well as capacity among the parties involved in the insolvency process – judges, attorneys, accountants, and other bankruptcy professionals – the system will not be able to achieve its full potential.
