Unity 5

DISCUSSING INSOLVENCY

Insolvency is a legal term that refers to a situation where an organization

or company is unable to pay their debts when they become due. It is a
state of financial distress in which the liabilities of an entity exceed their
assets. Insolvency can occur for various reasons, such as poor financial
management, economic downturns, or unforeseen circumstances.

In Zambia, insolvency law is primarily governed by the Corporate

Insolvency Act No. 9 of 2017, which provides provisions regarding the
insolvency and liquidation of companies. The Corporate Insolvency Act
includes provisions for both voluntary and involuntary liquidation
processes, allowing for the orderly winding up of insolvent companies.

The Banking and Financial Services Act No 7 of 2017 with its amendments
(Act No. 7 of 2020) also contain provisions relating to the insolvency of
Banks in Zamia.

Under Zambian law, when a company is insolvent or unable to meet its

financial obligations, it may enter into voluntary liquidation. Voluntary
liquidation occurs when the company's directors or shareholders make a
decision to wind up the affairs of the company. The process involves
appointing a liquidator who is responsible for distributing the company's
assets to creditors in a fair and orderly manner.
In addition to voluntary liquidation, the Corporate Insolvency Act also
provides for the involuntary liquidation of a company. Involuntary
liquidation occurs when a company is ordered by a court to be wound up
due to its insolvency. Creditors or shareholders of the company may initiate
the winding-up proceedings by filing a petition with the court, providing
evidence of the company's inability to meet its debts.

According to the Banking and Financial Services Act, it defines insolvency

as a situation where a financial service provider—
(a) is unable to pay a debt when it falls due;
(b) has assets that are insufficient to meet liabilities; or
(c) has regulatory capital which is at zero or lower
Acceptance of deposits by insolvent financial service providers
120. (1) Despite the Corporate Insolvency Act, 2017, or any other
law, an insolvent financial service provider shall not—
(a) Receive deposits; or
(b) Enter into any new, or continue to conduct existing, banking or
financial service business, except that which is necessary or incidental to
the orderly realization, conservation and preservation of the assets of a
financial service provider.
Resolution to voluntarily wind-up or dissolve financial service
provider
121. (1) A financial service provider shall not, except with the written
approval of the Bank, pass a resolution for the voluntary winding-up or
dissolution of the financial service provider in accordance with the
Corporate Insolvency Act, 2017, or any other law.
(2) A financial service provider seeking the approval of the Bank for
voluntary winding-up or dissolution, in accordance with subsection (1),
shall submit—
(a) a certified copy of the resolution; and
(b) an audited declaration of solvency by the directors to which shall be
attached a statement of affairs of the financial service provider showing the
—
(i) assets and total amount expected to be realised therefrom;
(ii) liabilities; and
(iii) estimated expenses of the winding-up, made up to the latest
practicable date before the resolution to wind-up was made.
(3) The Bank shall approve a voluntary winding- up if the Bank is
satisfied that the financial service provider is solvent and has
sufficient liquid assets to repay its depositors and all its other
creditors in full and without delay.
(4) Where a bank or financial institution passes a resolution for voluntary
winding-up or dissolution, the bank or financial institution shall record the
date, hour and minute of the passing of the resolution.
(5) A director, senior officer or other employee of a financial service
provider who makes a false declaration, causes or permits any false
declaration to be made, contrary to subsection (2), commits an offence
and is liable, upon conviction, to a fine not exceeding five hundred
thousand penalty units or to imprisonment for a term not exceeding five
years, or to both.
Duties of financial service provider on voluntary winding- up or
dissolution
122. (1) If a financial service provider receives approval from the Bank for
a voluntary winding up or dissolution, the financial service provider shall—
(a) surrender its licence to the Bank, within seven days of receipt of the
approval, and shall cease to do business and may exercise its powers only
to the extent necessary to effect its orderly winding up or dissolution in
accordance with the Corporate Insolvency Act, 2017, and this Act; and
(b) repay in full its depositors and other creditors.
(2) A director, senior officer or other employee of a financial service
provider who knows or, in the proper performance of duties, could
reasonably be expected to know of the insolvency of the institution and
who causes or permits any act contrary to this section, commits an offence
and is liable, upon conviction, to a fine not exceeding five hundred
thousand penalty units or to imprisonment for a term not exceeding five
years, or to both.
Rights of depositors and creditors
124. (1) An approval by the Bank for the voluntary winding-up or
dissolution of a financial service provider as provided in this Part, shall not
prejudice the right of a depositor or creditor to payment in full, or to the
return of funds or property held, by the financial service provider.
(2) All lawful claims shall be paid promptly and all funds and other
property held by the financial service provider shall be returned to the
rightful owners within such maximum period as the Bank may direct in
writing.
Powers of Bank of Zambia where assets insufficient or completion
unduly delayed
126. The Bank may take possession of the financial service provider being
voluntarily wound-up or dissolved, if the Bank subsequently finds out that
—
(a) The assets of a financial service provider are not sufficient to fully
discharge all obligations; or
(b) Completion of the winding-up or dissolution has been unduly delayed.

Powers of liquidator

128. (1) In effecting a compulsory winding-up or dissolution of the

financial service provider, in accordance with this Act the Bank may, in
addition to any other powers, exercise the powers of the financial service
provider concerned.
(2) Without limiting the generality of subsection (1), the Bank as liquidator
of a financial service provider shall have the power to—
(a) bring, carry on or defend an action or legal proceedings in the name
and on behalf of the financial service provider; and
(b) carry on the business of the financial service provider only for the
beneficial winding-up or dissolution of the financial service provider.

Priority of creditors
Section 132 (1) Despite Banking and Financial Services Act, or any other
written law, in any compulsory winding-up or dissolution of a financial
service provider, the following shall be paid in priority to all other debts in
the order set:
(a) expenses incurred in the process of compulsory winding-up or
dissolution;
(b) depositors whose deposit claims—
(i) are covered by a deposit protection scheme; and
(ii) not covered by a deposit protection scheme;
(c) taxes and rates dues;
(d) wages and salaries of employees of the financial service provider,
excluding executive employees, senior management and other categories
of staff that the Bank may determine, for a period of three months;
(e) charges and assessments due to the Bank; or
(f) other claims against the financial service provider in an order of priority
that the Court may determine on application by the Bank.

UNIT 6: IDENTIFYING LEGAL ASPECTS OF SECURITY

DEFINITION AND NATURE OF FLOATING AND FIXED CHARGES:

A charge is an interest or right which the lender or creditor obtains in

the property of the company by way of security that the company will
pay back the debt.

o A fixed charge is a specific and identifiable charge created over

specific assets or property of a company. The charge attaches
 to the assets, and the company cannot deal with those assets
without the consent of the charge holder.
o A floating charge, on the other hand, is a charge that floats or
hovers over a changing pool of assets. The assets subject to a
floating charge can be traded or used by the company in the
ordinary course of business until the charge crystallizes upon
the occurrence of certain specified events.

In the case of Illingworth v Houldsworth (1878) BCLC 17 Lord

Macnaghten on floating and fixed charges observed that:

Fixed Charge: A fixed charge is created over specific assets of the debtor,
which are identified and delineated at the time the charge is created.
These assets are usually tangible, such as property, machinery, or
equipment. By creating a fixed charge, the debtor's ability to deal with or
dispose of the charged assets is restricted without the consent of the
charge holder (creditor). In the event of insolvency, the assets subject to a
fixed charge are ring-fenced and must be used to satisfy the debt owed to
the charge holder before any other claims are considered.

Floating Charge: A floating charge, on the other hand, is ambulatory and

shifting in its nature, hovering over the assets the company. It does not
attach to any specific assets at the time of creation. It covers a class of
assets, which may change from time to time as the debtor carries on its
business. Typically, these assets are of a fluctuating nature, such as stock,
inventory, or accounts receivable. The chargor is allowed to deal with these
assets freely until certain events occur, known as "crystallization" events.
These events can include the appointment of a receiver, the debtor's
insolvency, or the occurrence of specified defaults. Once the charge
"crystallizes," it becomes a fixed charge, and the charge holder gains
control over the assets covered by the charge.

This position was reverberated in the Zambian case of Amiran and

Others v Agriflora (Z) Limited (In Receivership) (2004)/HPC/
0268. The case confirmed that the crystallization of a floating charge
extinguishes the company's power to deal with the assets and gives rise to
a fixed charge over the assets as at the date of crystallization.

These case law examples highlight the legal principles surrounding floating
and fixed charges, including their definition, nature, validity, and
enforceability. It is important to consult relevant case law and seek legal
advice for a comprehensive understanding of the specific jurisdiction's
approach to floating and fixed charges.

Mortgages

A mortgage is a conveyance of an interest in real property as security for

the payment of a sum of money on the condition that interest will be
extinguished or reconveyed when the sum is fully repaid. The person
borrowing the money is called the mortgagor and the lender is called the
mortgagee. The use of the word “Mortgage” is generally, but not necessary
restricted to those instances where the security given is land or an interest
in land.