How Private Schools Can Cope With Inability To Pay Their Debts

Two weeks ago, Ugandan schools finally reopened their classrooms for learners after two years of closure because of the Covid-19 pandemic. It was a world breaking record that was broadcast on almost every news channel worldwide.

According to the Education Abstract—2017, at least 10,246 of these are privately owned businesses and responsible for the direct employment and livelihood of at least 116,390 teaching professionals. With the only income from the termly school fees completely gone during the unexpected closure, it has obviously not been possible for these privately-owned schools to meet their payment obligations to teachers & other staff, suppliers and of course the lenders of loans they had taken.

Many teachers had to be terminated, while some had their monthly wages restructured all the way down to zero during the two years of redundancy. For the staff thus, re-opening is an obvious sigh of relief back into re-employment at last. For the School Directors however, the headache carries on as they grapple with how to cope with debts that have shot up with interest over the two years. In fact, far too many private schools are not reopening at all, and it almost feels like the end of the road for many.

Legal prohibitions on carrying on business at a time when one is not in position to pay their debts, make the above state of affairs even more difficult. Company law imposes a duty on a business’ Directors to immediately stop carrying on business the moment a company is unable to pay its debts. Violation of this attracts criminal sanctions. It is therefore understandable why some of the badly hit private schools have not reopened at all, and why some are handing over their students to other schools on reopening. While it is a very unfortunate situation for School Directors, it does not have to be the of the road yet. Being highly indebted does not necessarily mean the end of you! There is a wide range of reliefs that an indebted business can seek and still be in position to get back on its feet and running profitably again.

Loan restructuring is one of the available options. School Directors can approach their lenders and negotiate a restructuring of their debts. Government has encouraged this option, and so have the lending banks too. To lessen the risk of restructuring non-performing loans like those currently born by private schools, the Uganda Bankers Association formed an Asset Recovery Company. The outcomes of such negotiations are entirely contractual, and will be regulated by Contract law. Depending on the situation prevailing however, some creditors may be too impatient to agree to any such consensual arrangements. A financially stressed business will therefore have to consider other rescue vehicles if the business has to keep running lawfully.

Equity financing is the other option that indebted schools, and businesses in general, may have to resort to, to raise extra capital. With the guidance of your Lawyers, raise new capital for the business by creating and allotting a special class of shares to investors who will stay in the business for a limited period of time. The Uganda Development Bank (UDB), a Government entity whose role is to promote and facilitate Uganda’s economic development, is the most obvious of such an investor and one that will not rip you off. UDB has an equity financing service for SMEs, including entities such as start-ups and private schools to which further loans may not be a viable option to raise operational funds. Under this service, UDB does not give you a loan but invests its money in your cash-strapped business in exchange for taking up some shareholding for a limited period of time.  This will enable your struggling business to raise some much-needed funds, without incurring more debt. The good news is that the business will be preserved, and you will retain the control stake of original ownership.

Under a Government arrangement, a bail-out would have been the other option for financially-stressed businesses. However, the Ministry of Finance has been categorical in stating that Government will not be in position to have any bail-out package for the struggling private schools. Instead, the schools have been urged to explore the other available options, including taking cheaper loans from UDB. It is therefore advisable that School Directors explore the other options when they still can.

For any school or business that has tried all the above options and still found no relief, it is not the end of you. The law of insolvency has some temporary measures that can keep your business entity running for some time as you work towards clearing your debts. With the guidance of your Lawyers, your business can go into provisional Administration, and eventually Administration, a procedure that will stop your unpaid lenders from either dragging you to court or selling off the properties of your business. It is nonetheless advisable that you get to this procedure only as a last resort when all the other options have really failed. It is further advisable that you consult your Lawyers early enough, before the situation gets out of hand.



Claire Amanya Rukundo-Kakeeto

Claire is the Founder & Managing Partner of CR Amanya Advocates & Solicitors. She is a Rotarian, a UK trained lawyer, Advocate, a Commissioner of Oaths, a Notary Public, Insolvency Practitioner and a Certified Chartered Secretary with over twelve years’ experience in legal practice. Claire has previously acted as counsel and relationship manager to a number of leading multinational companies operating engaged in transactions in Africa such as Standard Chartered Bank, Barclays Bank, Lloyds TSB, African-Import Export Bank (Afrexim Bank). Not to mention regional companies like SABMiller, Tullow Oil Operations Pty, Total E& P Uganda B.V, Toyota Uganda, Helios Towers, AECOM Government Services et al.

Email: Phone: +256772484003


Frank Rovin Wadidi

Frank is a Lawyer working with CR. Amanya Advocates & Solicitors. He holds a Bachelor of Laws Degree from Makerere University, Kampala, and is currently a candidate for the Postgraduate Diploma in Legal Practice of the Law Development Centre. Frank joined the firm in November 2021, and his work at the Firm spans across the Litigation & the Corporate & Commercial Departments.

Email: Phone: +256705444656

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