Rwanda has introduced a first-ever specific draft law on simplified insolvency for micro and small enterprises (MSEs), which is aimed to assist investors faced with financial distress.

The Parliament’s lower chamber approved the relevance of the bill on October 7, and it will be scrutinised by a committee in charge, prior to being put to a vote by the plenary assembly.

According to an explanatory note of the bill, the proposed law aims to establish a simplified and efficient framework specifically designed to address the financial distress faced by MSEs, which are considered a critical segment of the Rwandan economy.

1. Size of business enterprises covered by the bill

The entities covered by the bill are micro and small enterprises which it defined as a natural or a legal person engaged in a business activity in Rwanda whose annual sales turnover for the business year preceding the date of the commencement application [for simplified insolvency proceeding], does not exceed Rwf600 million (each), or a different amount determined by the regulations issued by the Registrar General; and whose total debt on the day of the commencement application does not exceed Rwf500 million, or a different amount determined by regulation issued by the Registrar General.

The Registrar General (at Rwanda Development Board – RDB) is the chief administrator responsible for insolvency proceedings.

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In the explanatory note of the bill, the government stated that it aims to create a user-friendly and cost-effective insolvency framework specifically tailored to the needs of MSEs in Rwanda, by simplifying the process and reducing unnecessary financial burdens, this law encourages MSEs to address financial distress promptly and efficiently, ultimately fostering a healthier and more resilient business environment, the explanatory note pointed out.

2. Excluded assets, including some Rwf2.7 million to meet basic needs

Regarding scope, the bill applies to micro and small enterprises in relation to anticipated financial distress of a debtor; insolvency of a debtor; simplified insolvency proceedings for a debtor; and cross-border insolvency for debtor.

However, this law does not apply to an excluded debtor and excluded assets.

According to the bill, excluded assets means – where the debtor is a natural person (individual) – assets the debtor is entitled to retain as essential tools of their trade and family, such that if they are absent, they and their family cannot survive.

As proposed in the bill, those assets are up to a maximum value of Rwf2.7 million [per year] or other maximum value amount (to provide for the family) that can be determined by the regulations of the Registrar General.

For excluded debtors, the bill means a debtor for which a specialised insolvency proceeding exists in Rwanda.

3. Key differences from the existing law, at a glance

In terms of key differences from existing law (of 2021) that governs insolvency in general, the new bill offers a significant departure from the existing liquidation framework, the explanatory note indicated.

It provides for a low entry threshold by removing the requirement for an insolvency test, making it easier for MSEs to access the process.

It also offers streamlined procedures through a framework that utilises standard forms, an electronic platform, and an active Competent Authority to expedite proceedings.

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Again, it provides for comprehensive exits by offering three clear exit options: immediate closure, closure after asset sale and distribution, or confirmed restructuring plan.

4. Establishment of an Appeal Committee

The bill seeks to establish the Appeal Committee that receives and determines appeals against the decisions of the Registrar General relating to the simplified insolvency proceeding for micro and small enterprises.

However, RDB CEO Francis Gatare said that in case concerned entities are dissatisfied with the decision of the Appeal Committee, they can take their case to court for deliberation.

"But, we also want to reduce the cases that are directly taken to courts so that the backlog decreases through resolving possible cases outside courts,” he said.

5. Coverage of cost of insolvency proceeding

The debtor pays the costs of a simplified insolvency proceeding from the insolvency estate, the bill proposes. If the insolvency estate has insufficient assets and sources of revenue to meet the costs of the administration of a simplified liquidation proceeding, the Government covers the shortfall.

In the existing law of 2021 relating to insolvency – which is generic as it is not specific to MSEs – the liquidator must pay costs incurred by the committee of inspection in carrying out its duties and those costs are expenses properly incurred in the liquidation, unless otherwise ordered by the court.

The current law also provides that the court is solely competent to appoint an insolvency practitioner, and it does not appoint an insolvency practitioner if it is manifestly evident that the value of the assets of the debtor is insufficient to cover the costs of the insolvency proceedings.

In such a case, the court issues a declaration of debtor’s insolvency and orders the Chief Administrator to carry out the distribution of available assets to creditors.

6. Procedure for commencement of simplified insolvency proceeding

A debtor files a commencement application with the Registrar General by completing the relevant standard form for the opening of a simplified insolvency proceeding. In the standard form, the debtor must make a declaration that, at the time of the filing, they foresee inability to pay their debts.

Within eight working days following receipt, the Registrar General gives notice of the application to the debtor to allow them the opportunity to respond within eight working days to the commencement application, by contesting or consenting to it or requesting the commencement of a simplified insolvency proceeding different from the one applied for by the creditor.

Where the application for commencement of simplified insolvency proceedings is made by the debtor, the Registrar General, within five working days following receipt, on its own motion and on the basis of a preliminary examination, determines its competence, the eligibility of the debtor and the effective date.

A creditor of an eligible debtor can also file an application for commencement of simplified insolvency proceedings with the Registrar General by completing the relevant standard form. In this case, a simplified liquidation proceeding may commence without the consent of the debtor after the Registrar General confirms that the debtor is insolvent.

7. Debtor obligations during the process

From the effective date, as well as throughout simplified insolvency proceeding, the debtor is subject to obligations, namely to cooperate with and assist the Registrar General to perform its functions, including, where applicable, to take effective control of the insolvency estate, wherever located, and the business records, and to facilitate or cooperate in the recovery of the assets.

Others are to provide accurate, reliable and complete information relating to his or her financial position and business affairs, subject to appropriate time for collection; and appropriate protection of commercially sensitive, confidential and private information, with the assistance from the Registrar General, when necessary, and an independent professional where appointed.

The debtor has also to notify the habitual place of residence or place of business as the case may be; to adhere to the terms of the liquidation schedule or the restructuring plan as the case may be; and to have due regard to the interests of its creditors and other parties in interest in the day-to-day operations of the business.

They are also required to ensure that simplified liquidation proceeding, and the day-to-day operations are limited to preserving the value of the assets in the insolvency estate only, without a prior approval of the Registrar General.

8. Rescue finance

The debtor, following the commencement of the simplified restructuring proceeding, is allowed to obtain rescue finance. Before obtaining any rescue finance, the debtor sends the Registrar General a rescue finance notice.

Once the notice is received, the Registrar General appoints an independent professional to deal with the rescue finance.

In the bill, rescue finance means any financing obtained by the debtor following the commencement of a simplified restructuring proceeding for the continued operation or survival of their business of their or the preservation or enhancement of the value of the assets of the insolvency estate to facilitate the restructuring plan – a plan by which the financial well-being and viability of the debtor can be restored as submitted in, approved and confirmed in a simplified restructuring proceeding.

The Registrar General, within five working days from receipt of the rescue finance notice, notifies parties in interest in its simplified restructuring proceeding and the appointment of an independent professional to allow them to object or express opposition, within seven working days.

The debtor is entitled to, among others, granting right to a security for the repayment of rescue finance, including providing as collateral an unencumbered asset (which is free of debt or other financial liability) in the insolvency estate, or an after-acquired asset in the insolvency estate.