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How to proactively manage debt

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How to proactively manage debt
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Commercial attorneys suggest that the interim protective order is an optimal legal strategy for proactively managing debt obligations.

This legal remedy, rooted in insolvency law, halts all execution and debt distress exercises, providing a crucial breathing space for debtors.

Most importantly, it allows debtors to present a comprehensive financial plan aimed at redeeming their position, thereby eliminating wasteful attempts to evade debt collection. This approach also promotes constructive dialogue between debtors and creditors, leading to a more efficient and equitable resolution of debt issues.

An interim protective order acts as a shield for debtors against distress, execution, or any other debt collection measures during its validity. This temporary injunction offers essential respite to debtors striving to negotiate workable arrangements with their creditors.

It becomes relevant in situations where a debtor finds themselves unable to meet current or foreseeable debt obligations, often due to a significant disparity between their assets and liabilities or severe constraints on available cash.

In the process of assessing a debtor's financial standing, both existing and potential liabilities are considered.

When faced with demands for payment that they cannot meet, debtors are prompted to examine their financial affairs comprehensively to determine their immediate capacity to settle debts.

Should this assessment reveal an inability to do so or a looming financial crisis, the debtor may choose to pursue an interim protective order.

The procedure for obtaining an interim protective order and its duration depend on whether the debtor is an individual or a corporate entity.

Denis Yekoyasi Kakembo, a lawyer with Cristal Advocates, explains that for individuals, an interim protective order lasts fourteen working days from the date of issuance but may be extended.

To obtain this order, the debtor must prove that they intend to enter into an arrangement with their creditors and provide proof that a named insolvency practitioner has accepted to supervise the arrangement.

"The only caveat is that the debtor should not have obtained an interim protective order in the previous twelve months," Kakembo notes.

Corporate debtors can obtain an interim protective order when the board passes a special resolution acknowledging that the company is or will soon be unable to pay its debts.

The resolution must also highlight the company's intention to enter into an arrangement with its creditors and enter into provisional administration.

Another critical aspect is the appointment of an insolvency practitioner as a provisional administrator, and their consent must be procured in writing.

The company can then apply for an interim protective order, and once granted, it lasts for thirty days but can be extended for valid reasons.

Kalema Pula Lincoln, a lawyer and co-author of the Cristal Knowledge Series, notes that "In the matter of Deox Tibaingana v Vijey Reddy Miscellaneous Cause No. 286 of 2019, the Court explained that an interim protective order is a general stay of execution against a debtor and is made on the concrete ground that the debtor intends to make arrangements with their creditors."

The Court also held that a debtor should provide a definitive list of their assets and liabilities. The debtor may even present a draft proposal or proposed administration deed that they intend to present to their creditors as a working draft.

This gives the court a full picture of the debtor’s affairs and a projection of how the debtor intends to navigate their financial hardships.

An application that does not demonstrate a debtor’s genuine intention to make meaningful arrangements with their creditors is bound to be rejected by the court.

In the case of Hook v Jewson Ltd BCLC 664, Scott VC cautioned judges not to grant applications for interim protective orders which will most likely have no benefit for the creditors but are designed to delay inevitable insolvency proceedings.

When an interim protective order is in force, all creditors are barred from enforcing any charge against a debtor, levying any distress for payment of any debt, or filing and enforcing any execution against the debtor without the court's leave.

Creditors are also barred from appointing a receiver for any of the debtor's property, and an application for liquidation or bankruptcy of the debtor cannot be filed.

When the order is issued, the debtor, with the help of an insolvency practitioner, can then present the collective body of creditors with a plan on how their business can be improved to ensure that all creditors are paid.

The negotiations usually include extending the time of payment, halting the accumulation of interest, and outlining precise business strategies that the debtor will employ to improve their revenues and enable debt repayment.

For a company, the grant of the order signifies the beginning of the provisional administration of the company, and the arrangement is called an administration deed.

When creditors agree to the proposal, it is signed, and the company goes into administration under the supervision of an insolvency practitioner. For an individual, when the proposal is assented to by creditors, supervision of the arrangement by the insolvency practitioner begins.

Denis Kakembo insists that opting for an interim protective order can prevent debtors from getting caught up in a web of debt obligations they cannot honor in strict compliance with different agreements made with each creditor.

"In this case, having an arrangement with a single creditor does not prevent other creditors from enforcing their debts, which may disrupt the debtor’s business and cause a default on the arrangement made with the single creditor."

This approach is especially beneficial when a debtor cannot pay all their debts when they fall due but can pay them if allowed time to reorganize their affairs. For creditors, it provides a comprehensive picture

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