The government has tabled, before Parliament, a draft law on simplified insolvency for micro and small enterprises (MSEs), which is aimed at supporting investors faced with financial distress.
The new law, once enacted, could mean a difference for small businesses in Rwanda that often struggle with financial difficulties with limited options to recover from these difficulties.
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, a critical segment of the Rwandan economy.
Regarding scope, the bill applies to micro and small entreprises 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.
ALSO READ: Business community calls for review of draft law on insolvency and bankruptcy
The entities covered by the bill are micro and small enterprises, defined in the draft law 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 does not exceed Rwf600 million (each), or a different amount determined by the regulations issued by the Registrar General.
Such an entity's 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 draft law 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, the law encourages MSEs to address financial distress promptly and efficiently, ultimately fostering a healthier and more resilient business environment, the explanatory note pointed out.
The reform aligns with international best practices as the draft law reflects the World Bank Group (WBG) and the United National Commission on International Trade Law (UNCITRAL) recommendations for simplified MSE insolvency proceedings, it observed.
"Thus, the law is expected to position Rwanda as a leader in insolvency procedures for MSEs and improve its score in the WBG's Business Ready (B-Ready) assessment," the explanatory note reads in part.
In addition, the draft law builds on successful models in countries like Singapore, Australia, Organization for the Harmonization of Business Law in Africa (OHADA), and the US, and leverages international experience to create an effective framework for Rwanda.
MSEs role in economy
According to the government, MSEs are the lifeblood of the Rwandan economy, contributing significantly to the Gross Domestic Product (GDP) and generating a substantial portion of employment opportunities - with small businesses accounting for over 98 per cent, and contributing 55 per cent to the GDP and employing 41 per cent of the Rwandan population.
However, the existing insolvency law in Rwanda is not well-equipped to handle the specific needs of MSEs due to several factors.
ALSO READ: Registrar challenges creditors to make use of insolvency law
While justifying the relevance of the bill to lawmakers, Rwanda Development Board (RDB) Chief Executive Officer, Francis Gatare said, "we realised it is a large category of traders in business enterprises who are unable to go to court so that they help them in case of insolvency."
He told parliamentarians that the purpose of the bill is to reduce insolvency-related requirements including cost (money) and procedures for MSEs, and to help those who were struggling to go to courts for intervention in case of insolvency.
"This is the first time that we are going to facilitate small and medium investors in our country, but it will provide us an opportunity to see how they take up that and how we help them in the process," he noted, pointing out that improvement could be made if need be.
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
The bill, once enacted into law, will enable RDB to recover operations of entities that need support, Gatare said.
"There are many that owe debt and you realise there are possible repayment means, and the problem is the functioning or management of their enterprises," he explained, adding that they will put efforts in supporting entities with potential "instead of shutting down because they are unable to pay back loans or as a result of insolvency."
The draft law offers a significant departure from the existing insolvency framework. 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.
It also provides for comprehensive exits by offering three clear exit options: immediate closure, closure after asset sale and distribution, or confirmed restructuring plan.
