Solvency in the Caribbean

CARIBBEAN CORPORATE GOVERNANCE INSTITUTE

Tuesday, October 13, 2015

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The preceding article stated that the board of directors must examine the level of solvency within the company. If a company is insolvent it means that an organisation is either unable to pay its debts, or its liabilities and debts listed in the balance sheet exceed its assets. If the debts don't get paid, then the insolvency will lead either to bankruptcy for individuals and sole traders, or the company will be wound up or liquidated. In addition, the directors' control over the company will cease and the company will cease to trade, its assets will be sold and the proceeds will be distributed among its creditors.


The article concluded by noting that some business commentators regard solvency versus profitability as a false dilemma. They argue that both are important and that companies need to monitor both closely. On the other hand, other experts argue that a company cannot realise its potential profit if it can't remain solvent along the way. They argue that the relative importance of solvency versus profitability depends on the time horizon that is being used. If you are focusing upon a short-term time horizon, then solvency is more important than profitability. However, if you are focusing upon a medium- and longer-term time horizon, then profitability will become relatively more important.


Managing the affairs of the organisation and the director


Company Acts and Corporate Governance Codes throughout the region require directors to manage the affairs of the organisation. In order to govern well, a board must identify very clearly what constitutes risk and then put measures in place to mitigate the risk or identify as fast as possible when the risk materialises.


The insolvency definitions in the region are the same, but the practices are very different!


In the preceding article, we noted that the insolvency definitions used in the Caribbean are essentially identical. However, the insolvency practices vary significantly. For example, the length of time for the courts to deal with insolvency varies from just over one year in Jamaica to Haiti, St Kitts and Nevis, St Vincent and the Grenadines and Grenada having no insolvency resolution practices (see Table 2).


The World Bank has recently recognised that Trinidad and Tobago has made its insolvency processes easier by introducing a formal mechanism for rehabilitation, establishing a public office responsible for the general administration of insolvency proceedings and clarifying the rules on appointment of trustees. Globally, Trinidad and Tobago stands at 66 in the ranking of 189 economies on the ease of resolving insolvency, and is one of the top 10 countries in the world that has improved the most across three areas or more as measured by Doing Business in 2013/14. However, there is still much room for further improvement.


The insolvency recovery rates also vary significantly between countries. For example, the recovery rate varies from just over 65 cents in every dollar in Barbados to Suriname, Haiti, St Kitts and Nevis, St Vincent and the Grenadines and Grenada having no recovery rate practices (see Table 3).


Trinidad Cement Limited


Many companies in Trinidad and Tobago have experienced profitability and solvency issues. Perhaps one of the most well-known cases is Trinidad Cement Limited (TCL), which was discussed in the previous article.


This article has shown that although the laws and regulations concerning insolvency between the various countries in the region are very similar, the practices associated with the time to resolve the insolvency and the recovery rates vary considerably.


A recovery rate of 27 per cent in Trinidad and Tobago when the OECD average is 72 per cent provides a considerable disincentive for international investors and trade.


Despite some countries improving their international position, policymakers in the region should consider introducing methods for improving the insolvency practices in the region still further.


Perhaps consideration needs to be given to alternative dispute resolution so that all insolvency cases do not have to go through the courts. Also perhaps more status should be given to the insolvency practitioners in the region. There is still much room for improvement in the region.


This column does not constitute legal advice. Readers are advised to seek professional advice for their specific situations. The CCGI is an independent, non-profit, professional membership organisation registered with the Accreditation Council of T&T. CCGI is the award body that provides the Certificate and Diploma in Corporate Governance and the Chartered Director qualification throughout the Caribbean. CCGI welcomes membership applications and participation in its courses, events, and future chapters throughout the region. For more information visit: www.caribbeangovernance.org


 

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