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Godknows Hofisi-Business Law
Introduction
I have written extensively on corporate rescue in the past. In this article I share with you the importance of liquidity or funding for a company under corporate rescue proceedings.
Corporate rescue
For ease of reference and for the benefit of first time readers, I will define corporate rescue. In terms of section 121(1)(b) of the Insolvency Act (Chapter 6:07) (“the Insolvency Act”) corporate rescue means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for: the temporary supervision of the company, and of the management of its affairs, business and property.
A temporary moratorium on the rights of claimants against the company or in respect of property in its possession, and the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
Funding or liquidity requirements
When a company is under corporate rescue proceedings it will be facing financial distress.
Generally, a company in financial distress will be struggling to pay its debts as they become due and payable and there will be a chance that the company will continue to default.
A company under corporate rescue usually requires funding for the following purposes:
To pay creditors
For working capital
Capital expenditure.
Paying creditors
There are usually overdue creditors, with some taking legal action against the company and so on.
Creditors can be paid from the funds injected by, for example, shareholders or from the business’ net cashflows.
Working capital
A company may be without adequate working capital. This may be due to the erosion of the working capital base over time due to, for example, operating losses, default by debtors, mismanagement of funds or application of working capital on capital projects.
Capital expenditure
It is quite common to find a business with obsolete plant and machinery or other assets resulting inefficiencies or quality challenges. Such assets may require replacement.
Sources of funding
These sources depend on the company’ situation. However, the common ones include the following:
Borrowings from financial institutions such as banks.
Capital injection by existing shareholders.
Capital injection by new investors.
Finding from joint venture arrangements.
Borrowings
I wish to touch a bit on borrowings. From a risk perspective, some banks might be hesitant to lend to businesses which are under corporate rescue proceedings.
The fear being that the company may not recover and the loan proceeds will be lost.
At times there are suspicions that if the situation was caused by mismanagement, the loan proceeds may also be mismanaged. So it can be difficult to secure loan finance from financial institutions if a company is under insolvency proceedings.
Concessionary borrowings
The Reserve Bank and the Ministry of Finance may want to consider concessionary funding for distressed companies.
Conclusion
A company under corporate rescue proceedings requires funding usually to pay off creditors, for working capital or capital expenditure. Funds at concessionary rates will go a long way to assist those companies.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations) MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, commercial arbitrator, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He was recently appointed to sit on the Council of Estate Administrators in Zimbabwe. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@ hofisilaw.com or gohofisi@ gmail.com. Visit www//:hofisilaw.com for more articles.
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