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Godknows Hofisi
Corporate rescue is also known by other terms such as business rescue or judicial management. According to Section 121 of the Insolvency Act (Chapter 6:07), hereinafter (“the Act”) of 2018 corporate rescue means the proceedings to facilitate the rehabilitation of a company that is financially distressed. It involves providing for:
Temporary supervision of the company and of the management of its affairs, business and property, and
Temporary moratorium (relief) on the rights of claimants against the company or in respect of property in its possession, and
The development and presentation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity.
A corporate rescue practitioner, also known by other names is a professional who is registered with the Estate Administrators Council of Zimbabwe.
In Zimbabwe corporate rescue is regulated by the aforementioned Insolvency Act. Previously this was regulated by the Companies Act (Chapter 24:03) which was repealed and replaced by the Companies and Other Companies Act (Chapter 24:31). A corporate rescue practitioner derives general powers mainly from Section 133 of the Insolvency Act.
In this article I will share with you some of the factors which, in my view, influence the effectiveness of corporate rescue.
Understanding factors leading to insolvency
Insolvency can be due to many causes such as corporate governance failures, imprudent financial management, adverse changes in external factors, internal constraints such as inadequate funding or old equipment, loss of key suppliers, customers or personnel. Understanding the cause usually helps address the problem.
State of the company when placed under corporate rescue
A business is placed under corporate rescue if there are prospects of reviving it otherwise it is liquidated. This is akin to a patient — doctor or client — legal practitioner scenario in that the sooner a company seeks solutions to its challenges the better chances of being turned around. At times when a corporate rescue practitioner is appointed the sun would have set.
Stigmatisation by key stakeholders
When a company is under reconstruction some key stakeholders such as banks, customers or suppliers, as part of their risk mitigation measures, may not be willing to do business with it. This affects the success of turnaround.
Skills of the corporate rescue practitioner
It appears corporate rescue in Zimbabwe is dominated by accountants with legal practitioners developing interest in the last few years.
According to the Estate Administrators Act (Chapter 27:20), as amended in 2018, the following persons qualify as insolvency practitioners:
Registered legal practitioners,
Registered public accountants or public auditors,
Member of the Institute of Chartered Secretaries and Administrators of Zimbabwe,
Any related field the (Estate Administrators) council may consider.
The above persons are subject to certain council examinations, minimum practical experience unless exempt under the transitional arrangement under the amended Act.
There are diverse views as to the appropriate qualifications required of corporate rescue practitioners. Some of the arguments include that:
Most of the work done by corporate rescue practitioners is specialist in that it involves financial troubleshooting, strategic business management and legal troubleshooting.
Ordinarily a company’s board of directors has diverse skills. An individual corporate rescue practitioner rarely, if at all, has such combined skills.
A number of corporate rescue courses are offered by foreign institutions. Zimbabwean institutions of higher learning are encouraged to develop specific practical courses.
Governance structures during corporate rescue
A practitioner is advised to implement corporate governance structures to better manage the affairs of a business under rescue. Such measures may include:
Joint or co- corporate rescue whereby at least two practitioners work together,
Have the equivalent of a board of directors.
Retain some of the managers.
Dealing with external factors affecting the business (“PESTEL”)
Businesses are affected by external factors in different ways. These factors can be political, economic, social, technological, environmental or legal. A case in point is the current environmental factor of Covid-19.
Funding
When a company is under corporate rescue it is normally considered high risk by financial institutions who may not want to lend to the company. Shareholders may not be able or willing to inject more funds.
Customers and suppliers may be reluctant to pay deposits or supply on credit, respectively. Solutions usually come in the form of Government backed concessionary financial packages for distressed companies or the company itself issuing new shares to raise funds.
Profile and attitudes of creditors
The profile and attitudes of creditors have significant influence. For example co-ordinating many creditors or seeking their approval can be difficult. On the other hand a few major creditors may wield significant negotiating power.
Timeframes
Corporate rescue practitioners are usually under immense pressure to turnaround and exit the company. Such pressures usually come from creditors, shareholders or employees, etc. There are allegations that some practitioners may prolong their stay to earn more fees whereas some views that the expected timelines may be too ambitious. An interesting debate is whether reconstruction can take shorter than destruction.
The Insolvency Act has important timeframes meant to expedite corporate rescue proceedings. The Act is still new so time will tell whether the timeframes are realistic or not.
Quality of the corporate rescue plan and its implementation
The corporate rescue plan is central to the revival of a company. Pursuant thereto the Act has come up with some important requirements. Section 142 contains detailed minimum requirements whereas Section 144 provides key requirements at the meeting to be held to consider the corporate rescue plan. Developing the plan requires skills in financial trouble-shooting, strategic planning and legal trouble-shooting. In my view the plan should articulate what the practitioner intends to do differently to turn the company around. Regrettably, in business generally even excellent plans are not properly implemented.
Legal requirements
The process of corporate rescue is regulated in order to protect various stakeholders’ interests. There are various requirements at law which have to be met. Time will tell whether the new Act addresses the shortcomings alleged against the repealed Companies Act (Chapter 24:03) including improving the ease of doing business.
Disputes and litigation
By its nature corporate rescue can be characterised by disputes including litigation by creditors, employees or shareholders. For example creditors may be aggrieved by rejected claims or simply push for settlement whereas shareholders may resist their dilution or increasing debt.
Standard operating procedures
The Insolvency and Restructuring Association of Zimbabwe (“IRAZ”), an association of insolvency and restructuring professionals may step in and co-ordinate the development of standard operating procedures to improve service delivery.
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows Hofisi is a legal practitioner, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]
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