Judicial management explained

concern through the formulation and implementation of a reconstruction plan.
In other words, the process guarantees continuation of operations. In the United Kingdom, judicial management is referred to as administration.

Judicial management involves provisional and final processes with the latter seeking to implement long-term strategies. In terms of Section 299 of the Companies Act (Chapter 24:03) (“the Companies Act”) an application to place a company under judicial management has to be filed with the court.

Another way involves, where on an application being made for liquidation, the courts may grant instead a provisional judicial management order.

An application for judicial management can be made by any stakeholder but in most cases, creditors or shareholders file most of the applications. The placement of a company under judicial management can be a testimony that the company has committed acts of insolvency.

A typical example generally applies when a company exhibits financial challenges by failing to discharge obligations as they fall due.
Our experience has shown that the gearing ratios of companies sliding into a state of insolvency will be unsustainable. Put differently, most companies facing near collapse will be highly indebted considering our operating landscape that is characterised by liquidity challenges.
Provisional court order

Once an application has been filed with the court, the matter can be opposed by any stakeholder or otherwise. If the matter is unopposed the process to obtain a court order can be relatively faster than if the matter is opposed.

However, it is important to note that the courts have wide powers on judicial management matters and therefore an application can also be dismissed.
In the event that the application succeeds, a provisional court order will be granted pending the discharge of the same order on the return day which shall not be less than 60 days from the date the order is granted.

After the order has been granted, the Master of High Court (“the Master”) is required to appoint a provisional judicial manager within a reasonable period of time.
However, it is important to note that once the provisional order has been granted, directors are divested of their powers and therefore they will cease to be agents of the company which will be under

the control of the provisional judicial manager or the Master, pending the appointment of a provisional judicial manager.
A provisional judicial manager is nominated in two ways. The applicant can nominate a preferred candidate whose name will be set out in the provisional court order and if that is not done, the Master,

will exercise his discretion to appoint any registered estate administrator.

Bond of Security

However, the appointment of the judicial manager is not automatic as the candidate is required to furnish the Master with a bond of security, an issue that has proved to be a quagmire for insolvency practitioners, particularly in our dollarised economy. The purpose of the bond of security is to compensate mainly shareholders from non-performance by the judicial manager.
The value of the bond of security is invariably aligned to the value of the company which may be difficult to determine due to various methods that are used such as the liquidation approach which places emphasis on the net asset value (NAV) method or the going concern approach which involves various methodologies.

Indemnity

However, the nominated candidate can obtain an indemnity or negotiate for a lesser bond of security. In other words, shareholders can wholly or partly waive the requirement for a bond of security or they can be give leave to obtain a miniscule bond of security.
It is imperative to highlight that the nominated candidate will be subject to the rigorous suitability tests, such as membership status with the estate council.
In the next instalment we will explore the advantages and drawbacks precipitated in by judicial management.