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Introduction
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.
During corporate rescue the corporate rescue practitioner (“CRP”)’s main responsibility is around two areas, namely:
1) Paying off creditors
2)To improve the company’s operations including financial situation.
In many situations by the time the CRP is appointed, usually on application by creditors, the company would be in the following situations:
Debt and unable to pay its creditors,
Operations will be severely curtailed or ceased mainly due to working capital challenges.
Developing a comprehensive corporate revival or rescue plan
Section 142 of the Insolvency Act (Chapter 6:07) provides for the minimum information to be included in a corporate rescue plan. The plan is divided into three parts:
Part A – background
a) Part B- proposal
b) Part C- assumptions and conditions
My recommendations are that a CRP, while meeting the minimum requirements in terms of the Act, should develop a comprehensive corporate rescue plan in the manner explained below.
Current situation
The company situation can be summarised as:
Highly geared (debt ridden) and unable to pay,
Ceased or significantly curtailed operations.
Corporate rescue objectives
Based on the current situation, or informed by reason the company was placed under corporate rescue:
Address company debt or creditors
Improve the company’s operations and financial situation.
Causes of current situation
As part of the solution a CRP has to understand the causes of the current situation. If properly done this will give good pointers to the solutions required to trade the company out of its current situation. Some of the causes may include those explained hereunder.
Causing accumulation of debt
This could be due to bad corporate governance or financial mismanagement. It is quite common for a company’s working capital to be misused. For example working capital can be used to acquire property, plant and equipment or for new projects. Shareholders may also withdraw funds for personal use, these can be related to non-performing loans.
Debt may arise from cumulative losses over the years which eventually results in the company’s working capital base being eroded.
Causing curtailed or ceased operations
This could be a result of many challenges as explained below.
A result of financial mismanagement as explained above.
High inflation may lead to a disconnection between a business’ expenses and income. This may happen where it is difficult for a business to increase its process for example in the case of regulated businesses or where there is stiff competition.
Loss of markets may result in a company’s volumes and revenue shrinking.
A company may have old equipment which may inhibit it through frequent breakdowns, low volumes, high cost of production, etc.
Due to loss of staff a company may remain with less competent personnel.
Wrong strategies or priorities pursued.
Tools to use
A CRP is advised to use the following tools when considering a corporate rescue plan:
The PESTEL model which considers external factors that affect a business ie political, economic, social, technological, environment and legal.
SWOT analysis which considers a business’ strengths, weaknesses, opportunities and threats.
Porter’s five forces which looks at threat of substitutes, threat of new entrants, supplier power, buyer power and competitive rivalry.
Developing the plan
It is recommended that a CRP should cover the following areas.
Addressing debt or creditors
Kindly refer to The Herald article of September 23, 2021 titled “Options to address creditors during corporate rescue”.
Improving company operations
Assess if the company’s business is still viable. The business may no longer be viable for example due to the external factors under PESTEL.
Consider restructuring and to do away with loss making products or operations.
Consider major overhaul of old equipment or acquiring new equipment, subject to availability of funds.
Employ competent people. Consider termination, training or development.
Consider market development where markets have been lost.
Improving company finances
There is need for a solid and convincing plan to trade the company out of its current financial problems. In addition to dealing with creditors a CRP’s plan should consider the following aspects:
Improve corporate governance including financial management. Design and implement effective financial controls.
Removing the people who were responsible for the financial mismanagement eg management, board, etc.
Hire competent or professional staff.
Raise funding for working capital.
Raise funding for overhaul or acquisition of new equipment.
Space permitting, a separate article will be written on raising funding for a company under corporate rescue.
Documenting the corporate rescue plan
In documenting the corporate rescue plan the CRP is encouraged to consider the following:
Have clear objectives for the business
Developing action plans to address the identified current situations and their causes. Action plans that do not deal with the cause will fail.
Clear timelines should be assigned to action plans.
The CRP should assign people responsible for the action plans. This is key for implementation and monitoring thereof.
The CRP to take into account the minimum information requirements per section 142 of the Act.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner/conveyancer, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and is an experienced director of companies. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]
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