Online Reporter
Trust Maanda
Legal Position
CORPORATE rescue is seen as a measure which seeks to avoid the liquidation of a company in order to preserve it in a solvent state for the benefit of the company’s security holders and creditors including the company’s workers, as well as the society in which it exists.
This approach is broader than the approach under judicial management, in that it seeks to cover the interests of all stakeholders who benefit from the existence of the entity concerned.
Corporate rescue is in terms of the Insolvency Act which was enacted in June 2018, and repealed the former Insolvency Act [Chapter 6:04], and some provisions of the former Companies Act [Chapter 24:03].
The purpose of the current Insolvency Act is to provide for the administration of insolvency and assigned estates and the consolidation of insolvency legislation. The Insolvency Act replaced judicial management as a business rescue strategy with corporate rescue proceedings.
Judicial management was a procedure made available to a company by the court, in special circumstances and for prescribed purposes. The procedure was only adopted when the court was satisfied, on the facts contained in the application, that there was a reasonable probability that if placed under judicial management, the company which was unable to pay its debts will be able to pay its debts in full, meet its obligations and become a successful concern.
The object of judicial management was to avoid a company being placed in liquidation if there was some reasonable probability that, by proper management or by proper conservation of its resources, it may be able to overcome its difficulties and carry on.
Judicial management, which had been in terms of the former Companies Act, later became outdated and failed to cater for the needs of the modern-day business environment. It had some aspects that defeated the purposes of business rescue. It was discarded and in its place was substituted corporate rescue.
Corporate rescue, is seen as a measure which seeks to avoid the liquidation of a company in order to preserve it in a solvent state for the benefit of the public including the company’s security holders and creditors, the company’s workers, as well as the society in which it exists. This is a broader approach than the approach under judicial management. It that it seeks to cover the interests of all stakeholders who benefit from the existence of the entity concerned.
Companies that are financially distressed now have an opportunity to reorganise and restructure. This has far-reaching effects on creditors, financial institutions, shareholders, employees and society at large.
Corporate rescue aims at rehabilitation and preservation of viable businesses, as well as offering the ailing company a better chance of survival by allowing it to undergo a reorganisation or an arrangement plan instead of facing liquidation.
The consequences of liquidating a company can potentially be disastrous to creditors, employees and the community. This is what influenced the new concept of corporate rescue.
Corporate rescue proceedings aim at the restoration of viable companies rather than their destruction. Corporate rescue seeks to secure and balance the competing interests of creditors, shareholders and employees.
To preserve a business, the experience and skills of employees might in the end prove to be a better option for creditors. enables creditors to secure a better recovery of their debts from debtors.
The liquidation of companies brings about collateral damage, both economically and socially, with destruction of livelihoods. Business rescue is intended to provide a remedy directed at avoiding the negative consequences of liquidations in cases where there is a reasonable prospect of rescuing the business of a company in financial distress, or of securing a better return to creditors than would probably be achieved by an immediate liquidation.
Because of this, the Legislature enacted the current Insolvency Act with the new concept of corporate rescue procedures.
Corporate rescue is defined in Section 121(1)(b) of the Insolvency Act as 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; and a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and the development and implementation, 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.
If it is not possible for the company to so continue in existence, corporate rescue results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
Corporate rescue seeks to avert the eventual failure of a company and to achieve the above objectives.
The intended outcome is the survival of the financially distressed company.
Trust Maanda is a legal practitioner and a partner at Maunga Maanda And Associates. He writes in his personal capacity. He can be contacted on +263772432646 or [email protected].
