Managing legal risk during corporate rescue
In my article of 20 August 2020 titled “Factors affecting corporate rescue” I explained some of the factors affecting the effectiveness of corporate rescue in Zimbabwe.
For the benefit of those who may not have access to the said article, I wish to explain a few key terms. Corporate rescue is also known by other terms such as business rescue, judicial management, corporate recovery or administration. In Zimbabwe it is regulated by the Insolvency Act (Chapter 6:07) of 2018, hereinafter (the Act). According to the Act corporate rescue means the proceedings to facilitate the rehabilitation of a company that
is financially distressed.
Corporate rescue provides 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.
In the August 2020 article I explained that the factors affecting corporate rescue and include disputes and litigation. In the current article I look closer at the legal risk during corporate rescue.
Legal risk
Many entrepreneurs and business executives are quite familiar with the PESTLE model.
According to this model external factors affecting a business may be political, economic, social, technological, legal and environmental. By its nature corporate rescue proceedings can be characterized by legal disputes including litigation usually by affected persons who according to the Act include employees, creditors and holders of the company’s securities. Securities include shares such as ordinary shares. There can be other interested stakeholders.
Sources of legal disputes
Differences in legal opinions, if not properly managed, may escalate to disputes or even litigation. Some of the areas fertile for differences include the following:
Rights of employees,
Rights of creditors,
Rights of holders of securities such as ordinary shareholders,
Interpretation of the Act, contracts or agreements,
Appointment, suspension or removal of the corporate rescue practitioner.
Development and approval of the corporate rescue plan.
Meetings
Rights of employees
Briefly, these rights are contained in section137 of the Act. Some of them include forming a committee of employees’ representatives, being consulted by the corporate rescue practitioner during the development of the corporate rescue plan and to vote with creditors on a motion to approve a proposed corporate rescue plan to the extent that the
employee is a creditor.
Rights of creditors
Briefly, these are contained in section138 of the Act. The primary objective of creditors is to recover amounts owed to them by the company which is under corporate rescue.
Creditors’ rights are therefore mainly to ensure recovery of amounts owed. Some of the rights include to formally participate in the company’s corporate rescue proceedings to the extent provided for in the Act, informally participate in those proceedings by making proposals for a corporate rescue plan in the manner contemplated in the Act, and the
right to vote to amend, approve or reject a proposed corporate rescue plan.
Differences which may escalate to disputes or even litigation by creditors are usually around:
Claims submitted by a creditor, especially where a part of the whole of it has been rejected, Where some creditors, due to lack of appreciation of the law, push for undue preference in the form of payment ahead of the other creditors, Creditors trying to have the practitioner suspended or removed for whatever reason, Creditors not agreeing with the corporate rescue plan, Creditors contesting certain agreements or contracts the company may have entered into
with certain stakeholders such as suppliers.
Rights of holders of company’s securities
In most cases existing ordinary shareholders resist dilution of their current effective shareholding. They do so by resisting any issue of the company’s new shares whether through a rights issue or to new shareholders, at times despite clear lack of capacity to inject capital by the existing shareholders.
Some of the rights of existing shareholders include to formally participate in a company’s corporate rescue proceedings and to vote to approve or reject a corporate rescue plan.
Disputes over meetings
Disputes may also arise over meetings i.e. notices, adequacy disclosures, people entitled to participate, resolutions made, etc.
Implications of disputes and litigation
An aggrieved party has the right to seek protection by the law. However, unresolved disputes can be disruptive to the intended turnaround. For example incessant fights may frustrate the company’s efforts to raise funding to revive the company. Lack of employee cooperation may make it difficult to implement key decisions. Where a practitioner is
subject of attempts of suspension or removal this may distract him or her.
How to manage legal risk
It is situational but the following may be useful:
Understand and profile the company and its stakeholders, Identify potential legal risks, Define desired results, time and cost.
Formulate strategies to manage the identified legal risks.
Legal risks can be managed through understanding the Act or consulting knowledgeable legal practitioners especially before acting, complying with the law to avoid legal challenges, coming up with a legal fees budget, deciding between litigation and alternative dispute resolution, strong leadership skills, strong negotiation skills. It is also important to known if some people are being used as pawns so that you deal with the real person.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice. Laws on gold trade are subject to frequent reviews as Government works on well-meaning efforts to increase gold output and export earnings.
Godknows Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer with a local law firm, chartered accountant, insolvency practitioner, registered tax accountant, consultant in deal structuring, business management and tax and is an experienced director including as chairperson. He writes in his personal
capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com.-herald.cl.ze
