I have written extensively on corporate rescue in the past five years. In this article, I look at how to raise funding for a company under corporate rescue. Corporate rescue proceedings are regulated by the Insolvency Act (Chapter 6:07), hereinafter the Insolvency Act”.
Defining Corporate Rescue
For ease of reference and for the benefit of first-time readers, I will define corporate rescue. In terms of section 121(1)(b) of the Insolvency Act, corporate rescue means 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.
A temporary moratorium on the rights of claimants against the company or in respect of property in its possession, and
The development and implementation, if approved, 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 or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
Need for Funding
A business under corporate rescue proceedings may be in need of funding mainly due to some of the following factors:
Reduced working capital due to losses generated by the business.
Reduced working capital due to some of it being used to fund capital expenditure.
Leakages due to corporate governance failures.
The business’s debtors not settling their accounts.
Creditors withdrawing credit supply.
Financiers such as banks calling in the loans due to default by the company.
Funding Options
There are several funding options, depending on the situation of the company. Some of the options include the following:
Existing / current shareholders injecting funding into the business through a rights issue.
New shareholders acquiring shares in the company and paying for the shares.
Debt-equity conversion.
Debt restructuring (for example, converting short-term debt into long-term debt).
Supplier credit.
Loan financing from financial institutions, etc.
Joint ventures.
Tribute arrangements in the case of mining business.
Funding under Government funding programmes.
Existing Shareholders Injecting Funding
This normally comes in the form of current shareholders, through a rights issue, taking up new shares in the company and paying for them. The funds go into the company for use. This works to the extent that the current shareholders are willing and able to participate in a rights issue.
New Shareholders / Strategic Partners Injecting Funding
This is a very common way of raising funding. The corporate rescue practitioner will look for an investor who is willing and able to take up new shares in the company and pay for those shares. This option works to the extent that:
Such financiers exist and are satisfied with a due diligence on the company.
There is buy-in from existing shareholders. In other words, existing shareholders are not resisting the dilution of their shareholding. Such resistance may lead to the frustration of corporate rescue proceedings, usually through protracted litigation.
Debt-Equity Conversion
Where the company is under pressure from its creditors, it is common to negotiate to convert such debt into equity.
Debt Restructuring
Short-term creditors may be converted to long-term creditors in order to give breathing space to the business.
Supplier Credit
In most businesses, suppliers supply goods and services on credit. This is a form of financing. A corporate rescue practitioner may negotiate credit supply for the benefit of the business.
Loan Financing
This method of capital raising involves the business borrowing from financial institutions or related parties. This method works to the extent that:
Lenders are willing to take up risks in the company by lending.
Availability of such loan finance.
Ability of the company to offer security / collateral.
Joint Venture
This may work very well where the business enters into a joint venture arrangement with someone who provides funding in exchange for a share of profit.
Tribute Arrangement
In mining business, the owner of a mine or claims can enter into a tribute arrangement where someone with capacity mines at the mining location and the parties can share the product or profit.
Government Funding Programmes
The Government may set up funding programmes to support distressed companies.
Conclusion
The above funding options may help a company which is under corporate rescue.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations), MBA(EBS, Heriot-Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, commercial arbitrator, registered tax accountant, and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He sits on the Council of Estate Administrators in Zimbabwe. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@hofisilaw.com or gohofisi@gmail.com. Visit www.hofisilaw.com for more articles. He writes weekly articles in the newspaper since 2020.-herald
