This article is in addition to the several I have written on insolvency since the year 2020.
It focuses on the resolution by the directors of a company to place the company under voluntary corporate rescue proceedings in terms of the Insolvency Act (Chapter 6:07) (“the Insolvency Act”).
Corporate rescue
In terms of section 121(1)(b) of the Insolvency Act (Chapter 6:07) (“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.
Voluntary corporate rescue proceedings through company resolution
According to section 122(1) the board of directors of a company may resolve that the company voluntarily begin corporate rescue proceedings and place the company under supervision, if the board has reasonable grounds to believe that:
The company is financially distressed and there appears to be a reasonable prospect of rescuing the company.
In terms of section 122(2) the resolution shall only have force or effect if it has been filed with the Master of the High Court and the Registrar of Companies.
Meeting held to pass a resolution for voluntary corporate rescue proceedings
In a meeting held to pass a resolution for voluntary corporate rescue proceedings, the following issues are usually dealt with.
Agenda
The key issues on the agenda are usually the following:
Consideration of the declining financial situation of the company.
Proposed resolution to place the company under voluntary corporate rescue proceedings.
Financial and operational situation
The directors will consider the financial situation of the company, declining operational performance, financial distress, solvency, inability to pay creditors, risk of litigation, risk of liquidation and possibility of rescue.
Measures taken to save the company
The company will discuss past measures implemented to save the company, as well as possible future measures. They will consider whether the board and management will be able to turn the company around, or they will need the intervention of a corporate rescue practitioner.
Need for voluntary corporate rescue proceedings
The directors will discuss the risk of liquidation if the company’s situation continues to decline.
The directors will also consider the legal implications of continuing to run a financially distressed or insolvent company. The risk of involuntary corporate rescue proceedings initiated by a disgruntled creditor will be considered. The merits and demerits of corporate rescue proceedings will be discussed.
Legal issues
The directors will discuss the legal issues associated with voluntary corporate rescue proceedings in terms of the Insolvency Act. There are strict formalities to be complied with.
Corporate rescue practitioner
It is normal for the board to consider which corporate rescue practitioner to appoint. They may even consult their legal practitioners or the Master of the High Court. The Master is very helpful.
Resolution for voluntary corporate rescue proceedings
The resolution passed by the directors may include the following issues.
That the company is financially distressed as defined in section 121 of the Insolvency Act, specifically that it appears to be reasonably unlikely that the company will be able to pay all its debts as they become due and payable within the immediately ensuing six months.
After reviewing the financial situation of the company and consulting relevant provisions of the Insolvency Act, the board of directors resolved to place the company under voluntary corporate rescue proceedings in terms of Part XXIII of the Act. This decision was taken in the best interests of the company, its creditors, employees, other stakeholders, or affected persons.
The board resolved to appoint D. Director (full name) as its representative.
The board of directors identified and resolved to appoint P. Practitioner (full name) as the Corporate Rescue practitioner effective the set date, having verified that he/she is not disqualified in terms of section 131 of the Insolvency Act.
The board resolved to waive the bond of security requirement, where legally permissible, to facilitate the immediate appointment of the practitioner. Alternatively, the matter of security may be referred to the Master of the High Court for determination under section 131(f) of the Insolvency Act, on such terms and conditions as deemed appropriate.
Conclusion
The above summarises key issues concerning the directors’ resolution to place the company under voluntary corporate rescue proceedings.
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 BCompt (UNISA), CA(Z), ACCA (Business Valuations), MBA (EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, a 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 Board of 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.-herald
