How creditors benefit from corporate rescue
As explained in my previous articles, corporate rescue in Zimbabwe is known by other terms such as business rescue or in the past as judicial management.
The proceedings are regulated by the Insolvency Act (Chapter 6:07) of 2018, hereinafter called the Act.
According to the Act, corporate rescue proceedings are meant to facilitate the rehabilitation of a company that is financially distressed.
Section 121 of the Act provides for:
Temporary supervision of the company and 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.
Factors leading to insolvency
I have written before that insolvency can be due to many factors such as corporate governance failures, imprudent financial management, adverse changes in the external factors affecting the business, internal constraints such as inadequate funding or old equipment, loss of key suppliers, customers or personnel.
Application for corporate rescue by creditors
According to section 124 of the Act an affected person (such as a creditor) may apply to a Court at any time for an order placing the company under supervision and commencing corporate rescue proceedings.
In terms of section 124(4), after considering an application in terms of section 124(1) the Court may make an order placing the company under supervision and commencing corporate rescue proceedings, if the Court is satisfied that:
The company is financially distressed, or The company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or contract, with respect to employment—related
matters, or It is otherwise just and equitable to do so for financial reasons.
If there is a reasonable prospect for rescuing the company. Section 122 allows a company to make a resolution for voluntary corporate rescue.
Benefits of corporate rescue to creditors
In the context of insolvency creditors are persons (natural or juristic) who are owed money by the distressed company.
The primary objective by creditors is to recover what they are owed by the company. It may not be possible to recover the outstanding amounts if the directors or pre-existing management that caused the financial distress are still in office.
In that case it will be in the creditors’ interest that the company’s affairs are managed by an independent or neutral person in the form of a corporate rescue practitioner.
The benefits to creditors emanate from the general powers of the corporate rescue practitioner and the rights creditors derive from the Act.
General powers of corporate rescue practitioner
According to section 133(1) and 133(4) of the Act, the corporate rescue practitioner shall have the following powers and duties:
Full management control of the company in substitution for its board and pre-existing management which is dissolved in terms of section 130(2).
May delegate any power or function to a person who was part of the board or preexisting management.
May appoint a person as part of management of a company, whether to fill a vacancy or not.
Is responsible for developing a corporate rescue plan and implementing any corporate rescue plan that would have been adopted by affected persons.
Is an officer of the Court and must report to the Court in accordance with any applicable rules of or orders made by the Court.
Has the responsibilities, duties and liabilities of a director of the company.
Rights of creditors
According to section 138(1) and 138(2) each creditor is entitled to:
Notice of each court proceedings, decision, meeting or other relevant event concerning the corporate rescue proceedings.
Participate in any Court proceedings arising during the corporate rescue proceedings.
Formally participate in those proceedings by making proposals for a corporate rescue plan to the corporate rescue practitioner.
The right to amend, approve or reject a proposed corporate rescue plan in terms of section 144.
If the corporate rescue plan is rejected to propose the development of an alternative plan. The creditor may present an offer to acquire the interests of any or all of the other creditors in the manner contemplated in section 145.
Conclusion
There are benefits accruing to creditors if corporate rescue proceedings of a financially distressed company are carried out properly and effectively.
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), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, registered tax accountant 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 gohofisi@gmail.com-The Herald
