Introduction
I have written numerous articles on insolvency and corporate rescue over the past five years. I have covered both voluntary and involuntary corporate rescue. I have covered many areas such as developing a corporate rescue plan, meetings of creditors, rights of affected persons, effect of corporate rescue on shareholders and directors. I have previously explained that corporate rescue proceedings are regulated by the Insolvency Act (Chapter 6:07) of 2018, (“the Act” or “the Insolvency Act”). In this article I look at the general moratorium against legal proceedings. I have been requested to do so by some readers.
Understanding corporate rescue
In my previous articles I have explained that corporate rescue proceedings in Zimbabwe are known by other terms such as business rescue or in the past as judicial management. The proceedings are regulated by the Insolvency Act. According to the Act corporate rescue proceedings are meant to facilitate the rehabilitation of a company that is financially distressed. This will benefit affected persons who include the company’s creditors.
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.
General moratorium against legal proceedings
Moratorium or relief against legal action is afforded to the company by the Insolvency Act. Section 126 of the Act applies. The key provisions in that section are explained below.
According to section 126(1) of the Act during corporate rescue proceedings, no legal proceeding, including enforcement action, against the company or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum except:
- with the written consent of the corporate rescue practitioner
- with the leave (permission) of the Court and in accordance with any terms the Court considers suitable.
- as a set-off against any claim made by the company in any legal proceedings, irrespective of whether those proceedings commenced before or after the corporate rescue proceedings began
- criminal proceedings against the company or any of its directors or officers.
- proceedings concerning any property or right over which the company exercises the powers of a trustee.
- proceedings by a regulatory authority in the execution of its duties after written notification to the corporate rescue practitioner.
In terms of section 126(2) during corporate rescue proceedings, a guarantee or surety by a company in favour of any other person may not be enforced by any person against the company except:
- with leave of the Court, and
- in accordance with any terms the Court considers just and equitable in the circumstances.
It is worth noting that a company under corporate rescue enjoys protection from legal action, mainly from its creditors, except in the above mentioned circumstances. This applies to both voluntary and involuntary corporate rescue. In the case of voluntary corporate rescue in terms of section 122 of the Insolvency Act, the company will be seeking protection of the law against lawsuit by its creditors.
Beginning of corporate rescue and legal protection
I am of the view that the general moratorium applies from the time corporate rescue proceedings begin. According to section 125(1) of the Insolvency Act corporate rescue proceedings begin when:
- The company files a resolution to place itself under supervision in terms of section 122(3); or applies to the Court for consent to file a resolution in terms of section 122(5)(b), or
- An affected person applies to the Court for an order placing the company under supervision in terms of section 124( l ), or
- A Court makes an order placing a company under supervision during the course of liquidation proceedings or proceedings to enforce a security interest, as contemplated in section 124(7).
Conclusion
Corporate rescue proceedings afford a company a moratorium against legal proceedings, mainly by its creditors.
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 was recently appointed to sit 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.
