Introduction
I have written several articles before on insolvency practice covering both corporate rescue proceedings and liquidations. I have explained both voluntary and involuntary corporate rescue proceedings. I have previously explained why there can be delays in placing a company under corporate rescue. In this article I cover the consequences of delaying placing a company under corporate rescue proceedings.
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.
Types of corporate rescue proceedings
There are basically two types of corporate rescue proceedings:
• Voluntary corporate rescue proceedings in terms of section 122 of the Insolvency Act, and
• Involuntary corporate rescue proceedings in terms of section 124 of the Insolvency Act.
The main difference is that voluntary corporate rescue proceedings are done at the instance of the company whereas involuntary or forced corporate rescue proceedings are caused by affected persons such as creditors through securing a court order
Voluntary corporate rescue proceedings
According to section 122(1) the board 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.
Delays by companies in making voluntary corporate rescue decisions
In my article of 25 November 2025 I covered why there can be delays in placing companies under corporate rescue. In the one I wrote on 1 August 2020 I covered factors influencing corporate recsue proceedings.
Reasons for delays
Based on my previous article I summarise the reasons as follows:
• Belief that the business can be turned around without corporate rescue.
• Lack of understanding of voluntary corporate rescue
• Fear of losing control of the company.
• Loss of cashflows in the form of dividends, board fees or executive perks.
• Fear of investigations by corporate rescue practitioner.
• Stigma due to actual or perceived failure.
• Bad intentions such as asset stripping.
Consequences of delays
Such consequences may include the following:
• Further deterioration
• Worsening financial situation.
• Loss of stakeholder confidence.
• Depletion or loss of assets.
• Loss of market share.
• Shrinking of the business.
• Risk of liquidation
• Sale of shares at reduced prices.
Further deterioration
Generally, delays in placing a company under corporate rescue proceedings is akin to sick individual delaying seeking medical treatment. In most situations, delayed corporate rescue results in further worsening of the company’s situation.
Worsening financial situation
A company under financial distress is unable to pay its creditors as they fall due. There will be underlying reasons. As corporate rescue is delayed the company will continue to bleed through fixed overheads against declining business. The company will generate losses and accumulate liabilities. In addition to external creditors, a company may even owe its employees salaries and benefits for several months.
Loss of stakeholder confidence
As the situation continues to deteriorate some of the company’s key stakeholders may lose confidence in the business. These may include:
• Customers who will be forced to go to competitors due to the non – availability of goods or services.
• Suppliers who may be frustrated that they are owed and there is no solution in sight. Such suppliers may then reduce or stop supplying on credit.
• Employees usually do not have immediate options and often hope the company will soon be turned around. Delayed resolution of problems can frustrate a lot of them through delayed salaries and benefits and uncertainty over continued employment. Some may eventually be terminated as part of restructuring.
• Bankers may be unwilling to extend credit such as loans or overdraft facilities.
Depletion or loss of assets
It is common for a company under serious financial distress and delayed corporate rescue proceedings to lose assets through litigation by its creditors. Such assets will be attached and sold in execution of judgment debts. The company may also sell off some of its assets hoping to raise funds for working capital generally or to pay off creditors. The consequences can be catastrophic where a company sells part of its assets which it has been using to house its business as this may amount to reduction in the size of the business.
Loss of market share
This is quite common and inevitable for companies that operate in sectors where there is competition. As the company loses customers ort supplies less and less it will naturally lose its market share.
Shrinking of the business
A combination of loss of market share and loss of assets may easily shrink the size of the business. A company may be forced to revisits its model and restructure.
Risk of liquidation
As corporate rescue proceedings are delayed this increases the risk of liquidation. As the company’s situation worsens this increases its chances of failing to recover.
Sale of shares at reduced prices
To avoid total loss, existing shareholders may be forced to sell their shares at discounted prices. Even the company itself may be forced to issue new shares at reduced prices due to the reduced valuation of the company.
Conclusion
Delays in placing a company under corporate rescue proceedings can have far reaching implications such as liquidation and loss of value.
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 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.
