Introduction
I have been requested by some readers to explain the connection between corporate rescue proceedings and debt recovery. Put differently, the readers would like to understand how corporate rescue proceedings can be used to recover debts from defaulting companies.
Understanding corporate rescue
In my previous articles I have explained that 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. 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.
Debt recovery through corporate rescue proceedings
During corporate rescue proceedings creditors’ main interest is recovering amounts they are owed by the company. In other words, creditors are after payment. The creditors may also be interested in the survival of the company as this may ensure continuing business with the creditor as supplier. A corporate rescue practitioner’s main responsibility is to ensure payment of creditors.
Corporate rescue proceedings are therefore a form of debt recovery. The affairs of the company will be managed by an independent or neutral person in the form of a corporate rescue practitioner. The practitioner replaces the board of directors and management of the company.
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 pre-existing 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.
Application for corporate rescue by creditors
I have always been asked by creditors about how they can cause a defaulting company to be placed under corporate rescue proceedings. According to section 124 of the Insolvency 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.
Conclusion
An aggrieved creditor may use corporate rescue proceedings as a debt recovery mechanism.
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), MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deal and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
