This article is simplified and not exhaustive.
Corporate rescue is also known by other terms such as business rescue or judicial management. According to Section 121 of the Insolvency Act (Chapter 6:07) (hereinafter “the Act”) of 2018 corporate rescue means the proceedings of facilitate the rehabilitation of a company that is financially distressed. It involves providing for:
- Temporary supervision of the company and of the 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.
A corporate rescue practitioner, also known as insolvency practitioner, hereinafter called “the practitioner”, is a professional who is registered with the Estate Administrators Council of Zimbabwe.
In Zimbabwe corporate rescue is regulated by the Insolvency Act (Chapter 6:07) or the Act of 2018. Previously this was regulated by the Companies Act (Chapter 24:03) which was repealed and replaced by the Companies and Other Companies Act (Chapter 24:31) which became operational in February 2020. A corporate rescue practitioner derives his or her powers from Section 133 of the Act.
In this article I will share with you some of the factors which in my view will improve the effectiveness of corporate rescue. Broadly some of these factors include:
- Factors leading to the insolvency of the business,
- Understanding the state of the company at the time a corporate rescue practitioner is appointed,
- Stigmatisation by key stakeholders,
- Skills of the corporate rescue practitioner,
- Corporate governance structures during corporate rescue,
- Knowledge of the type of business or industry,
- Availability of key staff,
- External factors affecting the business (“PESTEL”)
- The business’ strengths, weaknesses, opportunities and threats (“SWOT”),
- Availability, cost and tenure of business rescue finance,
- Profile and attitude of creditors,
- Timeframes within which turnaround is expected,
- Quality and approval of corporate rescue plan,
- Legal requirements,
- Disputes or litigation involving key stakeholders such as creditors, shareholders.
- Standard operating procedures,
- Association of corporate rescue practitioners.
Some of the factors listed above are explained below.
Understanding factors leading to insolvency
There are various factors but common ones include mismanagement particularly of finances by management, worse when a business is owner managed. Even a businesses with sound governance practices can still become insolvent due for example to external factors explained below, internal constraints such as old productive equipment, loss of key staff, loss of key customers or suppliers, etc. Where corporate governance deficiencies are the cause it might be easy to turnaround the business.
State of the company when placed under corporate rescue
A business is placed under business rescue if there are prospects of reviving it otherwise it is liquidated / wound up. This is akin to a patient – doctor scenario or client – legal practitioner scenario. The sooner a company seeks solutions to its challenges the better chances of being turned around. At times when a corporate rescue practitioner is appointed the business’ finances would be beyond reconstruction, creditors’ patience exhausted, assets stripped or simply sold to finance obligations. Customers and suppliers might also have moved to alternatives.
Businesses should also consider engaging corporate rescue practitioners as consultants to avoid being placed under corporate rescue.
Stigmatisation by key stakeholders
When a company is under reconstruction some key stakeholders such as banks, customers or suppliers, as part of their risk mitigation measures, may not be willing to do business with it. This affects the ability or speed of turnaround.
Skills of the corporate rescue practitioner
It appears corporate rescue in Zimbabwe is dominated by accountants and legal practitioners, the latter developing interest in the last few years. As regards banks the curator is the Depositors Protection Corporation (“DPC”), who may then appoint agents to assist.
According to the Estate Administrators Act, as amended in 2018, the following persons qualify as insolvency practitioners:
- Registered legal practitioners,
- Registered public accountants or public auditors,
- Member of the Institute of Chartered Secretaries and Administrators of Zimbabwe,
- Any related field the (Estate Administrators) Council may consider.
The above persons are subject to:
- Having passed an examination in insolvency laws, and
- Having completed a period of no less than 2500 hours of supervision under the guidance of an experienced insolvency practitioner covering a period of 2-3 years, unless registered prior to the 2018 amendment or exempt under the transitional arrangement under the same Act.
There are diverse views as to the appropriate qualifications required of corporate rescue practitioners. Some of the arguments include that:
- Most of the work done by corporate rescue practitioners involves financial troubleshooting, strategic business management and legal troubleshooting.
- Ordinarily a company’s board of directors has diverse skills including technical expertise for the type of business, finance, legal, marketing, human resources, etc. Further, these skills may be found in executives who manage the company on a day to day basis working closely with the Chief Executive Officer, Managing Director, or so. The board and executive management teams and their skills may then be replaced by an individual corporate rescue practitioner.
- Reviving a business requires more than ordinary business management skills. It is like in the medical field where specialists are required to deal with certain situations. In corporate rescue there is strategic management and high level financial and legal trouble-shooting. An experienced practitioner who may have been through industry and commerce may have an advantage.
A number of corporate rescue courses are offered by foreign institutions, for example in South Africa. Zimbabwean institutions of higher learning are encouraged to develop specific courses as these do not only benefit practitioners but managers of businesses as well. This can be in the form of short courses or even degrees.
Governance structures during corporate rescue
A practitioner is advised to implement corporate governance structures to better manage the affairs of a business under rescue. Such measures may include:
- Joint or co- business rescue whereby at least two practitioners work together,
- Have the equivalent of a board of directors,
- Retain some of the executives.
Dealing with external factors affecting the business (“PESTEL”)
Businesses are affected by external factors in different ways. These factors can be political, economic, social, technological, environmental or legal. A case in point is the current environmental factor of COVID-19.
Funding
When a company is under corporate rescue it is normally considered high risk by financial institutions to the extent that some financial institutions have policies against lending to companies under corporate rescue. Shareholders of the company may not be able or willing to inject more funds into the company. Customers may not want to pay deposits to the company. Suppliers are usually not willing to extend credit to such companies. Solutions usually come in the form of Government backed concessionary financial packages for distressed companies or the company itself issuing new shares to attract new shareholders.
Profile and attitudes of creditors
The profile and attitudes of creditors have significant influence. For example co-ordinating many creditors or seeking their approval can be difficult. On the other hand a few major creditors may wield significant negotiating power. Some creditors might be willing to compromise to save the company whereas others may not mind being paid out of liquidation proceeds.
Timeframes
Corporate rescue practitioners are usually under immense pressure to turnaround and exit the company. This may come from creditors who want to be paid their dues, shareholders who want to take over control of the company, employees who want security of employment or at times Government that wants to improve the economy, etc. There are views that some practitioners may prolong their stay to earn more fees whereas some practitioners might be of the view that some of the timelines may not be realistic. I have been unable to answer the question asked by some non-practitioners whether it is possible for reconstruction to take shorter than the period of destruction.
The Insolvency Act has important timeframes meant to expedite corporate rescue proceedings. For example Section 125 has strict timelines on the duration of corporate rescue proceedings. Further, Sections 140-145 have strict timelines on the first meeting of creditors, preparation and consideration of corporate rescue plan. The Act is still new so time will tell whether the timeframes are realistic or not.
Quality of the corporate rescue plan
The corporate rescue plan is central to the intended revival of a company. To this end the Act has come up with some important requirements. Section 142 contains detailed requirements of the Act. Section 144 provides key requirements at the meeting to be held to consider the corporate rescue plan.
This part requires skills in financial trouble-shooting, strategic planning and legal trouble-shooting. A practitioner has to be at the top of his / her game to have the business rescue plan approved in order to move forward. The beauty is that the practitioner has to work with affected persons defined by the Act to include creditors, shareholders, employees or their trade unions. To avoid an asymmetry of information directors of the business immediately before corporate rescue proceedings are obliged, in terms of Section 135, to provide specified information to the practitioner.
Legal requirements
The process of corporate rescue is regulated in order to protect various stakeholders. There are various requirements at law which have to be met.
In the past the now repealed Companies Act (Chapter 24:03) was said to be outdated as regards corporate rescue. Time will tell whether the new Act addresses those shortcomings including improving the ease of doing business.
Disputes and litigation
By its nature corporate rescue can be characterised by disputes or litigation. For example creditors may be aggrieved by rejected claims or simply push for settlement. Labour cases may result through employees alleging unfair treatment, resisting measures taken by the practitioner, for example to avoid liquidation. Such measures may include altering employee benefits, etc. On the other hand shareholders may resist dilution of their shareholding or increasing debt / gearing.
Standard operating procedures
Auditors are guided by international financial reporting standards, auditing standards and internal audit programs. Legal practitioners, in addition to the laws of the land, are guided by Court rules for Court processes. The Insolvency and Restructuring Association of Zimbabwe (“IRAZ”), an association of insolvency and restructuring professionals may step in to improve that area for the benefit of its members.
Insolvency and Restructuring Association of Zimbabwe (“IRAZ”)
IRAZ was formed to bring together insolvency and restructuring professionals in Zimbabwe. Just like other associations some of the issues IRAZ can help address include:
- Bring corporate rescue practitioners together,
- Develop standards for its members,
- Liaise with the Estate Administrators Council and other stakeholder on behalf of its members,
- Continuously improve its members through for example regular seminars, newsletters, etc.
- Develop or improve ethical standards for its members.
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows Hofisi is a legal practitioner, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
