Introduction
On 20 August 2020 I wrote an article titled “Factors influencing corporate rescue”. Further, I have been asked by many MBA and PhD candidates to respond to their research questionnaires on corporate rescue proceedings in Zimbabwe.
In this article I will deal with two key areas a corporate rescue practitioner needs to understand, being finance and the law.
Corporate rescue
As previously explained 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 “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
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.
Factors influencing corporate rescue
In my said article I explained that these factors include but are not limited to state of the company when it was placed under corporate rescue, ability of company to raise funding, skills of the corporate rescue practitioner, governance structures during proceedings, profile and attitudes of creditors, set timeframes, quality of corporate rescue plan and its effective implementation, legal requirements, disputes and litigation involving affected persons and standard operating procedures.
Importance of understanding finance and the law
There is no doubt the work done by corporate rescue practitioners is specialist in nature. It involves financial troubleshooting, strategic business management and legal troubleshooting. Ordinarily, a company’s board of directors and management have diverse skills that should complement each other. The corporate rescue practitioner is coming in where the board and management have failed.
The powers of a corporate rescue practitioner include full management of the company in place of its board of directors and pre-existing management. The practitioner may delegate any of his or her powers or functions to a person who was part of the board or pre-existing management of the company.
It can therefore be argued that corporate rescue involves two distinct areas, namely:
- Attending to the business issues of the company most of which are financial in nature. This is particularly so due to the need to pay off creditors and trade the company out of its insolvency situation.
- Attending to legal aspects connected to the corporate rescue.
Business management and financial aspects
The temporary supervision of the company and management of its affairs, business and property require business and financial management skills. The same is true for the development and presentation of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity.
A corporate rescue practitioner should be able to deal with the business and financial aspects affecting the affected persons and the company itself. These key stakeholders include creditors, holders of equity, employees and others. A practitioner should also be able to handle suppliers and customers for the business to continue as a going concern. An understanding of key business processes and the value chain is quite important.
A corporate rescue practitioner should have very good understanding of strategic planning and its implementation as this will be necessary starting with the drafting of the corporate rescue plan and, if approved, its implementation. Having been a director of several companies for nearly twenty years my view is that strategic planning and effective implementation are easier said than done.
Further, a corporate rescue practitioner should be able to deal with financial management specifically cashflow management, debt management and capital raising.
The practitioner should also have very good appreciation of budgets covering the Income Statement, Cashflow Statement and Statement of Financial Position (formerly Balance Sheet). An understanding of tax planning and administration is also advantageous.
Accounting is another area very key to cover for example accounting systems, internal controls, the preparation and interpretation of monthly management accounts, preparation and interpretation of annual financial statements, external audit, forensic audit and internal audit, etc. Information provision is key to affected persons especially creditors who want to be assured that they will be paid their dues.
Legal aspects
Corporate rescue proceedings can involve many legal aspects to the extent of litigation. The numerous legal aspects involve rights of affected persons, compliance requirements with the Act, the Companies and Other Business Entities Act (Chapter 24:31) (“the COBE Act”) which replaced the Companies Act (Chapter 24:03) and other applicable laws. In most cases litigation is over rights of creditors, equity holders, employees or suppliers.
Outsourcing
Outsourcing to consultants is an option but may not always give the best results and comes at a cost to the struggling business. Non-legal practitioners will have no option but to engage legal practitioners on legal issues. Legal practitioners without adequate understanding of business and finance may also outsource. Practitioners may work together as co-corporate rescue practitioners or under other arrangements for effective turnaround of a company.
Conclusion
Adequate skills in business management, finance and legal will put a corporate rescue practitioner at an advantage in managing an insolvent company out of its difficulties.
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
