Introduction
There is inconclusive debate on the effectiveness or otherwise of corporate rescue proceedings done in terms of the Insolvency Act (Chapter 6:07) or “the Act”, in turning financially distressed businesses around. Some stakeholders argue that corporate rescue proceedings, even previously as judicial management, has registered low success rates. On 19 August 2020 I wrote an article titled “Factors influencing effectiveness of corporate rescue proceedings wherein I gave my views on the key factors affecting the effectiveness of corporate rescue proceedings. Five year on, I still fully associate myself with the views I expressed in that article.
Factors influencing effectiveness of corporate rescue proceedings
In my said article I explained some of the factors as those below.
State of the company when it was placed under corporate rescue proceedings
A business is placed under corporate rescue proceedings if there are prospects of it being revived otherwise it will be liquidated. This is akin to a patient – doctor scenario. The sooner the patient or company is attended to the better the chances of recovering. At times when a company is placed under corporate rescue proceedings the sun would have set. It will be too late.
Stigmatisation by key stakeholders
When a company is under reconstruction some key stakeholders such as banks, customers or suppliers, as part of risk management, may raise a red flag in the face of the struggling business. I perfectly understand this. This is why I am of the view that the Government or the Reserve Bank may set up some facilities for distressed companies. I remember David Whitehead Textiles benefitting from a loan facility extended to it by the Zimbabwe Asset Management Company (“ZAMCO”) which was an arm of the Reserve Bank. Appreciated is expressed to former RBZ Governor, Dr JP Mangundya.
Skills of the corporate rescue practitioner
This is akin to saying the success of a company depends on the competency of the board and management. This cannot be ignored or wished away. I mentioned that corporate rescue in Zimbabwe is dominated by accountants, with legal practitioners developing interest in the last few years. Accountants have the advantage of understanding business.
Corporate governance structures during corporate rescue proceedings
This may include corporate governance structures that help better manage a business. There is debate as to whether a single corporate rescue practitioner can do what a board of directors and management failed to do. In my respectful view, it all depends. If the financial distress is a result of corporate governance malpractices then a corporate rescue can succeed if he / she avoids or corrects those errors. However, some of the problems may emanate from the operating environment.
Funding
Banks may not be willing to lend, customers not keen to pay deposits or suppliers hesitant to give supply credit. Shareholders may be unwilling or unable to inject any or more funds.
Profile and attitudes of creditors
Corporate rescue is easier if the creditors are cooperating.
Disputes and litigation
I mentioned that by its nature corporate rescue can be characterised by disputes including litigation by creditors, employees or shareholders. Creditors may be aggrieved by a rejected claim or shareholders may resist possible dilution or simply resist loss of control of the company.
Enhancing skills of corporate rescue practitioners
In my respectful view, a lot can be done to improve the skills and therefore the performance of corporate rescue practitioners.
Qualifying examinations and experience
The Council of Estate Administrators and Insolvency Practitioners already has qualifying examinations and minimum experience requirements for one to qualify as a corporate rescue practitioner. In my view, this is very close to the training structure for chartered accountants where one qualifies as chartered accountant upon passing examinations and meeting the required hours of experience.
I express the view that this pre-qualifying training has to be practical and expose aspiring insolvency practitioners to the real issues. It is easier for someone who has worked in business as a manager to perform as a corporate rescue practitioner than someone who has largely been an auditor or legal practitioner.
Continuing Professional Development (“CPD”)
I hold the view that, the Council of Estate Administrators and Insolvency Practitioners should consider mandatory annual CPDs wherein a member will be required to attend certain annual CPDs amounting to a certain number of hours. The Law Society has such a system where CPD hours are a pre-requisite for renewing a practising certificate.
I hold the strong view that such CPDs can be on legal and business issues. On business such CPDs can cover the economic or operating environment, future projections, modern business trends, business technology, strategic management, corporate rescue plans, implementing plans, human resources management, risk management, finance for businesses under corporate rescue, capital raising, etc.
Standard Operating Procedures / Corporate Rescue handbook
This will serve as a quick guide to corporate rescue practitioners from the time of being appointed.
Conclusion
The skills or competence of a corporate rescue practitioner is important for successful corporate rescue. The regulator and the Master of the High Court can help with training.
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.
