Introduction
I have written many articles on corporate rescue in Zimbabwe. As explained in those previous articles 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.
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.
A company can be placed under voluntary corporate rescue proceedings in terms of section 122 of the Act or involuntary proceedings in terms of section 124 of the Act. According to section 122(1) of the Act 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,
- There appears to be a reasonable prospect of rescuing the company.
According to section 124(4) a Court may make an order placing the company under (involuntary) supervision and commencing corporate rescue proceedings if 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.
In this article I look at how a corporate rescue practitioner may address debt during corporate rescue proceedings.
Dealing with debt during corporate rescue proceedings
As indicated above section121 of the Act, corporate rescue proceedings give temporary moratorium (relief) on the rights of claimants against the company or in respect of property in its possession. For example, if creditors want to sue a company under corporate rescue they need leave (consent or permission) of the Court. The moratorium gives the corporate rescue practitioner time to address the company’s debts with the view to take the distressed company out of its financial distress. I explain below some of the ways of dealing with a company’s debt during corporate rescue proceedings.
Debt rescheduling with creditors
This involves restructuring the terms of existing debt. The most common is negotiating payment plans with creditors, thus effectively changing the payment due dates. A corporate rescue practitioner, without giving some creditors undue preference, may enter into negotiations for the payment of debts. This may even be more important to ensure key suppliers do not cut the company off. Debt rescheduling may also involve variation of interest rates, etc. A corporate rescue practitioner is required to prepare a corporate rescue plan and have it approved by creditors, etc. In that plan the practitioner has to be clear how creditors will be paid. He or she may propose to pay creditors according to some agreed way.
Debt equity swap
It is common for a corporate rescue practitioner to negotiate debt – equity swap so that creditors end up taking shareholding in the company through for example preference shares or ordinary shares with some being redeemable. This will give relief to the company in terms of pressure to pay and also any interest charges. The resulting shareholders may sell the shares at a later date.
Payments out of the company’s operating cashflows
A corporate rescue practitioner normally prefers to improve the operating and financial performance of the company. Creditors will then be paid out of the company’s own cashflows within agreed time frames. This option requires the consent of the creditors. The corporate rescue practitioner needs to work extra hard to ensure there are cashflows to pay creditors.
Pay creditors after selling redundant assets
With the necessary approvals, a corporate rescue practitioner may sell non-core or redundant assets of the company in order to pay creditors. It may also help manage interest charges.
Issue of new shares
A company under distress may issue new shares and use the proceeds to settle debt. Unlike debt – equity swap the shares are usually issued to people who are not necessarily owed by the company.
Conclusion
Dealing with deal is a major part of a corporate rescue practitioner’s duties under corporate rescue proceedings. He or she needs to understand financial structuring and to ensure the necessary approvals are in place.
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
