Introduction
I have previously written several articles on insolvency practice covering both corporate rescue proceedings and liquidations. I have explained both voluntary and involuntary corporate rescue proceedings. In this article I share with you some insights into why companies delay making the decision to enter into voluntary corporate rescue proceedings.
Corporate rescue
In terms of section 121(1)(b) of the Insolvency Act (Chapter 6:07) (“the Insolvency Act”), corporate rescue means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:
- the temporary supervision of the company, and of the management of its affairs, business and property.
- a temporary moratorium on the rights of claimants against the company or in respect of property in its possession, and
- the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
Types of corporate rescue proceedings
There are basically two types of corporate rescue proceedings:
- Voluntary corporate rescue proceedings in terms of section 122 of the Insolvency Act, and
- Involuntary corporate rescue proceedings in terms of section 124 of the Insolvency Act.
The main difference is that voluntary corporate rescue proceedings are done at the instance of the company whereas involuntary or forced corporate rescue proceedings are caused by affected persons such as creditors through securing a court order
Voluntary corporate rescue proceedings
According to section 122(1) 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, and
- there appears to be a reasonable prospect of rescuing the company.
Delays by companies in making voluntary corporate rescue decisions
I have previously explained some of the reasons affecting the effectiveness of corporate rescue proceedings. One of the reasons being that by the time a company is placed under corporate rescue proceedings it might be too late. I likened that to a doctor – patient situation when the patient visits his or her medical doctor when it could have been better if done earlier. In the case of a company, the sun may have set already, for example the company having sold by creditors in execution of court orders.
Reasons for delays
I have been engaged with many people in discussion as to why there are delays by companies in making voluntary corporate rescue decisions. I express my views below.
Belief that the business can be turned around
Whether right or wrong, shareholders, directors or management may genuinely believe that the company’s fortunes will be turned around even without a clear or tangible plan. They simply may live on hope though hope itself is not a strategy but good to have.
Lack of understanding of voluntary corporate rescue
Some people are honest enough to say that they will not consider voluntary corporate rescue because they do not understand it. They do not like the legalities involved.
Fear of losing control
Directors of a company and the shareholders who appointed them, may fear voluntary corporate rescue as that may or will result in them losing control of the company.
Loss of cashflows
Shareholders who may influence dividend decisions may fear that if the business is placed under corporate rescue, they may lose their influence on dividends and therefore lose cashflows coming from dividends.
Some directors may resist voluntary corporate rescue if they are benefitting from meaningful board membership or sitting fees or both.
Senior managers who are likely to be replaced or sidelined by an independent corporate rescue practitioner may resist voluntary corporate rescue as this may affect their earnings and welfare.
Fear of investigations
A corporate rescue practitioner, through an investigation of the company’s affairs, may uncover corporate governance malpractices by the shareholders, board or management. This may account for resistance or delays.
Stigma
Companies that go into voluntary corporate rescue are usually stigmatised as having failed and beyond redemption. The result is that shareholders, directors and management may be sceptical that the company and them will be treated that way. Companies do not necessary go into corporate rescue due to internal factors such as bad governance but due to some external factors such as economic, social, technological, environment, legal, etc. Stigma is real but should not stand in the way of a company’s turnaround efforts.
Bad intentions
Shareholders, directors or management want to asset strip the company before voluntary corporate rescue, hence some of the delays.
Conclusion
There are various factors accounting for the delays by companies in making decisions for voluntary corporate rescue proceedings.
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 sits on the Board of 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.
