Corporate rescue in Zim: The legal framework

November 25, 2021

FUNGAI CHIMWAMUROMBE & LEON GONA

 

With the Covid-19 pandemic constraining economic activity across the board, a number of businesses have experienced financial distress.

The pandemic has caused an increase in expenditures whilst incomes/ profitability diminished exponentially.

Notwithstanding the gradual return to normalcy and relaxation of lockdown regulations, that directly impacted upon commerce, some entities are still under financial distress.

The authors hereto take this instance to advise of business rescue proceedings in the case of business entities under financial distress.

Prior to the current Insolvency Act [Chapter 6:03], which came into effect in 2018, our jurisdiction (Zimbabwe) conducted judicial management proceedings prescribed under the former Companies Act.

The change from judicial management to business was influenced by a number of issues, which included the stigma attached to entities under judicial management as unrehabilitated insolvents and the contention that such proceedings would be initiated to wind up such entity and liquidate.

Some analysts have stated that up to 90% of entities, within Zimbabwe, have either failed to survive or have been under judicial management for extended periods.

Corporate rescue proceedings are focused on bringing relief to financially distressed entities.

The definition as stated under s121(b) of the Insolvency Act [Chapter6:03] notes the temporary nature of such proceedings and the requirement for the development and implementation of a rescue plan to maximise the probability of such entity continuing in existence and solvency thereafter.

Business rescue proceedings may be commenced either voluntarily, i.e. by virtue of a company resolution passed in terms of s122 of the Insolvency Act [Chapter 6:03], or by virtue of a court order obtained pursuant to s124 of the Insolvency Act [Chapter 6:03].

The option to voluntarily commence corporate rescue requires the board resolution effecting such commencement to state there are reasonable grounds to believe the company is distressed and there appears to be reasonable prospects of rescuing the respective company.

To ward off errant insolvents from evading their creditors and related obligations, the  Insolvency Act [Chapter 6:03] s122 (2) (a) and (b) notes that such resolution will only take effect upon filing the same with the Master of the High Court or  when there are ongoing liquidation proceedings.

In instances were corporate rescue is commenced pursuant to a court order, an applicant ; being either a shareholder or creditor, a registered trade union representing the company or any of the employees not represented by a registered trade union or their respective representatives; may approach the court to seek an order commencing corporate rescue.

The key benefit of commencing corporate rescue proceedings is the moratorium extended to financially distressed entities in respect of legal proceedings, including the enforcement against property owned by the company.

This includes creditors rights. S126 of the Insolvency Act [Chapter 6:03] places limits on the said moratorium, such that entities under corporate are not placed in an enclave devoid of legal rights or execution thereof by creditors.

The previous regime of judicial management brought into focus the competency of judicial managers. It is an indictment on that process and the custodians thereof, that successful judicial management cases are far and few between in addition to the protracted process such judicial managers took their respective company’s through.

It is therefore pertinent to note the qualifications set out for persons assuming the role of corporate rescue practitioner set out under s131 of the Insolvency Act[Chapter 6:03].

The limitation stated under the s131 are meant to offer safeguards to ensure that the practitioners as custodians of the corporate rescue proceedings.

Further to the individual requirements of the practitioner s142 of the Insolvency Act [Chapter 6:03] requires the corporate rescue practitioner to compile a proposal of the rescue plan possible for the adoption at a meeting of creditors and any other holders of voting rights.

The corporate rescue plan together with prescribed competencies of the business rescue practitioner seemingly address the stigma attached to the previous judicial management regime and mandate such proceedings commence with an end in sight, as prescribed by the rescue plan, and the return to solvency of such distressed entities.

Overall the corona virus pandemic has had far reaching economic impact on all businesses  As most seek to rebound, some may continue to struggle as issues of solvency attack their viability.

It is therefore imperative directors and shareholders alike, to remain cognisant of business rescue proceedings and shake any stigma attached thereto and avoid crumbling from excessive creditor obligations.

Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Chimwamurombe Legal Practice and can be contacted for feedback at fungai@zenaslegalpractice.com and WhatsApp 0772 997 889. Leon Gona is an Associate and can be contacted on leon@zenaslegalpractice.com 

 

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