Corporate rescue: Navigating the legal labyrinth

ASHLEY MABIGINYE AND FUNGAI CHIMWAMUROMBE

In today’s dynamic business landscape, the specter of financial distress looms large over corporations, often threatening their very existence.

The Insolvency Act (Chapter 6:07), has introduced a seminal aspect of Corporate Rescue in Zimbabwe, signifying a notable departure from the traditional judicial management process that previously governed the treatment of distressed companies.

This legislative advancement not only enhances the legal framework for restructuring financially troubled entities but also empowers business entities to initiate recovery processes.

By fostering a more flexible approach, the Act aims to facilitate the preservation of business value while ensuring equitable treatment of all stakeholders involved.

What is corporate rescue?

Corporate rescue is a strategic mechanism designed to revitalize financially distressed companies and other business entities, overseen by a qualified corporate rescue practitioner, ensuring effective rehabilitation. Section 121 of the Insolvency Act (Chapter 6:07) defines corporate rescue as the facilitation of the rehabilitation of a company that is financially distressed by corporate rescue practitioner .

The proceedings facilitate corporate rescue through the temporary oversight of the company’s management and affairs by a qualified and registered Corporate Rescue Practitioner. During this period, the company is granted a temporary moratorium on litigation, effectively halting any legal actions initiated by claimants regarding debts or liabilities owed to them, as well as any claims concerning property in the company’s possession.

This moratorium ensures that creditors cannot pursue litigation during the rescue process, fostering an environment conducive to recovery.

Concurrently, a comprehensive plan for the company’s rehabilitation is developed and implemented, aimed at restructuring its operations, assets, debts, and liabilities in a manner that maximizes the likelihood of the company’s continued viability on a solvent basis.

Section 142 of the Insolvency Act mandates that a Corporate Rescue Practitioner prepare a detailed corporate rescue plan for potential adoption, after consulting relevant stakeholders, including creditors and management.

The plan must encompass critical information necessary for stakeholders to make informed decisions, such as an inventory of material assets, identification of secured assets, a comprehensive creditor list, estimated dividends, and the Practitioner’s remuneration. It should also address the nature and duration of any litigation moratorium, debt relief, proposed debt-to-equity conversions, treatment of existing agreements, and the property’s availability for creditor claims, alongside a projected balance sheet and a three-year income statement.

The corporate rescue plan must be published within 45 business days of the Practitioner’s appointment, or longer if authorized by the High Court. Section 143(1) further requires the Practitioner to convene a creditors’ meeting within 10 business days after publication. Failure to adequately prepare the plan or convene the meeting undermines the proceedings and indicates professional incompetence

According to Section 125 of the Insolvency Act, corporate rescue proceedings may be initiated in four distinct ways. First, a company can commence proceedings by filing a board resolution to enter supervision.

Second, the company may seek the High Court’s consent to file such a resolution.

Third, an affected party can apply to the High Court for the company to be placed under supervision. Lastly, the High Court may order supervision during ongoing liquidation proceedings or when enforcing a security interest.

There are differing views on the duration of corporate rescue proceedings. One perspective posits that these proceedings conclude after the 90-day period specified in Section 125(3), which mandates that corporate rescue should be completed within three months.

Conversely, another viewpoint argues that corporate rescue ends under five specific circumstances outlined in Section 125(2): when the High Court annuls the initiating resolution or order; when the proceedings are converted to liquidation; when the Corporate Rescue Practitioner submits a notice of termination; upon the adoption and substantial implementation of a corporate rescue plan; or when a proposed plan is rejected without an extension.

Section 125(3) further stipulates that if the proceedings are not concluded within three months, or a longer period as authorized by the High Court, the Corporate Rescue Practitioner must prepare a progress report. This report, updated monthly, must be delivered to affected parties, the High Court, and the Master, ensuring transparency and accountability throughout the corporate rescue process.

Conclusion

In conclusion, the Corporate Rescue framework established by the Insolvency Act (Chapter 6:07) represents a pivotal shift in managing financially distressed companies in Zimbabwe.

By facilitating structured rehabilitation under the guidance of a Corporate Rescue Practitioner, the Act not only safeguards stakeholder interests but also enhances the prospects of business continuity.

The clear procedural guidelines and the emphasis on stakeholder consultation are vital for fostering transparency and accountability, ultimately promoting equitable resolutions that benefit both creditors and the broader economic landscape.

Ashley Mabiginye is an associate intern at Zenas legal practice can be contacted on What’sApp +263713738025 ashleytyno6@gmail.com

Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Chimwamurombe Legal Practice and can be contacted through email fungai@zenaslegalpractice.com.