Navigating the Storm: Options for businesses in financial difficulty under Zimbabwe’s insolvency law

NAMATIRAI RUZVIDZO

 Mawere Enterprises was once the toast of the town, known for its innovative products and flashy office space.

Yet, behind the scenes, the Company’s finances were a mess.

 CEO, Mr. Mawere, had a habit of splurging on luxury cars and fancy suits, while neglecting to pay suppliers and employees on time. The Company’s creditors soon descended upon Mawere Enterprises like vultures, demanding payment. Mr. Mawere was forced to sell his beloved luxury cars and fancy suits in an attempt to pay off some of the debt. Mr. Mawere’s fancy suits and cars were just a facade.

He should have focused on paying the Company’s suppliers and employees on time.In Zimbabwe’s dynamic economic landscape, businesses often face financial distress, an inability to meet obligations.

While daunting, this does not always signal the end. Zimbabwe’s Insolvency Act [Chapter 6:07] of 2018 (the “Act”) offers structured pathways for rehabilitation, restructuring, or orderly winding up.

This article demystifies these options, providing a comprehensive overview for businesses, creditors, and stakeholders on navigating insolvency law in Zimbabwe.

Financial distress is when a Company struggles to generate sufficient cash flow or profits for its obligations. Early recognition is crucial for recovery, with signs including persistent cash flow shortages, mounting debts, and inability to pay suppliers or employees.

Informal arrangements, like out-of-court negotiations with creditors to restructure debts or extend payment terms, are often preferred for their flexibility and lower costs.

Their success, however, depends on creditor cooperation and a credible recovery plan from the debtor. The 2018 Insolvency Act significantly reformed Zimbabwe’s insolvency framework. It replaced the old Judicial Management system, which often faced criticism for inefficiencies, with the more modern concept of Corporate Rescue.

This aligns Zimbabwe with international best practices, emphasizing rehabilitation over immediate liquidation. Corporate Rescue: A lifeline for rehabilitation Corporate Rescue (or Business Rescue), introduced by the 2018 Act, is a pivotal innovation aimed at rehabilitating financially distressed companies.

Its primary objective is to facilitate the Company’s rescue by: Providing temporary supervision by a Corporate Rescue Practitioner (CRP).Imposing a temporary moratorium on legal rights of claimants against the Company. Developing and implementing a corporate rescue plan to restructure affairs, debts, and equity.

The goal is to maximize the likelihood of the Company continuing as a solvent entity, or to achieve a better return for  creditors/shareholders than immediate liquidation.

Financial distress, in this context, means it is reasonably unlikely the Company can pay its debts within six months, or likely to become insolvent within that period.

This forward-looking definition encourages early intervention, offering a crucial lifeline to businesses facing temporary financial headwinds, preserving jobs and productive capacity.

The Corporate Rescue process: Key stages The corporate rescue process involves distinct stages: Initiation Proceedings can be initiated by a board resolution (if the board believes the Company is distressed and can be rescued) or by a High Court order, applied for by an affected person (e.g., creditor, shareholder) who must satisfy the court of financial distress and a reasonable prospect of rescue.Appointment of a Corporate Rescue Practitioner (CRP) An independent, qualified CRP is appointed to manage the Company during rescue, developing and implementing the rescue plan.

The Act sets stringent requirements for CRPs, emphasizing independence and expertise. Moratorium on legal proceedings A critical feature is the temporary halt on legal proceedings against the Company.

This provides breathing space, protecting the Company from aggressive creditor action while the rescue plan is formulated.

The CRP, in consultation with stakeholders, develops a detailed plan for restructuring and rehabilitation. This includes financial restructuring (debt repayment, conversions), operational restructuring (business model changes, cost-cutting), and funding plans.

Creditors’ meeting and plan approval The plan is presented to creditors and affected persons.

Approval requires a majority vote representing at least 75% of creditors’ voting interests. An approved plan is binding on all affected parties.

The CRP implements the approved plan. Proceedings terminate upon substantial implementation, court order, or if the Company enters liquidation. Liquidation: When rehabilitation is not possible When corporate rescue is not feasible or fails, liquidation (winding up) becomes necessary.

This involves the orderly realization of assets, distribution of proceeds to creditors by legal ranking, and ultimately, the Company’s dissolution. It ensures fair and transparent winding up, protecting creditor interests and preventing further debt accumulation.Types of liquidation: Voluntary and Compulsory The Act provides for two types of liquidation: Voluntary liquidation Initiated by shareholders/members.

In a Members’ Voluntary Winding Up, the Company is solvent and can pay debts in full. In a Creditors’ Voluntary Winding Up, the Company is insolvent, and creditors effectively control the process, aiming to maximize returns. Compulsory liquidation (Winding Up by the Court) Ordered by the High Court, typically initiated by a creditor when the Company cannot pay its debts. Other grounds include failure to commence business, reduced membership, or if the court deems it just and equitable.

A liquidator is appointed to control assets, realize them, investigate affairs, and distribute proceeds. The role of key stakeholders in insolvency proceedings Various stakeholders have distinct roles: The Debtor Company and its management In corporate rescue, management assists the CRP under supervision. In liquidation, directors’ powers cease, and the liquidator takes control. Creditors Creditors are central, categorized as secured (priority over specific assets), preferent (for example employees for wages, certain taxes), and unsecured (lowest ranking). They prove claims, vote at meetings, and can oversee the process.The Corporate Rescue Practitioner (CRP) / Liquidator Independent professionals with fiduciary duties.

CRPs focus on rehabilitation and plan implementation. Liquidators realize assets, investigate conduct, and distribute proceeds.

The Master of the High Court Supervises all insolvency proceedings, confirming appointments, approving accounts, and ensuring compliance with the Act.  Employees Impacted by distress, their claims for unpaid wages are preferent. In corporate rescue, their interests are considered; in liquidation, contracts are terminated. Shareholders typically, the last to receive distributions in liquidation. In corporate rescue, their rights may be affected by restructuring.

Insolvency significantly alters legal and financial positions. Implications for Creditors Creditors aim to recover debts, but distribution hierarchy means not all will recover fully. Secured and preferent creditors rank higher than unsecured. Active participation (proving claims, attending meetings) is crucial. In corporate rescue, creditors may make concessions for long-term rehabilitation, but the moratorium temporarily restricts individual action. Implications for Debtors (Company and Directors) In corporate rescue, the Company retains identity but management is supervised, aiming for reorganization and solvency.

In liquidation, the Company ceases to exist. Directors face potential personal liability for reckless or fraudulent trading. The concept of impeachable transactions allows liquidators to set aside certain prior transactions to recover assets.

For example, in Afrasia Bank Limited V K. S. Trust (SC 39-2018), the court scrutinized transactions that might prejudice creditors, a principle central to the current Act. Directors must seek early legal and financial advice to mitigate risks. Real-Life examples from the Zimbabwean landscape Recent cases highlight the Act’s utilization: Food WorldThe retailer entered corporate rescue, demonstrating how established businesses use the mechanism for rehabilitation and job preservation.

The ferrochrome giant’s corporate rescue case shows the Act’s application to large industrial players with substantial debts, reflecting broader economic challenges.

Truworths Limited This clothing retailer’s corporate rescue exemplifies how businesses sensitive to economic downturns can reorganize and seek stability.

The construction

Company’s application for corporate rescue illustrates its use in cyclical industries to address financial woes and secure future projects. These examples underscore the prevalence of financial distress across sectors, the increasing reliance on corporate rescue for rehabilitation, the complexity of cases, and the significant impact on all stakeholders.

Navigating financial difficulty is challenging, but Zimbabwe’s Insolvency Act of 2018 offers modern solutions. Corporate rescue, a significant shift from judicial management, emphasizes rehabilitation and value preservation, providing a lifeline for distressed companies. Its success depends on early recognition, competent CRPs, and stakeholder cooperation. For directors and business owners, proactive engagement is paramount.

Delaying action exacerbates problems and limits options. Seeking timely legal and financial advice is essential to understand financial positions, evaluate options, navigate legal requirements, and develop viable recovery strategies. With expert assistance, businesses can navigate these turbulent waters towards a more stable future.