NewZimbabwe.com has invited Vengai Madzima, the Senior Partner at Madzima Chidyausiku Museta Legal Practitioners (MCM Legal) to discuss with us legal issues that affect Zimbabweans. The discussions are of a general nature and those seeking specific legal advice should contact their lawyer.
Welcome back Mr. Madzima, this week we want to discuss corporate rescue, what it is and when it is necessary.
Before defining what corporate rescue is and its purpose, it is necessary to contextualize it in light of the general business operating environment in Zimbabwe. We have witnessed a lot of major businesses applying to be placed in corporate rescue of late.
This is a result of the limited access to affordable finance for businesses which are expected to remain innovative against the novel, fluid informal sector which operates with little to no recurrent fixed costs like wages, statutory obligations and rentals.
It is common knowledge that at the heart of every business, guaranteeing its very survival, is the business's ability to manage cashflow. A failure to manage cashflow can ultimately affect the very existence of the business due to financial distress.
Corporate rescue, previously known as judicial management, is intended to literally 'rescue' businesses that face collapse by placing a moratorium on legal actions against the company from creditors, restructuring the company's liabilities, debts, affairs and property with the purpose of returning it to being a viable concern.
The overarching purpose is to ensure that the business remains viable and 'open,' employees remain at work and creditors are paid the whole or an agreed part of what they are owed.
It is probably the last line of defence for a business against collapse.
When is a company considered financially distressed in corporate rescue proceedings?
A company is financially distressed when it cannot pay its debts when they become due in the normal course of business or when it is likely to be insolvent within 6 months. Key indicators may be negative cashflow, possibly from the company being owed significantly under long-term arrangements while itself being burdened by short term loans that have become due.
What is critical in the analysis of financial distress from a corporate rescue perspective is that the company has a realistic prospect of recovery if it is placed in corporate rescue, it has a positive net worth, with assets that are more valuable than liabilities or that if managed properly, the assets are capable of paying off the liabilities and returning the business to a viable competitive state.
What is the procedure to place a company in corporate rescue?
Our law allows for directors of a company to pass a resolution to put the company in corporate rescue if the directors are of the view that the company is financially distressed and there are reasonable prospects of rescuing the company.
Alternatively, an affected person, such as a creditor or even an employee can apply to the court to have the company placed under corporate rescue if they can demonstrate that the company is distressed and there are reasonable prospects of the company being rescued from that distress.
What is the effect of corporate rescue on stakeholders?
Once an order has been issued to place the company in corporate rescue, a corporate rescue practitioner takes over the management of the company. He or she will develop a rescue plan which includes the restructuring of the debts and operations of the company including its implementation plan if approved by stakeholders.
The most significant development is that a moratorium is imposed on all legal proceedings against the company allowing the company 'breathing space' to operationalize its rescue plan.
Long and short, the creditors' ability or rights to sue or enforce their judgments or court orders against the company are suspended. Their only option is to participate in the development of the rescue plan and in some instances, they will have to compromise on the quantum of the debts meaning agreeing to a 'haircut' of what they are owed. This in some situations is their only guarantee that the debts are repaid.
On the other hand, the employees' contracts remain in force and employee claims of unpaid wages are a priority. The powers of directors are significantly curtailed as they have to report to the corporate rescue practitioner and assist him or her in bringing back the company to viability.
The rights of the shareholders are preserved, however, their interest in the company may be affected by the restructuring and its consequences to the remaining value of the company. The positive is that after a successful rescue, they will still have a company to talk of. The alternative is having no company without corporate rescue.
Can an interested person object to a company being placed in corporate rescue and what will the grounds be?
Any affected party, creditors, employees, shareholders or any stakeholder can object to a company being placed in corporate rescue. The common objection is that the company is attempting to use corporate rescue in bad faith for purposes of circumventing its obligation to pay debts that have become due.
However, stakeholders may have different reasons for objecting to a rescue plan, for instance, if employees feel that their rights or claims are not adequately addressed, creditors feel that the rescue plan will not likely succeed but result in them having to wait too long for only a fraction of their debt et cetera.
Other reasons may be the questionable capacity of the rescue practitioner to revive the company, an unviable rescue plan or that the company has no prospect of rescue.
Thank you, Mr. Madzima we will continue on insolvency next week but we have run out of time.
Thank you.
You can contact Vengai Madzima on vengai@mcmlegal.co.zw or at www.mcmlegal.co.zw