eBusiness Weekly
Tapiwa G Kasuso
In June 2018, Zimbabwe enacted the Insolvency Act (Chapter 6:08). The Act repealed the old Insolvency Act (Chapter 6:04) and some provisions of the old Companies Act (Chapter 24:03).
The purpose of the new Insolvency Act is to provide for the administration of insolvency and assigned estates and the consolidation of insolvency legislation. Critically, the Insolvency Act replaced judicial management as a business rescue strategy with corporate rescue proceedings.
Judicial management was provided for in section 300 of the old Companies Act. With the passage of time, judicial management had become outdated and failed to cater for the needs of the modern day business environment.
It had several unsatisfactory aspects that defeated the purposes of business rescue. Firstly, the procedure was regarded as an extraordinary remedy, which infringed on the rights of creditors and was only available under special and limited circumstances.
Secondly, the procedure was only available to companies incorporated in terms of the Companies Act and was not available to other forms of business entities such as trusts, partnerships and private business corporations.
Thirdly, the judicial management scheme was too formal and over regulated by the courts resulting in the procedure becoming costly, slow and cumbersome. Fourthly, the requirements that had to be satisfied in an application for a judicial management order were onerous.
Lastly, the old Companies Act had serious defects in the appointment and qualifications of judicial managers. The Act allowed the applicant to nominate a person to be appointed as judicial manager.
As if that was not enough, there was a complete lack of regulatory control over the qualifications of judicial managers.
One could be appointed without having the necessary experience and expertise thus making the process prone to abuse.
In light of these weaknesses, judicial management failed to provide a mechanism for the management and reorganisation of companies with a view to returning them to profitability.
In most instances, it resulted in company failures and their winding up thus negatively impacting on the economy. It is against this backdrop that the legislature in its wisdom enacted the Insolvency Act with newly created corporate rescue procedures.
Corporate rescue is defined in section 121 (1) (b) of the Insolvency Act as proceedings to facilitate the rehabilitation of a company that is financially distressed.
This is achieved through the following measures: (a) the temporary supervision of the company and of the management of its affairs, business and property; (b) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and (c) 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.
Therefore, the purpose of corporate rescue is to save a company as a whole and achieve the above objectives. The only acceptable outcome at the end is the survival of the financially distressed company.
The Insolvency Act provides two ways of commencing corporate rescue proceedings. The first procedure is in section 122 (1) of the Insolvency Act that provides that the board of a company or its shareholders can take a resolution to institute corporate rescue proceedings. This procedure is voluntary and does not require the company to approach a court.
The resolution placing the company under supervision can only be taken if the company is financially distressed, in that it is unable to pay its debts and there appears to be reasonable prospect of rescuing the company.
For the resolution to be effective it must be filed with the Master of the High Court, the Registrar of Companies and the Registrar of Co-operatives Societies, in the case of a co-operative society.
The company must within five business days after filing the resolution notify every affected person and appoint a corporate rescue practitioner who satisfies the requirements of section 131 of the Act.
His or her responsibility is to oversee management of the company during the corporate rescue proceedings.
The second procedure is by an application to court for an order commencing corporate rescue proceedings.
The application to the High Court can be made by any affected person who in terms of section 121 (1) (a) of the Act includes the following: a shareholder or creditor of the company, any registered trade union representing employees of the company and employees of the company not represented by a registered trade union.
Directors of the company and the company itself are not affected persons and cannot make an application to court in terms of section 124 (1) of the Insolvency Act.
If a court is satisfied that, (i) the company is financially distressed, or (ii) the company has failed to pay any amount in terms of a public regulation, or contract, with respect to employment related matters, or (iii) it is otherwise just and equitable to do so for financial reasons, it may make an order placing the company under supervision and commencing corporate rescue proceedings.
Alternatively, the court can dismiss the application and make any further necessary and appropriate orders which include an order placing the company under liquidation. The court will also appoint a corporate rescue practitioner to manage the affairs of the company.
The effect of corporate rescue is to impose a general moratorium on commencing or continuing with legal proceedings, including enforcement of actions, against the company or in relation to any property owned by the company or lawfully in its possession, in any forum, for the duration of the corporate rescue proceedings.
The moratorium in terms of section 126 (1) of the Insolvency Act is automatic and comes into effect on commencement of corporate rescue.
During a company’s corporate rescue, the company can only dispose of its assets in circumstances prescribed in section 127 (1) of the Act. In respect of contracts of employment, the general rule is that employees who were employed by the company before commencement of corporate rescue proceedings will remain employed with no change to their terms and conditions of employment.
However, section 129 (1) (a) (i) – (ii) of the Insolvency Act provides exceptions to this rule. Furthermore, the Board of Directors is deemed to be dissolved during corporate rescue proceedings and directors can no longer exercise their functions as directors. The management of the company is vested in the corporate rescue practitioner.
Section 121 (1) (d) of the Insolvency Act defines a corporate rescue practitioner as a person appointed, or two or more persons appointed jointly, in terms of this Part to oversee a company during business rescue proceedings. As indicated earlier on he is appointed by way of company resolution or by court order.
To be eligible for appointment one must satisfy the requirements and qualifications spelt out in section 131 of the Act and the practitioner must accept the appointment in writing.
The powers of a corporate rescue practitioner are set out in section 133 (1) (a) – (d) of the Act and include: full management and control of the company in substitution of the board; he or she can delegate any of his or her powers to a person who was part of the board or pre-existing management of the company; appoint any person as part of management of a company; to develop a corporate rescue plan and implement any corporate rescue plan. Section 136 (1) of the Act also provides for remuneration of the corporate rescue practitioner.
The effect of section 121 (1) (c) of the Insolvency Act is to shed light on what a corporate rescue plan is. It is a plan drawn up by the corporate rescue practitioner in consultation with creditors, affected persons and management of the company showing how the rescue of the company will be achieved. The contents of a corporate rescue plan are prescribed in section 142 of the Act and include background information, proposals, assumptions and conditions. A corporate rescue plan must be approved by creditors and shareholders at a meeting convened in terms of section 143 (1) of the Act. During the corporate rescue proceedings the Insolvency Act recognises participation rights of employees (section 137), creditors (section 138) and holders of securities (section 139).
Finally, there is no provision for the automatic or compulsory termination of corporate rescue proceedings in the Act. However, the legislature in section 125(3) (a) of the Act intended that corporate rescue proceedings would not take more than three months. In terms of section 125 (2) (a) – (c) of the Act, corporate rescue proceedings are terminated in one of the following ways: by court order, the filing of a notice of termination with the Master and by rejection or substandard implementation of a corporate rescue plan.
In conclusion, it is submitted that the new corporate rescue proceedings are a paradigm shift from judicial management. The streamlined procedures are key in having a successful and effective business rescue regime critical to economic growth and stability.
Taiwa G Kasuso is a legal practitioner and lecturer in the Faculty of Commerce and Law at the Zimbabwe Open University.
