Introduction
In 2018, the legislature enacted the Insolvency Act [Chapter 6:07] (hereinafter the Act). One of the notable advancements in the Act is the introduction of corporate rescue proceedings to replace judicial management which was repealed in terms of the Companies and Other Business Entities Act [Chapter 24:31]. It is apparent that in introducing the Part XXIII corporate rescue procedure in our law the legislature transplanted the South African Chapter 6 business rescue provisions in the Companies Act 71 of 2008 (hereinafter the Companies Act). This article is a brief descriptive outline on the process for voluntary corporate rescue in Zimbabwe.
Purpose and Objectives of Corporate Rescue
Corporate rescue is a process to facilitate the rehabilitation of a company that is financially distressed (s121(1)(b) of the Act). Section 121(1)(h) states that 'rescuing the company' means achieving the goals in section 121(1)(b) of the Act.
The rehabilitative process is achieved through three processes, which are, namely: management displacement by the assumption of control by the corporate rescue practitioner in place of the board of directors (s121(1)(b)(i) of the Act); a temporary moratorium on the rights of claimants (s121(1)(b)(ii) of the Act); and the development and implementation of a corporate rescue plan (s121(1)(b)(iii) of the Act). See A G Petzetakis International Holdings Ltd v Petzetakis Africa (Pty) Ltd and Others 2012 (5) SA 515 (GSJ) [11].
It is important to bear in mind that the term 'rehabilitation' is not defined in the Act. Therefore, 'rehabilitation' within the context of corporate rescue means either a return of a financially distressed company to normalcy, or, where that is not possible, a better return to creditors or shareholders than they would obtain under liquidation (s121(1)(b)(iii) of the Act).
A question which naturally arises is whether corporate rescue may be pursued in terms of sections 122(1) and 124(4) of the Act for the sole purpose of providing a better return to creditors and shareholders than they would receive under liquidation? The current position in South Africa is that it is possible to initiate corporate rescue proceedings for the sole purpose of providing a better return to creditors and shareholders than they would receive under liquidation. See Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others 2013 (4) SA 539 (SCA) [26] & [28]. However, for a contrary view see A G Petzetakis International Holdings Ltd v Petzetakis Africa (Pty) Ltd and Others 2012 (5) SA 515 (GSJ) [2]; and Griessel and Another v Lizemore and Others [2015] 4 All SA 433 (GJ) [78]. This question is beyond the scope of this discussion but it is important for our courts to clarify this point.
Financial distress is defined as a situation where a company shall be unlikely to settle any of its debts or is likely to become insolvent within the immediately ensuing six month period (s121(1)(f) of the Act). In terms of section 3 of the Act the test for insolvency may be either factual (where liabilities exceed assets) or commercial (where assets exceed liabilities but a company is unable to settle its debts).
Right of Appearance (Locus Standi)
The corporate rescue procedure is generally available to a category of persons known as an 'affected person' (section 121(1)(a)(i)-(iii) of the Act). An affected person can either be a shareholder, creditor, trade union or an unrepresented employee.
Types of Corporate Rescue
Corporate rescue can either be voluntary or involuntary. In the absence of any liquidation proceedings by or against a company, a board of directors may voluntarily initiate corporate rescue proceedings through a resolution (section 122(1)-(2) of the Act). Where a board has not voluntarily initiated corporate rescue an affected person may file an application to court for a company to be placed under corporate rescue (section 124(1) of the Act). This article shall discuss the voluntary corporate rescue procedure.
Voluntary Corporate Rescue
The rational for voluntary corporate rescue is best summarized in the following quotation:
"The procedure (voluntary corporate rescue) is thus faster, simpler and much less expensive to commence than judicial management. It also allows the board of directors to act immediately once they realise that the company is heading for insolvency and needs the protection and the breathing space that business rescue proceedings will provide, during which a rescue of the company or its business can be attempted." Loubser A Some Comparative Aspects of Corporate Rescue in South African Company Law (LLD thesis University of South Africa 2010) at 51.
Once a resolution is adopted it must be filed with the Master of the High Court otherwise it is of no force or effect (section 122(2)(b) of the Act). Therefore, there is a distinction between the point when the corporate rescue begins in the factual sense with an adoption of a resolution and legal commencement when the resolution is filed. See Mouton v Park 2000 Development 11 (Pty) Ltd and Others and a related matter [2019] 4 All SA 133 (WCC) [67].
It is important for the board to be properly constituted and for the resolution to be passed in compliance with the relevant legal thresholds (See section 204 of the Companies and Other Business Entities Act [Chapter 24:31]). Within five days after adopting and filing a resolution a company is required to publish a notice of the resolution to all affected persons (s122(3)(a) of the Act). The notice must include a sworn statement detailing the grounds on which the resolution was founded (s122(3)(a) of the Act).
In the same five day period the company is expected to also appoint a corporate rescue practitioner who satisfies the requirements of section 131 of the Act (s122(3)(b) of the Act). Two business days after appointment the company must file a notice with the Master of the High Court on the appointment of the corporate rescue practitioner. Thereafter, five business days after the date of filing the company must notify all affected persons on the appointment of the corporate rescue practitioner (s122(4)(a)-(b) of the Act).
Failure to comply with any of the foregoing procedural notice requirements nullifies the resolution to commence corporate rescue proceedings (s122(5)(a) of the Act). A statutory bar will also be placed on the company precluding the board from adopting a resolution in terms of section 122(1) of the Act for a period of three months (s122(5)(b) of the Act). The statutory bar may be removed through an application to court.
There is some doubt on the meaning of section 122(5)(a) of the Act. A plain reading of the section implies that failure to comply with the notice procedures in sections 122(3) and (4) automatically nullifies a resolution to commence corporate rescue which effectively ends the proceedings, see Advanced Technologies and Engineering Company (Pty) Ltd v Aeronautique et Technologies Embarquées SAS GNP case no 72522/11. However, there is an argument that voluntary corporate rescue proceedings may only be terminated by section 125(2)(a)(i) read with 123(5)(a) of the Act. It is argued that section 122(5)(a) has the effect of nullifying the resolution, however, the corporate rescue which was commenced by the resolution remains valid and may only be terminated by section 125(2)(a)(i) read with 123(5)(a) of the Act, see Panamo Properties (Pty) Ltd and Another v Nel N.O. and Others 2015 (5) SA 63 (SCA). Our courts will need to clarify this point, however, in the meantime it is advisable to comply with the notice requirements.
During voluntary corporate rescue proceedings a company is precluded from adopting a resolution to commence liquidation proceedings until the corporate rescue proceedings have ended (section 122(6) of the Act). Where the board has reasonable grounds to believe that a company is financially distressed but fails to adopt a resolution in terms of section 122(1) of the Act, the board of directors is required to issue a notice to all the company's affected persons setting out the grounds for the belief in terms of section 121(1)(f) of the Act and the reasons for the board electing not to voluntarily commence corporate rescue.
This notice may sully the reputation of the company and provides a reason for an affected person to file an application to commence corporate rescue in terms of section 124(1) of the Act. The inclusion of the word "must" in section 122(7) means that this is a mandatory duty which a board must comply with upon the realisation that there is a reasonable possibility of the company being financially distressed. The provision makes no reference to the time within which a board must comply after having made the realisation which implies that notice must be issued immediately. See Loubser A Some Comparative Aspects of Corporate Rescue in South African Company Law (LLD thesis University of South Africa 2010) at 66-67.
At any time prior to the adoption of a corporate rescue plan an affected person has the right to make an application to court to either set aside a resolution to commence corporate rescue proceedings or the appointment of a corporate rescue practitioner (section 123(1)(a) and (b) of the Act). See section 123 of the Act and Delport P A et al Henoschberg on the Companies Act 71 of 2008 (LexisNexis Durban 2019) at 469-479.
Conclusion
Voluntary corporate rescue provides a timely and cost effective remedy to financially stressed companies and it is important for large and small companies to be aware of the benefits of this procedure. The right conferred on a board to appoint a corporate rescue practitioner is a means to inculcate a debtor-oriented approach and it is recommended for boards to consider the timely commencement of corporate rescue.
However, the notice in terms of section 122(7) of the Act could be counter-productive as this may cause undue strain as creditors realise the possibility of a company being in financial distress. The right to appoint a corporate rescue practitioner through section 122(3)(b) may provide a gateway for boards to fraudulently conceal mismanagement and fraud through collusion with a hand picked puppet. See Levenstein E An appraisal of the new South African Business Rescue Procedure (LLD thesis University of Pretoria 2015) at 631.
The article also points out potential contentious areas which the courts may need to clarify as the issues are contested by litigants in various disputes.
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