INTRODUCTION
There is no doubt that the Coronavirus disease 2019 (COVID-19) has caused unprecedented challenges worldwide resulting in a ripple effect in the economic performance of the corporate citizen known as a business. Oftentimes, when lives are under threat we often forget the danger to our juristic citizens known as companies, private business corporations (PBC) etc. These corporate citizens have a special place in our communities and nation as they provide jobs, pay taxes, produce goods and services, are reliable customers and earn foreign currency.
In March 2020, in response to the COVID-19 pandemic, the Government of Zimbabwe declared a State of Disaster and instituted restrictive measures which have had adverse effects on businesses. These restrictive measures popularly known as 'lockdown measures' have had severe impacts on the economy and by implication on businesses in Zimbabwe. However, the small start-up, co-operative or small and medium-sized enterprises (SMEs) are particularly vulnerable as they often rely on just in time stock management, hand to mouth breakeven cashflow management systems, have little to no collateral security, amongst a myriad of challenges.
What does one do when faced with cash-flow challenges and your organisation is unable to settle debts in the immediate future? I have personally come across many distraught business persons with otherwise sound businesses that just needed a break to survive. I have seen unemployed people who lost their jobs walking around like hungry zombies simply because a creditor was unreasonable and failed to agree to flexible repayment schedules.
Fortunately, in 2018, the enactment of the Insolvency Act [Chapter 6:07] introduced the corporate rescue procedure to rehabilitate and rescue financially distressed companies. It is essential for every director and member of a company to familiarise themselves with this Act (http://www.veritaszim.net/sites/veritas_d/files/insolvency%20act%20clean.pdf).
CORPORATE RESCUE
Corporate rescue is a procedure to facilitate the rehabilitation of a company that is financially distressed. Corporate rescue can be pursued to achieve one of two goals: 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.
Financial distress is defined as a situation where a company shall be reasonably unlikely to settle any of its debts or is likely to become insolvent within the immediately ensuing six month period. In light of the current restrictions to international and domestic travel, businesses in the tourism and transport sector are particularly affected. The same could apply to cross border traders or farming entities affected by unexpected climate shocks such as the 2019/2020 drought.
Corporate rescue is achieved through three processes which are as follows: appointment of a corporate rescue practitioner who assumes authority over a company; a temporary moratorium on the rights of claimants; and the development and implementation of a corporate rescue plan.
A corporate rescue practitioner is obliged to investigate the affairs of a company with the aim of assessing whether there is a reasonable prospect of a company being rescued. The most important advantage of corporate rescue is the moratorium it provides against legal claims which may be instituted by creditors, or any enforcement action during the corporate rescue process. There are certain exceptions to the moratorium, however, in general terms the moratorium provides a corporate rescue practitioner and a company breathing space to restructure and assess the viability of a company before it reaches the point of dissolution.
The supervision by a corporate rescue practitioner should culminate in the production of a corporate rescue plan. This plan is put to a vote at a meeting of creditors. Adoption of a corporate rescue plan may result in the rebirth or resuscitation of a financially ailing company which may otherwise have been dissolved.
COMMENCEMENT OF CORPORATE RESCUE
Corporate rescue can either be voluntary or involuntary. This article shall focus on voluntary corporate rescue proceedings. 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. Timing is therefore essential because once liquidation proceedings have been initiated the remedy of voluntary corporate rescue is no longer available to a company. It is important for the said resolution to be in compliance with the requirements set out in the Companies and Other Business Entities Act [Chapter 24:31].
To become legally valid a resolution to commence corporate rescue must be filed with the Master, and in the case of a company or co-operative, the Registrar of Companies or the Registrar of Co-operative Societies respectively. Within five days after adopting and filing a resolution a company is required to publish a notice of the resolution to all affected persons. The notice must include a sworn statement detailing the grounds on which the resolution was founded. An affected person can either be a shareholder, creditor, trade union or an unrepresented employee.
In the same five day period a company is expected to also appoint a corporate rescue practitioner who satisfies the requirements of the Act. Two business days after appointment the company must file a notice with the Master of the High Court and the Registrar of Companies or Cooperative Societies on the appointment of a corporate rescue practitioner. Thereafter, five business days after the date of filing the company must notify all affected persons on the appointment of a corporate rescue practitioner.
Failure to comply with any of the foregoing procedural notice requirements nullifies the resolution to commence corporate rescue proceedings. A statutory bar will also be placed on the company precluding the board from adopting a resolution to commence corporate rescue for a period of three months. It is therefore very important to comply with these procedural requirements.
DIRECTOR DUTIES
One point which seems to have gone unnoticed when the Insolvency Act was enacted was the introduction of a duty on directors acting through a board of directors to issue a notice to affected persons where the board has reasonable grounds to believe that a company is financially distressed but fails to adopt a resolution. The notice must set out the grounds for the boards belief that a company is likely to be financially distressed and the reasons for electing not to voluntarily commence corporate rescue.
In the event that a company is eventually liquidated failure to adhere to this notice requirement may infer reckless conduct of business or insolvent trading which may result in severe civil and criminal liability claims against directors or proprietors. This means that whilst commencement of corporate rescue may be optional failure to commence corporate rescue in circumstances where a reasonable board of directors would have done so may carry severe consequences for the directors involved.
CONCLUSION
Voluntary corporate rescue is a fast and simple means of saving your company from dissolution. The breathing space provided by a moratorium under corporate rescue is essential in enabling struggling companies to revive under these difficult economic conditions.
The ability to appoint a corporate rescue practitioner enables a board to appoint a qualified professional to assess the viability of a business from an external viewpoint. In most cases the success or failure of corporate rescue always hinges on the time at which the process started. It is therefore essential for boards to consider this option at the first signs of financial distress.
This article is a brief descriptive outline and should not be considered to substitute professional legal advice. For any further information the author may be reached on tanyamilne2000@yahoo.co.uk.
© 2020 Tanyaradzwa Manhombo All Rights Reserved.
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