The business operating environment in Zimbabwe for both large and small companies has been marred with challenges over the past 20 years. Sanctions, inflation, currency changes, and exchange rate distortions have all contributed to making it difficult for businesses to survive, let alone thrive.
Such a landscape characterized by insolvency often presents a challenging scenario, with several companies grappling to address mounting liabilities and the risk of financial collapse. In such circumstances, corporate rescue proceedings emerge as a potential solution, offering a structured framework for the rehabilitation and recovery of financially distressed entities. This article emphasizes the need to evaluate the efficacy in securing a better return for creditors, particularly in cases where a company’s solvency is uncertain.
Corporate rescue was introduced to Zimbabwe through the Insolvency Act [Chapter 6:07].1 Prior to the enactment of this Act, the rescue of companies was conducted through judicial management proceedings.2 The purpose of judicial management was to prevent a company from being placed in liquidation if there was a reasonable probability of the company being able to recover and resume operations.3 However, the courts found judicial management to be a “spectacular failure”. One of the reasons for its failure was the high burden of proving “reasonable probability”.4 Additionally, unlike corporate rescue which should be concluded within 3 months,5 judicial management continued for an indefinite period resulting in negative financial impact on creditors. Judicial management also had several unsatisfactory aspects that undermined its intended purpose.
Corporate rescue entails the restoration of a company to a healthy state, allowing it to preserve its value and continue operations. The primary objective of corporate rescue is to maintain the solvency of the company for the benefit of its stakeholders, including security holders, creditors, workers and other parties who rely on the company’s existence.6 This is achieved through temporary supervision of the company and its affairs, a moratorium on the rights of claimants against the company or its assets and the implementation of a rescue plan aimed at restructuring the company’s affairs.7 The corporate rescue plan serves as the central focal point of the process, guiding the development and implementation of the company’s rescue efforts.
Corporate rescue proceedings commence when the company initiates the process by submitting a resolution to subject itself to supervision,8 or seeks court approval to file a resolution,9 or when an affected party applies to the court for an order to place the company under supervision.10 Alternatively, a court may order the company to be placed under supervision during liquidation proceedings.11
Upon the commencement of corporate rescue proceedings, a corporate rescue practitioner is appointed to assume full management and control of the company. The practitioner’s primary responsibility is to develop and implement a corporate rescue plan, which will be evaluated by affected parties.12
The exercise of rights by secured creditors and other contracting parties following the initiation of corporate rescue plays a crucial role in determining the success or failure of the rescue efforts.
All of the company’s creditors are required to actively participate in the rescue process and cooperate with the rescue practitioner by ensuring that their claims and interests are well taken care of during the preparation, consideration and implementation of the corporate rescue plan.13 Each of the company’s creditors has the right to receive notification of all court proceedings, decisions, and meetings, as well as the opportunity to participate in both court and corporate rescue proceedings. They are also entitled to submit proposals for the corporate rescue plan14 to amend, approve, or reject a proposed rescue plan and to propose the development of an alternative plan. Additionally, the creditors have the right to establish a creditors committee, which will be consulted by the corporate rescue practitioner during the formulation of the rescue plan.15
Regarding voting interests, a secured or unsecured creditor’s voting interest is equivalent to the value of the amount owed to them by the company. An unsecured creditor who would be subordinated in a liquidation, as per a subordination agreement, has a voting interest based on the amount they would reasonably expect to receive in such a liquidation of the company.16
To optimize the likelihood of delivering tangible benefits to all stakeholders, including the secured creditors themselves, section 126 of the Insolvency Act imposes a general moratorium on legal proceedings; no enforcement actions against the company or related to its property may be initiated unless specifically ordered by a court under section 126 of the Act.17 This temporarily suspends the rights of secured creditors to sell or dispose of company property over which they hold security interests throughout the rescue period.18 Furthermore, the enforcement of guarantees or sureties given by the company to other parties requires prior approval from the court. Consequently, all creditors, including secured and preferential creditors, are prohibited from pursuing individual enforcement measures during the rescue period.19
This provision serves as a robust tool for ensuring the stability and continuity of operations during corporate rescue, while also guaranteeing fair and equitable treatment of all creditors. By temporarily restraining the exercise of rights by secured creditors and other parties, the moratorium fosters an environment conducive to the successful implementation of the rescue plan, ultimately benefiting all stakeholders involved.
The notification of affected persons by standard notice in corporate rescue proceedings is a crucial aspect of ensuring creditor protection and inclusion. The legal obligation to notify each affected party through standard notice serves to provide all creditors and affected parties with the opportunity to assert their claims and actively participate in the proceedings. Failure to notify each affected person by standard notice renders the application for corporate rescue fatally defective.20
Lastly, it is important to acknowledge that corporate rescue proceedings are not without their challenges. Unsatisfactory aspects of previous rescue mechanisms, such as judicial management, have highlighted the need for a more effective and efficient approach. The introduction of corporate rescue proceedings, as provided for in the Insolvency Act, represents a significant step forward in addressing these challenges and enhancing creditor returns.
In conclusion, corporate rescue proceedings have the potential to be a valuable tool in insolvency cases, offering a fair and equitable resolution for distressed companies and their creditors. By striking a balance between the interests of all stakeholders and providing a structured framework for rehabilitation, corporate rescue proceedings contribute to the enhancement of creditor returns.