Corporate Rescue Procedure Under the Insolvency Act

 

KELVIN SABAO

 

Introduction

 

The Corporate Rescue Procedure, as outlined in the Insolvency Act (Chapter 6:07), is a procedure designed to provide struggling businesses with a lifeline to recover from financial distress and avoid liquidation.

This procedure was introduced by the Insolvency Act on 25 June 2018 and since that time, it has gained popularity.

This procedure has essentially replaced judicial management. Furthermore, this procedure is essential for preserving businesses and protecting stakeholders, including employees, creditors, and shareholders.

In this article, I will delve into the key aspects of the Corporate Rescue Procedure in Zimbabwe, including its objectives, process, and its significance in the country’s business landscape.

 

Objectives of Corporate Rescue in Zimbabwe

 

1. Preserving Viable Businesses: The primary goal of the Corporate Rescue Procedure is to preserve businesses that are deemed viable. By doing so, it protects jobs, suppliers, and economic stability within the country.

 

2. Maximizing Asset Value: The procedure aims to maximize the value of a distressed company’s assets for the benefit of its creditors, as opposed to immediate liquidation, which often results in diminished asset values.

 

3. Avoiding Liquidation: Liquidation is the last resort, and the Corporate Rescue Procedure strives to prevent it. This is because liquidation can lead to a complete shutdown of operations, job losses, and a significant loss of value for all stakeholders involved.

 

Key Components of Corporate Rescue

 

1. Appointment of a Corporate Rescue Practitioner: The first step in the corporate rescue process is the appointment of a qualified Corporate Rescue Practitioner (CRP). The CRP is responsible for overseeing the rescue process, developing a rescue plan, and ensuring its successful implementation.

 

1. Corporate Rescue Plan: The CRP develops a corporate rescue plan, which is a comprehensive strategy to rehabilitate the distressed company. The plan must address the company’s financial, operational, and managerial challenges. It is submitted to the creditors for approval.

 

1. Creditor Involvement: The corporate rescue plan is submitted to the creditors for approval. Creditors have the power to reject or modify the plan.

 

1. Protection from Legal Actions: During the rescue process, the distressed company is protected from legal actions by creditors. This “stay of proceedings” is essential to provide the company with the breathing room it needs to recover.

 

1. Implementation of the Rescue Plan: If the rescue plan is approved, the CRP oversees its implementation. The plan may involve debt restructuring, asset disposal, operational changes, or other strategies to return the company to profitability.

 

Significance of Corporate Rescue in Zimbabwe

 

1. Job Preservation: One of the most significant advantages of the Corporate Rescue Procedure is its ability to preserve jobs. By giving distressed companies a chance to recover, it safeguards the livelihoods of employees.

 

1. Economic Stability: Corporate rescue helps maintain economic stability by preventing the abrupt closure of businesses, which could have ripple effects on suppliers, creditors, and the broader economy.

 

• Creditors’ Interests: The procedure protects the interests of creditors by ensuring they have a say in the rescue process and an opportunity to recover their debts, rather than seeing their claims severely reduced in a liquidation scenario.

 

1. Encouraging Entrepreneurship: Knowing that there is a safety net for struggling businesses can encourage entrepreneurship and innovation in Zimbabwe. It sends a positive signal to potential investors and entrepreneurs that the legal system supports business recovery.

 

Steps in the Corporate Rescue Procedure

 

The Corporate Rescue Procedure in Zimbabwe involves several key steps, which are as follows:

 

1. Application for Corporate Rescue: The distressed company’s board of directors, or shareholders can voluntarily make a resolution to institute corporate rescue proceedings. The Insolvency Act also empowers creditors to initiate the corporate rescue process by applying to the High Court of Zimbabwe.

 

2. Appointment of a Corporate Rescue Practitioner: A qualified corporate rescue practitioner must be appointed to oversee the process. The corporate rescue practitioner takes control of the company’s operations and affairs.

 

3. Moratorium: The imposition of a moratorium provides the company with temporary relief from legal actions by creditors and other parties. This is intended to create a conducive environment for developing a corporate rescue plan.

 

4. Development of a Corporate Rescue Plan: The corporate rescue practitioner works with the company’s management, creditors, and other stakeholders to create a corporate rescue plan. This plan outlines the strategies and actions to be taken to rescue the company.

 

5. Creditor Approval: The corporate rescue plan is presented to the company’s creditors for approval. Creditors can vote to accept or reject the plan, and the plan must be approved by a majority of creditors in value.

 

6. Implementation of the Plan: If the corporate rescue plan is approved, it is implemented under the supervision of the corporate rescue practitioner. This may involve restructuring debt, selling assets, or making operational changes to improve the company’s financial health.

 

7. Monitoring and Reporting: Throughout the corporate rescue process, the corporate rescue practitioner is responsible for monitoring progress and providing regular reports to the court, Master of the High Court, creditors, and other stakeholders.

 

8. Conclusion of the Procedure: The corporate rescue procedure concludes when the rescue plan is successfully implemented, or the corporate rescue practitioner has filed with the Master of the High Court a notice of the termination of corporate rescue proceedings; or if the court orders its termination. If the rescue plan is not approved or fails to produce the desired results, the company may still face liquidation.

 

Conclusion

 

The Corporate Rescue Procedure, as stipulated in the Insolvency Act, serves as a vital tool for salvaging distressed companies and ensuring the protection of stakeholders. By providing a structured process for rehabilitation, it not only preserves jobs and economic stability but also promotes a more conducive environment for business growth and entrepreneurship. In a challenging economic climate, the Corporate Rescue Procedure offers a lifeline for businesses facing financial difficulties, contributing to the long-term economic health of Zimbabwe.

 

Disclaimer:

The information and opinions expressed above are for general information only. They are not intended to constitute legal or other professional advice.

 

Kelvin Sabao is a duly registered Legal Practitioner practising law at Titan Law. He writes in his personal capacity. He is a co-author of a book titled ‘The Directors’ Handbook in Zimbabwe’. This publication underscores his expertise and dedication to advancing the knowledge and understanding of corporate law and corporate governance in the Zimbabwean context. For more information, you can contact Kelvin via email at: [email protected]

 

 

 

 

 

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