HomeBusiness DigestReviving a company under corporate rescue proceedings

Reviving a company under corporate rescue proceedings

CORPORATE rescue is also known by other terms such as business rescue or judicial management. According to Section 121 of the Insolvency Act (Chapter 6:07), hereinafter (“the Act”) of 2018 corporate rescue means the proceedings to facilitate the rehabilitation of a company that is financially distressed. It involves providing for:

  • Temporary supervision of the company and of the management of its affairs, business and property;
  •  Temporary moratorium (relief) on the rights of claimants against the company or in respect of property in its possession; and
  • The development and presentation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity.
  • During corporate rescue the corporate rescue practitioner (“CRP”)’s main responsibility is around two areas, namely:
  •  Paying off creditors
  • To improve the company’s operations including financial situation.
  • In many situations by the time the CRP is appointed, usually on application by creditors, the company would be in the following situations:
  • Debt and unable to pay its creditors,
  • Operations will be severely curtailed or ceased mainly due to working capital challenges.
  • Developing a comprehensive corporate revival or rescue plan
  • Section 142 of the Insolvency Act (Chapter 6:07) provides for the minimum information to be included in a corporate rescue plan. This is explained later in this article.
  • My recommendations are that a CRP, while meeting the minimum requirements in terms of the Act, should develop a comprehensive corporate rescue plan in the manner explained below.
  • Current situation
  • The company situation can be summarised as:
  • Highly geared (debt ridden) and unable to pay,
  • Ceased or significantly curtailed operations.
  • Corporate rescue objectives
  • Based on the current situation, or informed by reason the company was placed under corporate rescue:
  •  Address company debt or creditors.
  •  Improve the company’s operations and financial situation.
  • Causes of current situation
  • As part of the solution a CRP has to understand the causes of the current situation. If properly done this will give good pointers to the solutions required to trade the company out of its current situation. Some of the causes may include those explained hereunder.
  • Causing accumulation of debt
  • This could be due to bad corporate governance or financial mismanagement. It is quite common for a company’s working capital to be mismanaged through for example capital projects, withdrawals by shareholders for personal use or through non performing related party loans.
  • Debt may arise from cumulative losses over the years which eventually results in the company’s working capital base being eroded.
  • Causing curtailed or ceased operations
  • This could be a result of many challenges as explained below.
  •  A result of financial mismanagement as explained above.
  • High inflation may lead to a disconnection between a business’ expenses and income where it is difficult to adjust prices.
  • Loss of markets may result in a company’s volumes and revenue shrinking.
  • A company may have old equipment which may inhibit it through frequent breakdowns, low volumes, high cost of production, etc.
  • Due to loss of staff a company may remain with less competent personnel.
  • Wrong strategies or priorities pursued.
  • Tools to use
  • A CRP may use the following tools when considering a corporate rescue plan:
  • The Pestel model which considers external factors that affect a business i.e. political, economic, social, technological, environment and legal.
  • Swot analysis which considers a business’ strengths, weaknesses, opportunities and threats.
  • Porter’s five forces which look at threat of substitutes, threat of new entrants, supplier power, buyer power and competitive rivalry.
  • Developing the plan
  • It is recommended that a CRP should cover the following areas.
  • Addressing debt or creditors
  • Amounts due to creditors can be addressed through:
  •  Agreeing on a moratorium (relief period) with creditors.
  •  Phased payments through a payment plan.
  •  Disposal of redundant or non-core assets
  •  Issue new shares to existing or new shareholders
  •  Shareholder loans.
  •  Compromise with creditors.
  • Conversion of debt to equity.
  • Improving company operations
  • Assess if the company’s business is still viable.
  • Consider restructuring and to do away with loss making products or operations.
  •  Consider major overhaul of old equipment or acquiring new equipment, subject to availability of funds.
  •  Employ competent people. Consider termination, training or development.
  • Consider market development where markets have been lost.
  • Improving company finances
  • There is a need for a solid and convincing plan to trade the company out of its current financial problems. In addition to dealing with creditors a CRP’s plan should consider the following aspects:
  •  Improve corporate governance including financial management. Design and implement effective financial controls.
  •  Removing the people who were responsible for the financial mismanagement e.g. management, board, etc.
  •  Hire competent or professional staff.
  •  Raise funding for working capital.
  • Raise funding for overhaul or acquisition of new equipment.
  • Minimum information to be included in corporate rescue plan
  • In terms of section 142 of the Insolvency Act the following minimum information should be included in the plan:
  • Part A – background
  • This part must include at least:
  •  A complete list of all the material assets of the company, as well as an indication as to which assets were held as security by creditors when the corporate rescue proceedings began;
  •  A complete list of the creditors of the company when the corporate rescue proceedings began as well as an indication as to which creditors would qualify as secured, statutory preferent and concurrent in terms of the laws of insolvency, and an indication of which of the creditors have proved their claims;
  •  The probable dividend that would be received by creditors, in their specific classes, if the company were to be placed in liquidation;
  •  A complete list of the holders of the company’s issued securities;
  •  A copy of the written agreement concerning the corporate rescue practitioner’s remuneration; and
  •  A statement whether the corporate rescue plan includes a proposal made informally by a creditor of the company;
  • Part B – proposals
  • This part must include at least:
  •  The nature and duration of any moratorium for which the corporate rescue plan makes provision;
  •  The extent to which the company is to be released from the payment of its debts, and the extent to which any debt is proposed to be converted to equity in the company, or another company;
  •  The ongoing role of the company, and the treatment of any existing agreements;
  •  The property of the company that is to be available to pay creditors’ claims in terms of the corporate rescue plan;
  •  The order of preference in which the proceeds of property will be applied to pay creditors if the corporate rescue plan is adopted;
  •  The benefits of adopting the corporate rescue plan as opposed to the benefits that would be received by creditors if the company were to be placed in liquidation; and
  •  The effect of the corporate rescue plan on the holders of each class of the company’s issued securities.
  • Part C – assumptions and conditions
  • This part must include at least:
  • A statement of the conditions that must be satisfied, if any, for the corporate rescue plan to a) come into operation and b) to be fully implemented;
  • The effect, if any, that the corporate rescue plan contemplates on the number of employees, and their terms and conditions of employment;
  • The circumstances in which the corporate rescue plan will end;
  • Projected a) Balance Sheet (Statement of Financial Position) and Statement of income and expenses for the ensuing three years, prepared on the assumption that the proposed corporate plan is adopted.
  • The projected balance sheet and income and expense statement:
  • Must include a notice of any material assumptions on which the projections are based; and
  • May include alternative projections based on varying assumptions and contingencies.
  • Certificate
  • A proposed corporate rescue plan must conclude with a certificate by the practitioner stating that any:
  • Actual information provided appears to be accurate, complete, and up to date; and
  •  Projections provided are estimates made in good faith on the basis of factual information and assumptions as set out in the statement.
  • Documenting the corporate rescue plan
  • In documenting the corporate rescue plan the CRP is encouraged to consider the following:
  • Have clear objectives for the business.
  • Developing action plans to address the identified current situations and their causes.
  • Clear timelines should be assigned to action plans.
  •  Assign people responsible for the action plans.
  •  The minimum information requirements per section 142 of the Act.
  • Disclaimer
  • This simplified article is for general information purposes only and does not constitute the writer’s professional advice.

Hofisi is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, corporate advisor and is an experienced director of companies. He is a member of Icaz’s Investigations Committee and currently advises on legal matters on disciplinary issues. He writes in his personal capacity. — +263 772 246 900 or gohofisi@gmail.com

Recent Posts

Stories you will enjoy

Recommended reading