Zimbabwe’s GDP contracted by an estimated 8% in 2020. The global COVID-19 pandemic was certainly a large contributor to this contraction. With Zimbabwe currently under another enforced national lockdown due to a large second wave of Covid-19 infections, most business are facing significant cash flow problems. Most businesses have to operate at reduced capacity and others remain totally shut down. With little or no revenue but with fixed expenses to be met, countless companies face financial distress and are now or will soon tread the waters of near-insolvency. Such businesses have to re-organise or restructure their affairs, either informally or via corporate rescue proceedings, the subject of this article.
When a company is facing financial difficulties, it is tempting for directors and management to continue trading in the hope of generating income to alleviate the company’s financial difficulties. It is imperative for directors and management of companies to bear in mind that, under the Companies and Other Business Entities Act [Chapter 24:31] and the Insolvency Act [Chapter 6:07]:
- They have a duty to act with the care, skill and attention that a diligent business person has in the same circumstances;
- They may be held personally liable for any debts or liabilities incurred by the Company if it is deemed that the business of the company was carried on fraudulently, recklessly or with gross negligence; and
- They will be held personally liable for debts and liabilities of the company in the event of liquidation if they allowed the company to carry on business whilst knowing that the company would be unable to pay its debts as they became due and payable.
What Is Corporate Rescue
Corporate rescue proceedings were introduced into our law by the Insolvency Act in June, 2018 and with the repeal of the Companies Act [Chapter 24:03] in February 2020 have replaced judicial management as the formal tool of restructuring companies in financial distress. The purpose of corporate rescue is to facilitate the rehabilitation of a financially distressed company.
When a company is placed under corporate rescue proceedings, its affairs are attended to by an independent corporate rescue practitioner who prepares a plan to rescue the business. It provides a debtor with legal protection in order to give it the opportunity to reorganise and thereby to provide creditors with going concern value rather than slight satisfaction through liquidation.
Corporate rescue is a process meant to facilitate rescue of a company that is close to insolvency, primarily by three ways:
- Granting a temporary moratorium against legal proceedings and executions against the company;
- Providing the temporary supervision of the company by a corporate rescue practitioner; and
- The development and implementation of a corporate rescue plan to rescue company by restructuring its affairs, business, property, debt and other liabilities and equity in a manner that maximises the likelihood of the company continuing to exist on a solvent basis.