Impact of Insolvency Bill on economy

Davies Chipinda Correspondent—

In a bid to improve the business environment and attract both domestic and foreign investment, President Mugabe last year proposed a Ten Point Plan meant to maintain economic growth, in particular the creation of jobs.Pursuant to this, a steering committee was constituted in September 2015 to lead an accelerated reform effort through a rapid results approach.

The plan targeted revitalising agriculture and the agro-processing value chain; advancing beneficiation and value addition to the agricultural and mining resource endowment; focusing on infrastructure development, particularly in the key energy, water, transport and ICTs sub-sectors; and unlocking the potential of SMEs. Five thematic technical working groups, reporting to the Steering Committee, were constituted to conceptualise reforms and deliver on action plans developed by stakeholders.

Of particular importance is the proposed new law on insolvency.

The Insolvency Bill seeks to promote a culture of corporate rescue to preserve jobs in companies that are viable but are experiencing challenges.

Generally, insolvency is the inability to pay debts as they mature, or as obligations become due and payable. A person/organisation may still have an excess of assets over liabilities, but will still be considered insolvent if is not able to convert the assets into cash in order to meet financial obligations.

If, however, there is a reasonable probability that the company if placed under judicial management will be able to pay its debts or meet its obligations and become a successful concern, it will be just and equitable to place it under judicial management.

By the time a company gets to that stage, it is usually very sick and the probability of recovery is very low, hence the need to place a company under a business rescue process which is a more helpful and pre-emptive measure.

The proposed Bill purports to introduce “business rescue” into the Zimbabwean legal framework. This commercial procedure, dubbed as successfully flogging a dead horse, has been long overdue as it constitutes one of the most essential modern business resuscitation procedures. It involves restructuring of companies in financial distress, a culture which is on the increase globally, unlike the traditional judicial management which considers the option when the organisation is insolvent. Although the concept of business rescue has been in practice in many overseas jurisdictions — especially in the US — for some time such has not been the case with Zimbabwe.

By its nature, it goes beyond the normal managerial responses and judicial management process to corporate troubles. It is seen as “a major intervention that is necessary to avert eventual failure of the company”. It aims at providing an alternative to liquidation proceedings by facilitating the rehabilitation of a financially ailing but economically viable company by helping them recover from the temporary cash flow difficulties through freezing the enforcement of creditors’ claims and implementation of a business rescue plan by restructuring the business.

There is however no one size fits all in determining which company and at what stage will a corporate qualify for business rescue. The standard evident in other jurisdictions is that a company must be financially distressed for it to commence business rescue proceedings.

Before commencing business, rescue proceedings, there is need to prove prospects of success in the form of the rescue plan. This is a significant requirement in which a business’ shot at business rescue heavily relies upon. Failure to produce a convincing plan is detrimental to the application as it will be dismissed in its entirety.

The introduction of business rescue will cure major shortfalls of judicial management. Analysts have commented on the lack of a legal framework that allows creditors to form a committee and formally contribute to the business rescue process by making submissions to the business rescue practitioner, and enriching the practitioner’s business rescue plan.

Davies Chipinda is a lawyer and legal advisor.

In China, restructuring is required to be supervised by the administrator, but there exists a provision for the debtor (company in distress) to apply to manage its assets and business itself in place of the administrator, maybe a more liberal approach affording the stakeholders an opportunity to be involved might score high for Zimbabwe when the bill is passed.

Creditors would be reluctant to finance a company which has shown insolvency symptoms. Such finance however, is critical and the regulatory framework needs to provide security. This can be by order of preference enabling the financing persona some protection. A good example will be the South African Companies Act which determines the order of preference in making payments. In addition, with business rescue there is a legislated time frame by which the business rescue plan needs to have been implemented and completed, and the legislature can afford protection to foreign creditors and shareholders by providing for preferential treatment. The degree to which the rights of foreign investors and creditors are recognized and supported by government agencies and the courts may encourage investment in Zimbabwe.

A lot can be derived from jurisdictions which have put the emerging procedure to test. Specifically, South Africa with whom we share a common approach to Business Law. Courts should be worry of frivolous applications by company insiders seeking to use the provision to frustrate creditors’ rights and to stave off liquidation for motives of their own. Hence caution should always be taken when considering business rescue, that is weighing the impact on all stakeholders involved and whether or not the support of all stakeholders would be achieved in seeking business rescue. Only grounds that are material, factual and objective can justify a bonafide commencement of business rescue proceedings.

However, the quality of real or tangible outcomes achieved by statutory regulatory instruments generally, and commercial law-related instruments in particular, may depend in part on their interpretation and application by the courts. If the wording of the Act is clear and unambiguous, it must be interpreted as such. Should it perceive its mandate to extend further than that, the judiciary will run the risk of meddling in another sphere of government. That, bearing in mind that it is not the purpose of the courts to clarify what it believes the thinking of the legislature ought to have been and the unavoidable allegations of disregarding the separation of powers that accompany such meddling, is something that the judiciary should best avoid.

The interpretive approach and attitude of the courts will be critical to the efficacy of the rescue mechanism and, to the attainment of the underlying public policy objectives. The Legislature has recognised the impact of liquidation; that more frequently than not occasions significant collateral damage, both economically and socially, with destruction of wealth and livelihoods. It is in the public interest that the incidence of such adverse socioeconomic consequences be avoided where reasonably possible. Business rescue is intended to serve that public interest by providing a remedy directed at avoiding the deleterious consequences of liquidations.

Davies Chipinda is a lawyer and legal advisor.

You Might Also Like

Comments

Take our Survey

We value your opinion! Take a moment to complete our survey