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Business Reporter
Zimbabwe needs to reform its insolvency framework for a more progressive regime, which could encourage further lending at less onerous terms, according to the Zimbabwe Economic Policy Analysis and Research Unit. While the country has a sound legal framework on resolving financial distress, the recuperation system has been criticised for failing to revive distressed firms after the process and, in other instances, for taking too long.

“Further complicating these efforts is the lack of an efficient mechanism for restructuring the ownership of a company under judicial management, to dilute current shareholders and allow new shares to be issued to creditors in lieu of payment,” ZEPARU found in recent study. The number of filings for judicial management has increased substantially in recent years and is likely to continue to increase in the near future given difficulties facing the economy, including the liquidity crisis.

“In a number of instances, it appears judicial management has been used by debtors to stem efforts of creditors to initiate a wind up,” ZEPARU said. Judicial managers have also found it difficult to reshape the work force of distressed debtors and to obtain new capital from banks to restart operations.

Wind up proceedings have been subject to some criticism as well, primarily their tendency to result in a piecemeal asset sale rather than the sale of a company as a going concern. In general though, there is a perception that these proceedings are underused, as too many companies are sitting in judicial management that should instead be wound up.

ZEPARU said while there is some controversy on whether judicial management and wind up proceedings in Zimbabwe can be considered successful or not, broad consensus acknowledges considerable room for improvement with regard to the insolvency resolution regime, especially given the mounting financial challenges that Zimbabwe faces.

The economic policy think tank said progressive and effectively enforced insolvency resolution regime can have benefits beyond the companies and creditors affected as such regimes reduce financial risk, giving creditors greater confidence and enticing them to lend on less onerous terms.

As such, ZEPARU said Zimbabwe has a range of reform options to pursue, which would likely improve the insolvency resolution regime to a certain degree. On one end of the spectrum, they include focusing solely on improved implementation and transparency of current procedures.

Alternatively, this involves drafting a new unified insolvency law based on international best practices or abandoning structured negotiations in favour of market-oriented mechanisms for adjusting ownership and creditor claims.

Other options entail a combination of regulatory issuances under current law supported by a few key legislative amendments to the Companies and Insolvency laws where there is need to reform or change laws.

Another promising option would be to substitute current judicial management proceedings with those similar to the business rescue proceedings recently adopted in South Africa, the economic research unit said.