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Godknows Hofisi

Introduction

This article gives insights into how employees of a company can cause their employer to be placed under corporate rescue proceedings.

Voluntary versus involuntary corporate rescue proceedings

As I previously explained, there are two ways a company can be placed under corporate rescue proceedings. 

One ways is voluntary through Section 122 of the Insolvency Act (Chapter 6:07), hereinafter “the Act”. Another is involuntary through Section 124 of the same Act.

Voluntary corporate rescue proceedings

According to Section 122 of the Act the board (of directors) of a company may resolve that the company voluntarily begin corporate rescue proceedings and place the company under supervision, if the board has reasonable grounds to believe that:

The company is financially distressed, and

There appears to be a reasonable prospect of rescuing the company.

Involuntary corporate rescue proceedings

According to Section 124(1) of the Act, unless a company has adopted a resolution contemplated above (Section 122), an affected person may apply to a Court at any time for an order placing the company under supervision and commencing corporate rescue proceedings.

In terms of Section 124(4)(a) of the Act, after considering an application in terms of Section 124(1), the Court may make an order placing the company under supervision and commencing corporate rescue proceedings, if the Court is satisfied that:

(i) The company is financially distressed, or

(ii) The company has failed to pay over any amount in terms of a public regulation, or contract, with respect to employment- related matters, or

(iii) It is otherwise just and equitable to do so for financial reasons.

From the foregoing it is clear that the definition of “affected person” is key as it relates to employees. Section 124(4)(a)(ii) is also very important as it overs employment related non-payments.

Affected persons and employees

An affected person is defined in Section 121(1)(a) as meaning:

A shareholder or creditor of the company, and

Any registered trade union representing employees of the company, and

If any of the employee of the company are not represented by a registered trade union, each of those employees or their respective representatives.

From the above definition employees of a company are therefore affected persons and can therefore institute legal proceedings to cause a company to be involuntarily placed under corporate rescue proceedings.

Why employees may apply for corporate rescue proceedings

In most cases where employees apply for corporate rescue proceedings it is because they would be owed salaries and benefits by the employer company. 

It is common for employees to be owed salaries and benefits for several months and this may happen over extended periods. 

Such employees are therefore empowered to make an application for involuntary corporate rescue in terms of Section 124(4).

Effect of corporate rescue proceedings

According to Section 121(b) of the Act “corporate rescue” means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:

(i) the temporary supervision of the company, and of the management of its affairs, business and property; and 

(ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession: and 

(iii) the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

General powers and duties of the corporate rescue practitioner

According to Section 133(1) during a company’s corporate rescue proceedings, the corporate rescue practitioner, in addition to any other powers and duties, inter alia, has full management control of the company in substitution for its board of directors and pre-existing management which is dissolved in terms of the provisions of section 130(2).

Conclusion

In corporate rescue proceedings employees are mainly interested in recovering what is due to them and also to ensure they do not lose their jobs through liquidation. This is why they may be motivated to apply to place a defaulting company under corporate rescue proceedings.

Disclaimer

This simplified article is for general information purposes only and does not constitute the writer’s professional advice.

Employees are therefore empowered to make an application for involuntary corporate rescue in terms of Section 124(4)

Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, registered tax accountant, consultant in deal structuring and business valuer. He is a director with Investacare International (Private) Limited. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]