Protection given to companies under corporate rescue proceedings
Business & Law
I have written many articles on corporate rescue proceedings before. I have explained that corporate rescue is also known by other terms such as business rescue, judicial management, corporate recovery or administration.
In Zimbabwe, it is regulated by the Insolvency Act (Chapter 6:07) of 2018, hereinafter (the Act). According to the Act corporate rescue means the proceedings to facilitate the rehabilitation of a company that is financially distressed.
According to section 121(b) corporate rescue provides 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, 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.
Placing a company under corporate rescue
A company can be placed under voluntary corporate rescue proceedings in terms of section 122 or involuntary through a Court application as provided for in section 124 of the Act.
Voluntary corporate rescue
According to section 122 the board 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.
According to section 121(f) “financially distressed,” in reference to a particular company at any particular time, means that “It appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months, or it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.”
Involuntary corporate rescue
According to section 124 (1) of the Act an affected person may apply to a Court at any time for an order placing the company under supervision and commencing corporate rescue proceedings.
An affected person is defined in section 121(1)(a) to mean: a shareholder of the company, or creditor of the company, or any registered trade union representing employees of the company; and if any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives;
According to section 124(4) after considering an application in made 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: The company is financially distressed, or The company has failed to pay over any amount in terms of an obligation under or in terms of public regulation, or contract, with respect to employment-related matters, or It is otherwise just and equitable to do so for financial reasons, and there is a reasonable prospect for rescuing the company.
General moratorium on legal proceedings against the company in under corporate rescue Section 126 – General moratorium on legal proceedings against the company, provides legal protection against companies under insolvency practice.
According to section 126(1) during corporate rescue proceedings, no legal proceeding, including enforcement action, against the company or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum except with the written consent of the practitioner; or with the leave of the Court and in accordance with any terms the Court considers suitable; or as a set-off against any claim made by the company in any legal proceedings, irrespective of whether those proceedings commenced before or after the corporate rescue proceedings began; or Criminal proceedings against the company or any of its directors or officers; or proceedings concerning any property or right over which the company exercises the powers of a trustee; or
Proceedings by a regulatory authority in the execution of its duties after written notification to the corporate rescue practitioner.
Section 126(2) provides that during corporate rescue proceedings, a guarantee or surety by a company in favour of any other person may not be enforced by any person against the company except with leave of the Court and in accordance with any terms the Court considers just and equitable in the circumstances.
Further, according to section 126(3) if any right to commence proceedings or otherwise assert a claim against a company is subject to a time limit, the measurement of that time must be suspended during the company’s corporate rescue proceedings.
From the foregoing, it is clear that a company under corporate rescue is protected from legal action except in certain specified situations. A person who intends to sue such a company in civil matters needs the written consent of the corporate rescue practitioner for that company or leave or permission of the Court.
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is a practising commercial lawyer and conveyancer, chartered accountant, corporate rescue practitioner, registered tax accountant, consultant in deal structuring and business valuer. He can be contacted on +263 772 246 900 or [email protected]