Zimbabwe Insights - Corporate Rescue: the Good , the Bad and the Ugly

The recent adoption by a well-known retail entity, OK Zimbabwe Limited, of a corporate rescue resolution has cast the spotlight on corporate rescue as a strategy for business continuity. 

On one hand are strong sentiments that corporate rescue is often abused to evade or at least delay payment to creditors, and on the other hand are equally strong views that it is a useful means by which struggling business can be afforded a lease on life. 

In this article, we address, in simple terms, the meaning of corporate rescue, how it is open to abuse, the legal mechanisms for stakeholder protection, and its desirability over liquidation. 

What is corporate rescue?

This is a process by which an insolvent company’s affairs are handed over to an expert, a corporate rescue practitioner, who manages the company and attempts to turn it around. It can be commenced by the insolvent company’s adoption of a corporate rescue resolution in terms of section 122 of the Insolvency Act 2018 or through a court application for placement of a company into corporate rescue – usually made by a creditor. 

What type of company would find corporate rescue a useful strategy? 

Insolvent companies whose liabilities exceed their assets, and which cannot pay their debts as they become due may find corporate rescue to be a useful tool.

These companies may benefit from the appointment of an expert corporate rescue practitioner, who among other things, assumes leadership of the company, formulates a turnaround plan and interacts with the company’s stakeholders. 

The main advantage of corporate rescue is that it affords a company the much-needed breathing space and recovery room for it to turnaround. 

What formalities are necessary for the adoption of a corporate rescue resolution ? 

These formalities are mostly outlined in section 122 of the Insolvency Act, and are important because non-compliance with them can render a resolution invalid. Important to note firstly is that a corporate rescue resolution can be adopted at any time that the board decides to adopt it, provided the company is not already in liquidation. Secondly, the resolution is accompanied by a statement of debtor’s affairs and a sworn statement by a director of the company, detailing the reasons for the decision to place the company in rescue. It ought to be accompanied by the consent of the person identified to be appointed as a practitioner, with proof of that individual’s qualifications as a rescue practitioner. 

Further, the resolution must be served on both the Companies Registry and the Master of the High Court. Finally, it must be served on all affected persons. The law requires strict compliance with these formalities. 

Finally, why is this process open to abuse? 

The process is open to abuse because one perk of being under corporate rescue is the moratorium against litigation and pending enforcement actions. This moratorium is afforded in section 126 of the Act. 

One sure way to frustrate a creditor is to place the company in corporate rescue a day before the creditor is due to sell the company’s assets in execution. 

Corporate rescue can therefore be abused to achieve a delay of enforcement actions pending against the company. A creditor is however not left without recourse. Such a creditor can still apply to the Court for leave to proceed with an enforcement action while the company is under corporate rescue.

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