Unpacking the business rescue procedure: The importance of a cost-effective solution

March 1st, 2024
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Picture source: Getty/iSotck

By Claudious Nhemwa

The Insolvency Act [Chapter 6:07] (the Act) introduced to Zimbabwean corporate law, a novelty in the form of corporate rescue (Metallon Gold Zimbabwe (Pvt) Ltd and Others v Shatirwa Investments (Pvt) Ltd and Others SC 107/21 at p8, E Levenstein South African Business Rescue Procedure (Durban: LexisNexis 2021) at 7-1, Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others 2013 (4) SA 539 (SCA) at para 5). This procedure was described as a ‘profound change’ and ‘a new innovation’ when it was introduced in South Africa (SA) under the Companies Act 71 of 2008 (Swart v Beagles Run Investments 25 (Pty) Ltd (Four Creditors Intervening) 2011 (5) SA 422 (GNP) at para 23; Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd 2012 (2) SA 423 (WCC) at para 1). The philosophy behind business rescue is the recognition of the fact that a company has greater value to all stakeholders as a going concern rather than in liquidation (Metallon Gold Zimbabwe at p8-13, FHI Cassim 2ed Contemporary Company Law (Cape Town: Juta 2017) at 862, Oakdene at para 31). The definition of corporate rescue in s 121 of the Act illustrates that there are three levels of business rescue procedure, namely –

  • the temporary supervision of the business;
  • a temporary moratorium on claimants; and
  • the crafting and implementation of a business rescue plan (Cassim (op cit) at 865, A Boraine, JA Kunst and DA Burdette Insolvency Law and its Operation in Winding-up (Durban: LexisNexis 2017) at 18-8).

A key feature of the corporate rescue regime is its bias towards reorganisation or reconstruction of financially distressed companies as evidenced by provisions dealing with the moratorium, post-commencement finance and suspension or cancellation of contracts among others. These are designed to provide breathing space to a financially distressed company to enable its rehabilitation primarily to ensure its continued existence as a solvent business or alternatively to achieve a better return to its creditors and shareholders than would be achieved under liquidation (Metallon Gold Zimbabwe at p8-13, Oakdene at para 6, Southern Palace Investments at para 3). In contrast with the traditional pro-creditor culture, which held that a creditor had a right ex debito justitiae to liquidate a company (HS Cilliers, ML Benade, JJ Henning, JJ Du Plesiss, DA Delport, L de Koker and JT Pretorius 3ed Corporate Law (Durban: LexisNexis 2000)), the new procedure seeks the rescue of the business in a manner that balances the interests and rights of all the stakeholders (Metallon Gold Zimbabwe at p12, s 7(k) of the Companies Act 71 of 2008, M Laubscher ‘Cloete Murray and Another v Firstrand Bank Ltd t/a Wesbank [2015] ZASCA 39’ (2015) 18 PELJ 1881 at 1884).

Despite the accepted purpose of this new procedure, it has been saddled with numerous problems, which threaten its efficacy just like its predecessor, judicial management which failed dismally (D Gewer D ‘Legal aspects of turnarounds’ in N Harvey (ed) Turnaround management and corporate renewal: A South African perspective (Wits University Press 2011) at 73). Critics in SA have often pointed to the poor drafting and interpretation of ch 6 of the Companies Act as the major threat to its chances of succeeding where judicial management failed (RH Barends A Critical Analysis of Section 129 of the Companies Act 71 of 2008 (LLM thesis, University of the Western Cape Town, 2017) at 81-83). In particular, the hurdles to entry into business rescue are central to the efficacy of this rescue regime.

A key success factor of any rescue proceeding is the ease with which financially distressed businesses can access it (D Burdette ‘Legislative framework for the facilitation of turnarounds in South Africa’ in Harvey (op cit) at 132). It is widely accepted that the timing of entry into rescue is a critical success factor to any business rescue as any delayed response would lead to financial haemorrhage and consequently, the demise of the company (P Kloppers ‘Judicial management reform − steps to initiate a business rescue’ (2001) 13 SA Merc LJ 358 at 375, United Nations Commission on International Trade Law ‘Legislative Guide on Insolvency Law − part five: Insolvency law for micro- and small enterprises’ at para 373). This issue overshadows most of the other shortcomings of the Act because it creates an impediment to access to the procedure by financially distressed companies, thereby defeating the very purpose for which the law was created. While many of the shortcomings may only weaken the rescue process itself, barriers to entry may sound a death knell to any financially distressed company.

Notice requirements

An affected applicant is expected to notify each affected person of the application by giving standard notice (s 131(2)(b) of the Companies Act 71 of 2008). It is important to note that the affected persons referred to, as defined in s 121 of the Act, include shareholders, creditors, registered trade unions with members within the company or non-unionised employees or their representative (P Delport Henochsberg on the Companies Act 71 of 2008 (Durban: LexisNexis 2015) at 444). It may be extremely difficult for the applicant who has no access to company records to identify and find the addresses of all affected persons especially if they include thousands of shareholders and non-union workers who may be located all over Zimbabwe. Notification of all affected persons was held to be a substantive matter and not a mere procedural step (Taboo Trading 232 (Pty) Ltd v Pro Wreck Scrap Metal CC and Others 2013 (6) SA 141 (KZP) at para 11.3). The notice requirement has so far seen the still birth of several compulsory applications for corporate rescue.

In the seminal Metallon Gold Zimbabwe case, Malaba CJ stated that the notice requirements enshrined in s 124(2) were couched in peremptory language and non-compliance with those requirements rendered the application a nullity. More critical is the observation by the court that the notice is supposed to by way of standard notice which is defined in s 2 of the Act as notice by way of a registered mail, e-mail, or personal delivery and not by way of publication in a newspaper. One observes that under the repealed procedure of judicial management there was no requirement to give notice to any of the new class of affected persons. Furthermore, any notices were supposed to be given by way of publication in the Government Gazette and/or any national newspaper. The burdensome and costly notice requirement prescribed in s 124(2)(b) adds further costs of entry into business rescue an issue which was of concern with judicial management (Merchant West Capital Solutions (Pty) Ltd v Advanced Technologies and Engineering Company (Pty) Ltd (GJ) (unreported case no 13/12406, 10-5-2013) (Kgomo J) at para 3). One can safely conclude that it is not only more onerous to obtain a court order of business rescue but even more expensive than what was required to obtain a court order of judicial management under the previous regime despite the low hurdle required as noted in the Metallon Gold Zimbabwe case.

Comparing the position with the similar South African provision indicates an even worse situation. In SA notice is designed to be given in the prescribed manner. Regulation 124 provides that a copy of the court application must be delivered in terms of reg 7. Regulation 7 prescribes for delivery in terms of s 6(10) of the Companies Act 71 of 2008 or Table CR3, which like the standard notice definition in the Zimbabwean Insolvency Act, lists the methods as including facsimile, electronic e-mail, registered or physical delivery. The difference between the two pieces of legislation is that while in Zimbabwe the applicant is only required to give a notice, the South African position requires delivery of the court application as per reg 124. One observes therefore, that the South African position is more onerous than the Zimbabwean position. The South African subsidiary legislation dealing with the s 131(2)(b) notice requirement, reg 124 prescribes that each affected person must be served with a copy of the application.

In Cape Point Vineyards (Pty) Ltd v Pinnacle Point Group Ltd and Another (Advantage Projects Managers (Pty) Ltd Intervening) 2011 (5) SA 600 (WCC) it was correctly noted that reg 124 as a piece of subsidiary legislation went beyond what was provided for by the Act, which only requires notice of the application. The court correctly pointed out that there was a clear distinction between s 131(2)(a) of the Act, which requires service on the company and the Companies and Intellectual Property Commission (CIPC) of the application and s 131(2)(b) of the Act, which requires notice of the application on all affected persons. It recommended that an order of substituted service be sought in terms of reg 7(3) for compliance purposes in future. In the case of Kalahari Resources (Pty) Ltd v Arcelormittal SA and Others [2012] 3 All SA 555 (GSJ) it was held that compliance with reg 124 was required until the reg was declared invalid by a court of competent jurisdiction. Therefore, under South African business rescue, the applicant is obliged to serve the application on the company, the CIPC and all affected persons.

Recommendations

One observes that the notice requirements prescribed in the Insolvency Act create a huge hurdle for entry into corporate rescue through the compulsory route. There is also nothing to learn from our South African counterparts as the position in SA is even more onerous. Consequently, since the Supreme Court has already stated the position of the law and confirmed a literal interpretation of the provision, there is need for legislative reform. One notes that the notice to all affected persons is required to ensure that all stakeholder interests are covered. Nevertheless, a notice in the Government Gazette and a national newspaper as the position was with notices under judicial management would suffice. This would then be coupled with a requirement that the order of corporate rescue is served on all affected persons by the corporate rescue practitioner within a stipulated period after their appointment. The corporate rescue practitioner will have access to company information and records. As a result, they will not have difficulties which currently work against the court applicant.

Conclusion

In conclusion, one observes that a critical success factor of any business rescue procedure is the easy with which the financially distressed companies have access to it. This is crucial because entry into business rescue must not only be simple but also less costly. A company in financial distress does not only need urgent resuscitation interventions but also needs to consider the cost as financial distress is a cashflow issue. The earlier the intervention, the better the chances of a successful rescue. On the contrary prolonged litigation and regulatory hurdles create undesirable costs and increase the risks of failure as result of delayed intervention. Consequently, one recommends legislative reforms to curtail the procedure and reduce costs. This can be done through prescription of a less onerous notice method like publication of a notice of the application in the Government Gazette and national newspaper coupled with delivery of the court order by the corporate rescue practitioner.

Claudious Nhemwa LLBS (UZ) SLP Business Rescue (UJ) Certified Rescue Analyst (UP) is a legal practitioner and Corporate Rescue Practitioner at C Nhemwa and Associates Attorneys in Harare.

This article was first published in De Rebus in 2024 (March) DR 30.

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