Zimbabwe’s corporate rescue law faces scrutiny amid low success rate
Source: Zimbabwe’s corporate rescue law faces scrutiny amid low success rate – herald Business Reporter CORPORATE RESCUE — a local form of bankruptcy protection — is increasingly being tested as more companies leverage the law to stave off potential liquidation. The law’s emphasis on rescuing companies and saving jobs has seen several high-profile companies applying […]
CORPORATE RESCUE — a local form of bankruptcy protection — is increasingly being tested as more companies leverage the law to stave off potential liquidation.
The law’s emphasis on rescuing companies and saving jobs has seen several high-profile companies applying for corporate rescue in recent months.
These include RioZim Limited, whose matter is currently before the courts, Beta Bricks, Truworths, Zimasco, Khaya Cement, Windmill and most recently, Telecel.
Corporate rescue can be initiated voluntarily by the company’s board or non-voluntarily by creditors.
However, in both scenarios, the underlying motive remains the belief in prospects for a turnaround.\
Beta Bricks
While some market watchers believe the process is a viable mechanism for safeguarding both business value and jobs by facilitating the revival of the companies, others insist it is not effective considering the relatively low success rate.
“It represents the last line of defence from liquidation . . . providing breathing space for rehabilitation efforts,” Ms Moreblessing Shereni, an independent investment analyst, said in an interview.
A key feature immediately triggered by corporate rescue proceedings is the temporary legal shield that freezes all claims, lawsuits and enforcement actions by creditors against the company’s assets.
For firms facing imminent collapse, the provision is critical.
It halts the often-fatal “run” on assets, allowing the court-appointed corporate rescue practitioner to operate without immediate threat of seizure, thereby maximising chances of resuscitation.
Truworths
Unlike self-rescue efforts, corporate rescue ensures a high level of independent scrutiny.
The appointment of a corporate rescue practitioner, who assumes full management control, is critical for restoring stakeholder trust.
The practitioner acts as an officer of the court, tasked with objectively assessing the company’s affairs and, most importantly, determining if there is a “reasonable prospect of rescue.”
This external oversight is essential for securing creditor buy-in for the eventual corporate rescue plan, which outlines the restructuring of the company’s debts and operations.
While the process is complex, the goal remains clear: to transition the company back to a solvent, sustainable existence.
The recent successful exit of entities like the Cold Storage Company (CSC) from the process demonstrates that the mechanism can indeed deliver new life and protect significant national assets, a success mirrored by the well-documented turnaround of David Whitehead Textile Limited.
Zimasco
Challenges
Admittedly, there are cases where corporate rescue has not yielded the desired results on time or as expected.
However, it is crucial to note that the operating environment for companies under corporate rescue and those pursuing self-turnaround is the same — both face challenges such as difficulty accessing working capital and the adverse macroeconomic environment.
This is precisely where corporate rescue holds a significant edge over a self-managed turnaround.
Under a self-turnaround, management faces the dual challenge of reviving the business while simultaneously battling court cases to avoid the attachment and disposal of company assets.
Corporate rescue, by contrast, provides an automatic moratorium, protecting the company’s assets and allowing corporate rescue practitioners to focus exclusively on restructuring and financial recovery.
For instance, RioZim, whose corporate rescue matter is scheduled for hearing on November 12, had some of its assets saved after a local company obtained an order to attach its properties over debt.
This is highly significant because once the corporate rescue application is filed, the automatic moratorium immediately comes into effect.
Confederation of Zimbabwe Industries
It legally insulates the company from attachment by creditors.
In the absence of corporate rescue, a writ of execution could have been successfully carried out, leading to the loss of assets.
“This situation clearly illustrates the critical advantage that corporate rescue provides over a self-managed restructuring,” said Ms Shereni.
Shortage of expertise
The Confederation of Zimbabwe Industries (CZI) recently highlighted that the low success rate of the corporate rescue mechanism may be directly attributable to a shortage of competent practitioners.
“Only three registered corporate rescue practitioners have successfully concluded major industrial turnarounds since the introduction of the Insolvency Act in 2018, highlighting a serious shortage of restructuring expertise,” the CZI said.
Corporate lawyer Mr Godknows Hofisi argues that self-rescue, where a company’s existing management and directors attempt a turnaround without an independent corporate rescue practitioner, presents a “viable yet complex” alternative to statutory proceedings since the strategy relies solely on the current leadership of the business.
If the insolvency is primarily due to external factors, the existing management that failed to adapt to these changes may find it difficult to “correct course”.
According to Mr Hofisi, if the cause lies in management or corporate governance failure, replacing or restructuring the board or the management based on new skills and attitudes could be the key to a turnaround.
He, however, points out that the existence of self-rescue is implicitly validated by the large number of companies that are liquidated without going through the formal corporate rescue process.
“Judging by the number of companies that are liquidated without going through corporate rescue, the whole argument becomes quite open,” said Mr Hofisi.
