Not all companies succeed in their missions. Many factors affect business operations either internally or externally. When the going gets tough the company is faced with a reality of shutting down operations. There are ways to go about it in situations like this and one of them is Corporate Rescue. A somewhat a beacon of hope in tough times.
🛟Corporate Rescue
Corporate Rescue is a legal process that helps companies that are struggling financially to become solvent again. The process involves restructuring a company’s assets and liabilities. It aims to rehabilitate companies to avoid liquidation whilst protecting the interests of all stakeholders including shareholders, creditors and the company. For Companies that have a chance of survival, Corporate Rescue is a more attractive option than liquidation, because, it provides a structured process for companies to recover from financial difficulties. If corporate rescue fails, liquidation proceedings can be started. However, when liquidation proceedings have started an application for corporate rescue can suspend those proceedings.
📉A financially distressed company
A company is financially distressed when it cannot pay all of its debts as they become due and payable within the ensuing six months. Also, a company is financially distressed when it is likely to be insolvent within six months. Signs of distress include delayed supplier payments, declining sales, and eroding liquidity. Left unaddressed, such issues can trigger creditor lawsuits, asset seizures, or forced liquidation, exacerbating losses for all stakeholders.
⚖️Ways in which a company can be placed under corporate rescue are:
- Voluntary Board Resolution: The board can resolve to commence rescue if it believes recovery is feasible. This requires shareholder notification and filing with the High Court, signaling proactive crisis management.
- Court Application by Affected Persons: Creditors, shareholders, or employee representatives (e.g., trade unions) can petition the court. Applicants must demonstrate the company’s distress and the viability of rescue. Courts often prioritize evidence of a credible turnaround plan.
- Company Application: The company itself can seek court approval to file for rescue, often preempting creditor actions.
- Court Intervention During Liquidation: Even during liquidation, courts can suspend proceedings and order rescue if there’s a reasonable chance of rehabilitation
During Corporate Rescue a Corporate Rescue Practitioner (CPR) is appointed. The Corporate Rescue practitioner has full management control of the company in substitution of its board and pre-existing management. CRPs must be licensed insolvency practitioners with no conflicts of interest (e.g., ties to creditors or the former management). Their effectiveness hinges on expertise in financial restructuring and stakeholder diplomacy. Key responsibilities include:
- Debt Restructuring: Renegotiating terms with creditors, potentially deferring payments or reducing debt.
- Operational Reforms: Identifying inefficiencies, divesting non-core assets, or renegotiating contracts.
- Stakeholder Communication: Balancing competing interests while ensuring transparency.
🗞️Companies that are recently placed under Corporate Rescue in Zimbabwe:
- Truworths Limited – August 2024
- Khaya Cement- December 2024
- Beta Holdings – Applied December 2024
- Metro Peeche – August 2023.
According to reports a mismatch between long-term obligations and short-term funding is an underlying issue. Cash flow pressures: Companies face persistent liquidity crunches as short-term debt payments outpace revenue cycles. Debt accumulation: Short-term borrowing cycles lead to debt rollovers, increasing the overall debt burden. Operational disruptions and insufficient working capital result in operational inefficiencies and supply chain disruptions
Conclusion
Corporate rescue represents a vital mechanism for economic preservation. By balancing stakeholder interests and emphasizing rehabilitation over liquidation, it sustains businesses, jobs, and value. A good option to know about as a business leader.
Tkc Notes 