By Godknows Hofisi
HARARE – (Mining Index) – Corporate rescue is also known by other terms such as business rescue or judicial management. According to Section 121 of the Insolvency Act (Chapter 6:07), hereinafter (“the Act”) of 2018 corporate rescue means the proceedings to facilitate the rehabilitation of a company that is financially distressed. It involves providing for:
- Temporary supervision of the company and of the management of its affairs, business and property, and
- Temporary moratorium (relief) on the rights of claimants against the company or in respect of property in its possession, and
- 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.
During corporate rescue the corporate rescue practitioner (“CRP”)’s main responsibility is around two areas, namely:
- Paying off creditors
- To improve the company’s operations including financial situation.
In many situations by the time the CRP is appointed, usually on application by creditors, the company would be in the following situations:
- Debt and unable to pay its creditors,
- Operations will be severely curtailed or ceased mainly due to working capital challenges.
Developing a comprehensive corporate revival or rescue plan
Section 142 of the Insolvency Act (Chapter 6:07) provides for the minimum information to be included in a corporate rescue plan. In summary the information includes the following:
- Part A – background
- Part B – proposals
- Part C – assumptions and conditions
My recommendations are that a CRP, while meeting the minimum requirements in terms of the Act, should develop a comprehensive corporate rescue plan in the manner explained below.
Current situation
The mining company situation can be summarised as:
- Highly geared (debt ridden) and unable to pay,
- Ceased or significantly curtailed operations.
Corporate rescue objectives
Based on the current situation, or informed by reason the mining company was placed under corporate rescue:
- Address company debt or creditors.
- Improve the company’s operations and financial situation.
Causes of current situation
As part of the solution a CRP has to understand the causes of the current situation. If properly done this will give good pointers to the solutions required to trade the company out of its current situation. Some of the causes may include those explained hereunder.
Causing accumulation of debt
- This could be due to bad corporate governance or financial mismanagement. It is quite common for a company’s working capital to be mismanaged through for example capital projects, withdrawals by shareholders for personal use or through non performing related party loans.
- Debt may arise from cumulative losses over the years which eventually results in the company’s working capital base being eroded.
Causing curtailed or ceased operations
This could be a result of many challenges as explained below.
- A result of financial mismanagement as explained above.
- Increasing operating costs depending on the mining methods used and depth of the mine.
- Fall international metal prices.
- Unfavourable exchange control regulations and exchange rates.
- A company may have old mining equipment which may inhibit it through frequent breakdowns, low volumes, high cost of production, etc.
- Due to loss of staff a company may remain with less competent personnel.
- Wrong strategies or priorities pursued.
Tools to use
A CRP may use the following tools when considering a corporate rescue plan:
- The PESTEL model which considers external factors that affect a business i.e. political, economic, social, technological, environment and legal.
- SWOT analysis which considers a business’ strengths, weaknesses, opportunities and threats.
Developing the plan
It is recommended that a CRP should cover the following areas.
Addressing debt or creditors
Amounts due to creditors can be addressed through:
- Agreeing on a moratorium (relief period) with creditors.
- Phased payments through a payment plan.
- Disposal of redundant or non-core assets
- Issue new shares to existing or new shareholders
- Shareholder loans.
- Compromise with creditors.
- Conversion of debt to equity.
Improving company operations
- Assess if the mining company’s business is still viable.
- Consider restructuring and to do away with loss making operations.
- Consider major overhaul of old equipment or acquiring new equipment, subject to availability of funds.
- Changing mining methods or mining locations.
- Mixing of different ore grades.
- Employ competent people. Consider termination, training or development.
Improving company finances
There is need for a solid and convincing plan to trade the company out of its current financial problems. In addition to dealing with creditors a CRP’s plan should consider the following aspects:
- Improve corporate governance including financial management. Design and implement effective financial controls.
- Removing the people who were responsible for the financial mismanagement e.g. management, board, etc.
- Hire competent or professional staff.
- Raise funding for working capital.
- Raise funding for overhaul or acquisition of new equipment.
Documenting the corporate rescue plan
In documenting the corporate rescue plan the CRP is encouraged to consider the following:
- Have clear objectives for the business.
- Developing action plans to address the identified current situations and their causes.
- Clear timelines should be assigned to action plans.
- Assign people responsible for the action plans.
- The minimum information requirements per section 142 of the Act.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, corporate advisor and is an experienced director of companies. He is a member of ICAZ’s Investigations Committee and currently advises on legal matter on disciplinary issues. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com.
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