From judicial management to corporate rescue: a paradigm shift

Rueben Mukavhi

In a previous instalment, we mentioned that in the old law, when a company was in financial distress, it would be placed under judicial management. The new Insolvency Act [Chapter 6:07] abolished judicial management and replaced it with what is called corporate rescue proceedings. In this instalment, we highlight some of the major differences between the two processes.

The basis for judicial management was that by reason of mismanagement or other the company was unable to pay its debts or being prevented from becoming successful. The problem with this was that managers would not be too keen to apply for judicial management because that would amount to them admitting mismanaging the company. The company would thus continue to be flogged when it was dying, until too late. On the other hand, the basis for corporate rescue is simply that the company is in financial distress. The reason for the distress is not relevant. This is expected to make it less of a self-indictment on the part of managers to seek help quickly.

The intended outcome of judicial management was to enable the company to pay its debts and to make it successful. This was a long shot. It meant that judicial management would not end until all the creditors were paid, and until the company was a going concern once again. The intended outcome of corporate rescue is rescuing the company from liquidation. This could be achieved by simply agreeing a compromise with creditors and restructuring the balance sheet of the company. It can therefore be done within a short period of time.

Judicial management was always by order of court. A company could not place itself under judicial management; it just had to go to court. This made the process expensive and intimidating. With corporate rescue, there is provision for both voluntary corporate rescue and corporate rescue through order of court. A company can just adopt a resolution to commence corporate rescue, without the need to go to court. This is less expensive and less intimidating.

Judicial management was indefinite. This made it a kind of blank cheque for judicial managers who could keep the company under supervision for as long as they wished. Corporate rescue has a 3 month- rule, whereby corporate rescue proceedings must be completed within three months. This puts practitioners on the spot to do the assignment and leave. This is good for business.

Judicial managers were empowered to manage the company in such manner as they considered most economic and most likely to promote the interests of the members and creditors of the company. They were only required to produce a report, which they would present to meetings of creditors and members, without getting any input from those affected persons. The creditors and members had very little say. They would only contribute if the judicial manager asked them to pass some resolution. The corporate rescue practitioner, on the other hand, is required to design a plan of rescue for the company, which plan shall be subject to approval by the creditors and members of the company. This requirement has given a voice to the creditors and members in the management of their company. If they are not happy with a proposed rescue plan, they can just reject it or require the practitioner to amend it.

Though this exposition is not exhaustive of the differences between the two judicial processes, it makes it clear that the concept of corporate rescue marks a paradigm shift from the old law. It is geared more towards saving companies from collapse for the benefit of all stakeholders than just protecting the interests of creditors.

Get in touch on rmukavhi@gmail.com

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