The Sunday Mail
Tichawana Nyahuma
When looked at through the spectacles of the law, a company is seen as separate from its directors and or shareholders and is said to be a juristic entity or artificial person.
This means that it has its own existence which is completely independent of its owners or the directors who run it.
The owners or shareholders may be other corporate bodies or natural persons. The directors are only the agents through which the company conducts its affairs.
Therefore, whatever the company does, it does so in its own name. Its shareholders or directors in their personal capacities, have nothing to do with the actions of the company. So whenever you transact or deal with a company, know that you are not, in the same breath, also dealing with the owners or directors of the company in their personal capacities.
If you have a claim against a company, the same does not extend to the directors or shareholders of that company.
In other words, the claim will be limited to the company only. That is why whatever the name of the company may be, the last word thereof is “Limited”.
This position has only but one exception,which is when it is shown that the company was set up as a vehicle to commit fraud or to cover up such other illegal activities of the proprietors. In such events, the shareholders or directors may be held personally liable in what is commonly referred to as “the lifting or piercing of the corporate veil”.
Limited liability companies have the obvious advantage that the company’s directors and shareholders cannot be held personally responsible for the debts or other liabilities of the company at any point.
In other words, conducting business under a limited liability company removes the threat of directors’ personal liability for the liabilities of the company.
In this contribution, I wish to touch on the processes that have become commonplace relating to companies in financial difficulties in our country in these last few years. These processes are Judicial Management and Liquidations.
I have said at the beginning that a company is a separate legal “person”. So, since a company is also “a person”, it follows that it may also fall sick, just like you, the natural person.
There are certain procedures that are provided by law, if you want, for the “treatment” of an ailing company and if that treatment should fail, then for the termination of its life and distribution of its assets and liabilities as what also happens to a natural person.
Otherwise as long as a company is financially healthy, it is possible for it to exist forever unless it is terminated according to law.
A terminally ill company may be treated by a Judicial Manager. A Judicial Manager may therefore be equated to a “medical doctor” of a company while a Liquidator may be likened to an undertaker. In all this, the Master of the High Court remains present just like he does upon the death of a natural person.
It is well known that most companies the world over conduct business on credit. That is to say, they buy goods and services on credit. At the same time, they also sell goods and services on credit.
For the sake of clarity and completeness, a credit transaction is one whereby the goods or services are supplied now and then paid for later as the parties may agree.
Now, if things are not managed prudently, it is possible that the company may end up in a financial predicament where on the one hand, it owes other companies and individuals, called creditors, certain sums of money for goods and services supplied by them to it and on the other hand, other companies and individuals called debtors, will also be owing the company certain amounts of money for goods and services provided to them by the company.
If a point is reached where the company fails to collect the money owed to it by its debtors, it naturally means that it will also fail to pay its creditors.
That means the company would have fallen “terminally ill”, if you want, and therefore in need of one form of treatment or another. The most common prescriptions in such circumstances are either Judicial Management or Liquidation.
These options may be taken voluntarily by the directors of the company or compulsorily at the option of the creditors through an application to the court.
Judicial Management
A Judicial Manager is a person that is appointed by the court to run the affairs of a company that is in financial difficulties. Although appointed by the court, he in fact, is not an official of the court.
This process is undertaken in an effort to avoid the drastic option of closing down the company altogether. The procedure itself is one whereby either the company itself opts for voluntary judicial management, also called voluntary surrender or compulsory judicial management via its creditors who approach the court with a request for the placement of the company under judicial management. I add that voluntary surrender is somewhat tantamount to an admission by the directors that they would have failed to properly run the affairs of the company.
Legally,a company can only be placed under judicial management through an order of the court.
Once such an order is issued, it means that the directors of the company will step aside and the person appointed by the court will assume all the powers of the previous directors.
He will have full authority to run the affairs of the company with his main objective being to harness and protect the company’s assets and try to rehabilitate the company.
In this situation, employees’ employment contracts are not automatically terminated as the company will still be in operation though facing difficulties.
Termination of employment contracts by whatever means will be possible as part and parcel of managing the company out of its troubles. So, the advantage of judicial management is that the company will remain in operation and its creditors will eventually be paid if the company’s financial illnesses are cured thereby making it possible to pay off its debts.
A word of caution though. Judicial management tends to disadvantage historical creditors in that those creditors will be disabled from suing the company for recovery of liabilities owed to them because in law, a company that is under judicial management is somewhat protected from its creditors.
Instead, it is the company itself that can attack and take legal action against its own debtors. It is therefore not surprising that most judicial management applications are by the company’s directors rather than by creditors mainly because this process freezes legal processes by creditors and consequently delays liquidation if that should be the ultimate option.
It can therefore be said that during judicial management, the company will be on some sort of holiday or break from creditors.
During that period, it will not be obliged to pay historical creditors there and then but until after the company has fully recovered.
The only creditors entitled to payment from proceeds of judicial management are those that will arise from the time when the company was placed under judicial management as well as those past creditors who were secured.
Secured creditors are those who would have supplied goods and services to the company on condition that the company provides some form of registered security to the creditor either through the company’s immovable or movable assets which would have been bonded as for example, mortgage or notarial bonds.
There is sometimes an option that may be extended to creditors of a company under judicial management. Instead of waiting to be paid when the company eventually recovers, it may be prudent for the creditors to accept the conversion of what they will be owed by the company into shares.
This assists in the “treatment” of the company in that it will no longer be burdened by those debts as the creditors would have become shareholders who will be paid dividends when the company comes back on the rails and begins to operate profitably. Accountants refer to this as the conversion of debt into equity.
Although a number of critically ill companies have gone the judicial management way in recent years, it seems that this option has largely been a failure in Zimbabwe.
The reasons are many and debatable on another day. It is however instructive that this option has somewhat been abused by unscrupulous directors/shareholders who use it as an escape route to run away from creditors.
In his dealings with the company, the judicial manager is at all times under the supervision of the Master of the High Court to whom he reports from time to time as well as to the creditors.
Winding Up/Liquidation
If the judicial manager fails to turn around the fortunes of the company, then the next option would be to close down the company.
That is what is commonly referred to as winding up or liquidation of the company. Just as with judicial management, winding up can also be voluntary or compulsory at the direction of the court via an application by the directors or creditors of the company in that order.
Note however that, liquidation or winding up of a company is not always preceded by judicial management. If the court is satisfied that the company’s state of financial affairs are such that it is impossible to rehabilitate it, then an order for its liquidation will be issued without resort first, to judicial management.
There are several grounds on which a company may be wound up but the one that has been in the forefront in recent years in our country is that most companies are being closed down for failure to pay their debts.
Failure to pay debts refers to a state in which the company’s liabilities are in excess of its assets so that even if the assets are converted into cash, the debts will remain. In simple language, the company will be bankrupt or insolvent.
During liquidation, all court actions against the company for recovery of any monies are also suspended. Creditors have to lodge and prove their claims to the Liquidator.
After harnessing the company’s assets, the Liquidator will convert them into cash for distribution to the creditors pro ratato what they were owed by the company.
You will find that in all probability, the creditors will suffer huge loses upon liquidation of the company because, as I have already said, the company’s debts will already be in excess of its assets so mathematically, it will be impossible for the creditors to recover in full, what they were owed by the company.
So the Liquidator is the undertaker that ensures that the activities of the company are brought to a final end.
However, it is possible that a liquidated company can emerge a healthy new company that can take the place of its predecessor through what is known as a Scheme of Arrangement with Creditors. I shall discuss that one on another day.
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