The Sunday Mail
Are struggling companies worth the hassle of being rescued?
For one thing, they are struggling for a reason.
It is that reason that the answer to that question lies.
Sometimes, companies fail because of poor management.
Management typically includes planning, organising, controlling, directing and communicating.
These significantly contribute to the success or failure of a company.
In this case, there might be need for business rescue of a failing firm as new or efficient management can be expected to revive the fortunes of the entity.
In other scenarios, companies fail because the fundamentals are all wrong.
A business might have been started in an industry that is not, or is no longer profitable.
Or there just might be a complete failure to understand its market(s) and its customers.
When a business’ foundation is all wrong, sometimes it’s best to simply let it die.
This brings into question the role of judicial management in Zimbabwe.
According to the Companies Act (Chapter 24.03) (300) (a), a company, its directors or creditors can make an application for a provisional judicial management order to the High court.
The court may, if it is satisfied that the company is or will be unable to pay its debts, issue the order.
But, the court must be satisfied that if the order is made it will lead to the survival of the company as a whole or part of its undertaking as a going concern, the approval under the Companies Act of scheme of arrangement between the company and any such persons as are mentioned in the Act, and the better realisation of the company’s assets than if the company was to be wound up.
The requirements of the creditors are also taken into cognisance by the court in coming up with the judicial management order.
Some of the important processes that a judicial manager does include seeking out investors, downsizing human capital, selling major assets and negotiating with the debtors to defer payments while the company recovers.
But sometimes things don’t go according to plan.
Should every struggling business be brought under judicial management?
A broad analysis of Zimbabwean companies that have been categorised as ‘struggling’ over the years have shown that they tend to have a high gearing ratio; that is, they have a high proportion of debt to equity, placing their going concern status in jeopardy.
Financial experts typically contend that a gearing ratio above 50 percent should be taken as highly levered or geared, thus the company would be at greater financial risk if profits are low.
What has also contributed to local firms’ increased susceptibility to loan defaults and eventual bankruptcy is the high cost of borrowing.
It is, therefore, common that the key role of most judicial managers is to deal with high levels of indebtedness.
A case in point: Last week, milling and timber manufacturing company Border Timbers said it will remain under judicial management “for the foreseeable future” as a longstanding legal dispute remains outstanding.
The company was placed under provisional judicial management in January 2015 and went into final judicial management in April 2016 after failing to service debts to several financial institutions.
Border Timbers’ exit from judicial management was expected this year, but mainly depended on the settlement of an ongoing dispute with creditors over US$25 million awarded to the company by the International Centre for Settlement of Investment Disputes (ICSID).
Without the settlement of this debt, the company’s position remains precarious.
Extended judicial management comes at the cost of the company itself insofar as judicial management fees are ordinarily paid by the company (although they are regulated by the State).
According to the Companies Act (Chapter 24:03), Section 308 (1), the remuneration of the judicial manager must be ‘reasonable’.
However, the financial position of the struggling firm is often not considered in determining the remuneration fee, and a nightmare scenario is when the judicial manager still has to be paid even if there are no results to show for it.
In cases of ‘public entities’ such as Air Zimbabwe, the cost burden goes to Government and, ultimately, the taxpayers.
There are also concerns about the cost of judicial management with regards to how the judicial management fees tend to be given priority over some creditors.
However, when successful, there are various benefits that are derived from the success of judicial management.
A key advantage for the revival of struggling company’s fortunes are the retention of jobs, while pre-judicial management debts are paid first before the cancellation of a judicial management order as a benefit of the judicial management order.
The creditors can get their full payment.
In 2018, Zimbabwe’s largest ferrochrome miner, ZIMASCO, came out of judicial management (presided over by Grant Thornton’s Reggie Saruchera) after almost two years after posting a $45 million profit from a turnover of $158 million during the period that it was under care.
Therefore, in a case where the process is successful and the company is rescued from the jaws of debt, workers and shareholders stand to benefit.
But in cases where the company collapses, the judicial manager still smiles all the way to the bank while other parties count their loses.