BUSINESS RESCUE PROCEEDINGS

Our corporate law resume has for many years been criticized as being devoid of effective mechanism for

the restoration of financially distressed companies back to profitability.

Part 3 of the corporate insolvency Act has introduced a concept known as administration

Administration is a procedure whereby a company that is in financial trouble but has possible prospects of

being turned around can be saved from collapse by being placed under the supervision of a qualified

insolvency practitioner and also fencing it off from creditors enforcing their rights. So, creditor‟s legal rights

of enforcing …. Has been briefly suspended during administration and this process is known as

administration

How does the process of administration commence?

Section 21 CIA provides one of the two methods of commencement of administration or business rescue

procedures. The first procedure is that the company may by special resolution resolve that the company

voluntarily begin business rescue proceedings and the company be placed under supervision of an

administrator.

Further reading of the section suggests that there are certain preconditions to be satisfied in order for this

resolution to be valid. And these are:

1. The board of directors must have reasonable grounds to believe that the company is

financially distressed. So you cannot begin this process if the company is not financially

distressed and you just want to run away from the obligation of the company to meet its debt

obligations. Section 2 of the Act defines financial distress as “a company is likely to be insolvent
 within the immediately ensuing six months. So the belief should be that if nothing is done, this

company will become insolvent.

2. There appears to be reasonable prospects of rescuing the company. You cannot begin the

business rescue proceedings unless you know that there are prospects of this company being

turned around.

Purposes of business rescue mechanisms

The purpose of business rescue procedures as set out in section 21(1) is to:

1. Maintaining the company as a going concern.

2. Achieve a better outcome for the company‟s creditors as a whole than is likely to be the case if the

company were to be liquidated.

3. Realize the property of the company in order to make a distribution to one or more secure or

preferential creditors.

The law further says that the company cannot validly make a resolution to commence business rescue

proceedings if liquidation proceedings have already commenced. This is in order to prevent members from

frustrating the rights of creditors who have already commenced liquidation proceedings. The law is on all

falls to balance the rights of members as well as that of creditors.

Once the resolution has been passed, then it must be filed with the registrar. There is no prescribed period

within which this resolution is to be filed. However, what the law says is that this resolution will only become

effective after it has been filed with the registrar. The act does not say when it is filed but after it has been

filed. The reason is that it is the members who will give or appoint the effective date of the resolution and
give notice within 30 days after filling it. This notice should be to all affected people indicating to them the

effective date of this resolution.

Who are these affected persons?

Section 2 of the act says the affected persons includes a regulator, shareholder, member, director, creditor

or an employee, a former employee of a company, registered trade union representing employees of the

company and the registrar.

The members can then proceed and appoint the business rescue administrator.

21(4) says, when you have appointed the business rescue administrator, you must within 7 days publish a

copy of the notice of appointment of the business rescue administrator to each affected person.

Failure to give the two notices referred to above, 21(5) provides that it would mean within 60 days after

passing the resolution, the resolution shall lapse. Meaning the company shall not be placed under

administration and therefore not fenced off.

Section 22 provides for the ability to oppose this resolution. Any affected person may apply to court to

oppose the adoption of the resolution and the application to set aside should be based solely on the

grounds set out in section 22.

Section 22(1) provides for these grounds as:

1. There is no reasonable basis for believing that the company is financially distressed

2. There is no reasonable prospect of rescuing the company or

3. The company has failed to satisfy the procedural requirements set out in section 21.

4. It could also be that the business rescue administrator is not qualified to act as such. It should be

noted that section 30 of the Act sets out the qualifications of the business rescue administrator.
 This person must be a receiver qualified to be appointed as administrator and the subscription is

valid for one year. An administrator is someone who has the ability to turn around the company

from collapsing to financial stability.

Section 23 provides a second means through which business rescue proceedings may be commenced.

This time around it‟s through a court process. The section provides that any affected person may apply to

court for an order to place the company under supervision and begin the business rescue proceedings.

The procedure is that:

The person will make an application to court by a petition

The applicant shall serve a copy of the petition on the company, the registrar and the official receiver

(Administrator General) and prepare the notice to all affected persons and when the court is satisfied, the

court will then make an order to place the company under administration.

Further, 23(4) provide for the conditions that the court will consider placing the company under supervision

these being that:

1. The company is financially distressed

2. The company has failed to pay any amount in terms of an obligation under a contract with respect

to employment-related matter; or

3. It is otherwise just and equitable to do so for financial reasons, and there is a reasonable prospect

of rescuing the company

However, Section 23(7) creates a problem. It should be mentioned that commencement of business rescue

proceedings as provided for in this statute is premised on the South African Insolvency Act and this section

has created a lot of problems and already in Zambia, there are calls to amend the section.
The subsection reads “If liquidation proceedings have been commenced by or against a company at the

time an application is made as provided in subsection 1, the liquidation proceedings shall be suspended

until:

a. The court has adjudicated upon the application; or

b. The business rescue proceedings terminate, if the court makes the order applied for.

What this provision is saying is that, if there are liquidation proceedings going on in court and any affected

person files an application for a business rescue process then the liquidation proceedings are to be

suspended until the court has adjudicated upon that application or if the court grant the order to commence

proceedings and then the proceedings terminate then liquidation proceedings resumes. The problem here

is that the Act does not define the term liquidation proceedings. A question would then be asked as to that

does the use of liquidation proceedings only refers to the process at court? Or does it include also when the

liquidation itself has commenced. The fear is that creditors will be in trouble because liquidation

proceedings will be frustrated. Liquidation entails that the company is in debt and incapable of paying its

debt. In here, there are no prospects of turning around.

The court in South Africa said this:

„It is in my view remarkable that the legislator did not refer to the company already under liquidation.

Although there is no definition in the Act as to what liquidation precisely entails, liquidation does not to

include a liquidated company…….

Therefore, if there are no problems with commencement and the business rescue proceedings have

commenced, then fencing off is automatic and this fencing of the company is known as a “moratorium”. A

moratorium is period within which creditors lose their rights of enforcement against the company.
Therefore, according to section 25, there shall be no legal proceedings against the company unless with

written consent of the business rescue administrator, with leave of court and in accordance with any terms

and conditions the court considers suitable in any particular matter related to the business rescue

proceedings.

Proceedings also shall be valid if they are a set off against any claim made by the company in any other

legal proceedings, irrespective of whether those proceedings commenced before or after the business

rescue proceedings began.

Another exception would be in criminal proceedings against any of the company‟s directors or officers, or

proceedings concerning any property or right over which the company exercises the powers of a trustee.

The procedure requires that the administrator will from time to time hold meetings with the affected persons

and make progress reports and he is required to make a plan which must be approved by the affected

persons.
WINDING UP OF COMPANIES

What is winding up of the company?

Winding up of a company is the process by which a liquidator is appointed to realize the assets of the

company, pay off the debt and if there is anything remaining, pay off to those entitled in the manner

prescribed by articles or statute.

METHODS OF WINDING UP

There are three principle ways in which is wound up

1. Voluntary winding up by the members

A member‟s voluntary winding up is initiated when the members of a company adopt a special resolution

for the voluntary winding up of a company.

It should be noted that the member‟s voluntary winding up is only possible where the company is solvent

A company is said to be solvent when the assets of the company exceeds its liabilities..

Therefore, the insolvency Act requires that the directors must sign a statutory declaration of solvency

Section 91 of the corporate insolvency act provides that the directors must sign a statutory declaration of

solvency declaring that they have carried out an inquiry into the affairs of the company and that they are

satisfied that the company meets the solvency test.

What do we mean the solvency test?

Section 3 provides that;

Solvency test means a test to determine that;

 a. The company is able to pay its debts as they become due in the normal course of
business; and
b. The value of the company’s assets is greater than the value of its liabilities, including
contingent liabilities

Contingent liabilities are liabilities which have not yet come into existence but are likely to come up. For

example land rates, etc you have to put them together and see if still the assets of the company exceeds its

liabilities.

However, if the company is not solvent, the member‟s voluntary winding up is not possible because you

cannot operate a company where you borrow money and then pass a resolution that you are winding up.

The idea is for the protection of creditors.

What does it mean if the company is not solvent? It means that the process becomes the creditors

voluntary winding and this is the second method through which a company is wound up.

2. Creditor’s voluntary winding

Creditor‟s voluntary winding is initiated when the members adopt a special resolution for voluntary winding

up without a statutory declaration of solvency by the company‟s directors.

A creditor‟s voluntary winding up is invoked in relation to insolvent companies

It should be noted that the involvement of the court is not required in initiating this process because it

begins as a members voluntary winding up and after searching of the company‟s assets realize that they

cannot make a statutory declaration of solvency.

3. Compulsory winding up by the court

The court may issue an order that a company winds up on the application of the following persons who may

petition the court to issue and order of winding up the company;

1. The registrar or the official receiver

2. The company itself

3. A creditor

4. A member

5. A person who is a personal representative of a deceased member

6. The liquidator if the company is in liquidation by way of members voluntary winding up

7. The trustee in the bankruptcy of a member

It should be noted that the grounds upon which the court may compulsorily wind up the company are

limited and are specified in section 57 of the Corporate Insolvency Act.

The court may order the winding up of the company on the petition of a person other than the official

receiver is

a. The company has by special resolution resolved that is be wound up by the court. This is mostly

resorted to when the relationship between members is so acrimonious hence the members may

want the process to be supervised by the court.

b. The company is unable to pay its debts. If the court carries out an inquiry and comes to the

conclusion that the company is insolvent, it may order that the company be wound up.

c. The period, if any, fixed for the duration of the company by the articles expires, or an event occurs

in respect of which the articles provide that the company is to be dissolved. If this company was

incorporated for a particular adventure and this adventure is finished, that is good ground to go to
 court and obtain a court order that the company be wound up because the venture for which we

incorporated this company has come to pass.

d. The number of members is reduced to below two. Every company in Zambia must have a minimum

of two members. If for any reason one member of the company has relinquished his shares and

the remaining member cannot find any other person to take up those shares, he can petition the

court to wind up the company.

e. The company was formed for an unlawful purpose. If it is proved to the court that the purpose for

which the company was formed is for an unlawful purpose.

f. The incorporation of the company was obtained fraudulently; or

g. In the opinion of the court, it is just and equitable that the company should be wound up.

JUST AND EQUITABLE GROUNDS OF WINDING UP THE COMPANY

The first authority of the meaning or how to apply this provision is the case of Ebrahim v Westbourne

Galleries Limited 1973 AC 6

This is a case where the company was incorporated by two people then one of the shareholders brings into

shareholding the son. Then the son and father passed a resolution to remove one of the shareholders as

director. Then the party petitioned to have the company wound. The court then said:

There has been a tendency to create categories or headings under which cases must be

brought if the clause is to apply. This is wrong. Illustrations may be used but general but

general ways should remain general and not to be reduced to the sum of particular

instances. In companies that are quasi partnerships, the question should always be, would

it unjust and inequitable for the petitioner to be forced to remain a member of the company.

In a nutshell, the principles established in the case are that:

 1. The just and equitable clause to wind up a company may apply even though the respondents acted

within their strict legal rights. We cannot give strict instances when the clause can be applied.

2. The just and equitable clause may apply when the complaint relates to behavior that is contrary to

the settled and accepted course of conduct between parties whether or not reinforced by contract

or by the articles. Even if the shareholders have enforced their agreement through shareholders

agreement, the court can still look beyond the agreement to establish whether or not it will be just

and equitable.

OTHER INSTANCES OR EXAMPLES

1. The just and equitable clause to wind up the company will be applicable where its

substratum or principle object of the company has failed. This principle will normally apply

where the company was formulated to pursue a particular adventure. In Re Germany (1882) 20

Chd 169. The only object of the company was to acquire and work a patent but they failed to

acquire a patent. Re Kitson and Company Limited 1946 1 ALL ER 435

2. It is just and equitable to windup a company where there is a complete deadlock in

management. In most cases, the courts will hold that there is no deadlock where there exists

some legal means to get decisions made using some procedure either under the articles or the

general law.

3. It is just and equitable to wind up a company where there is a justifiable lack of confidence

in the management of the affairs of the company. See; Loch v John Blackwood Limited

(1924) AC 792. The directors representing the majority had refused to call meetings, submit

accounts or recommend a dividend. The minority had lost confidence in the

management and suspected that the majority were trying to force them to sell their shares at
 undervalue. HELD: the company should be wound up as there was a justifiable lack of confidence

in the management.

EFFECTS OF WINDING UP BY THE COURT

When a petition has been received by the court for winding up of a company, and the proceedings have

commenced, section 62 CIA prohibits the disposition of properties of companies including things in action

(those things or issues which can create some proprietary rights of a person). It also prohibits any transfer

of shares, alteration in the status of members of the company.

Section 63 CIA provides that, an attachment, sequestration, distress or execution put in force against the

estate or assets of a company after the commencement of a winding up by the court is void. Therefore, if

the court has begun winding up the process, there can be no distress action by the creditor against the

company or assets of the company and sequestration cannot be done.

Section 66 CIA no action against the company except with leave of court can commence. You cannot

commence any action against the company in liquidation unless you have obtained leave of court and the

court can refuse or accept that you commence such an action.

Section 67 The court may either appoint and individual as provisional liquidator or as liquidator. A

provisional liquidator is one who is appointed for the time being. If the court has not appointed any

liquidator then the official receiver will automatically be the liquidator.

POWERS OF THE LIQUIDATOR

 Once the court has appointed a liquidator, what powers do they assume

 Powers of the liquidator are provided for in Section 74

 To pay any class of creditors in full

  Making compromises or arrangements with creditors

 Or postpone

 Make arrangements on questions

The liquidator cannot operate in isolation. The liquidator has a responsibility to account. The liquidator

appointed by the court is an agent of the court and works subject to the instructions by the court. Also the

liquidator subject to the comments and recommendations of the committee of inspection

Section 77, committee of inspection to consist of the creditors and the mebers of the company or persons

holding

a. General powers of attorney from creditors or members; or

b. Special authority from the creditors or members of the company

Therefore, the liquidator has the responsibility to report to the committee of inspection.