As companies continue to go through difficult times while some go under due to the prevailing harsh economic environment, experts believe there is need for the establishment of a fund to rescue troubled, but viable and critical companies.
VICTORIA MTOMBA
A number of companies have either been placed under judicial management or liquidation. Judicial management is a temporary court supervised rescue plan that aims at rehabilitating companies that are in financial trouble and helping restore them to profitability.
A judicial manager for 21 years, Cecil Madondo, said one of the major challenges of judicial management was that the distressed companies receiving judicial assistance often faced serious interference from their shareholders and former directors. He said the other difficulty was dealing with a legal framework which was not aligned and the lack of access to credit facilities or funds for recapitalisation.
“The long-lasting solution is for the government, the corporate sector and the banking industry to come up with a statutory revolving fund that can be used to rescue ailing and financially distressed but viable companies of national importance,” he said.
Of the 32 companies that were put under Madondo’s watch, 17 were resuscitated, eight were liquidated, while seven are still under judicial management.
He said the business rescue plan was most welcome as it would deal with an outdated legal framework.
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“It is my humble view that whether it is judicial management or business rescue plan, it must be accompanied by a source of funding in the form of a revolving credit facility and policies that attract foreign direct investment,” Madondo said.
The government has in the past come up with similar initiatives to bail out companies.
Such initiatives include the $40 million Distressed Marginalised Areas Fund (Dimaf), which was earmarked for ailing companies in Bulawayo and other cities countrywide. The fund was launched in 2011 but has since disappeared. There was also the Zimbabwe Economic Trade Revival Facility (Zetref). Zetref was launched in 2012 and had $70 million contributed by government and the African Export-Import Bank.
However, the funds had a low uptake due to high interest rates, especially under Dimaf.
Confederation of Zimbabwe Industries president Busisa Moyo said previous rescue funds were too little to revive struggling companies.
Moyo said most companies were given 10% of their requirements through business rescue funds such as Dimaf. He said some companies received $300 000 when they required $3 million.
“It became bad money as it was not sufficient, although Zetref was better, but the interest charges were 36%. It did work for a few companies which were strong but for ailing companies, it never did as it left them in a worse position,” Moyo said.
He said the charges for judicial management were too high as judicial managers took the lion’s share of what the company generated.
Moyo said if the rescue fund was established, there was need for research and consultations, and the price of the money had to be at least 10%. He said the tenure had to be three to five years for working capital requirements and five to 10 years for retooling.
Judicial management is credited with rescuing companies such as Cairns, Blue Ribbon and Archer Clothing from the brink. Cairns exited judicial management last year after Takura Capital invested $33 million into the agro-processor. It had been under judicial management since 2012.
Capacity utilisation has since risen to 40% from 5% in 2012 and it now employs over 400 people. In 2012, the company employed 120 people.
Competition Tariff Commission chairman Dumisani Sibanda said companies that were revived under judicial management were helped by the determination of stakeholders, including government, to get them out of the doldrums.
“Cairns Foods had working capital constraints which made it fail to procure sufficient raw materials to enable it to sufficiently use its capacity. Protection by government from cheap imports helped shield the company. The company had a ready market which was being unfairly taken by importers,” he said.
“Blue Ribbon Industries also had a market and was under financial distress. It had overborrowed and failed to pay back its loans. The same applies to Archer Clothing; it had overborrowed but had a viable market. These companies were saved from bankruptcy by judicial management.”
Sibanda, however, said judicial management was “fraught with weaknesses which the government needs to address”.
The weaknesses included lack of a code of ethics and standards for judicial managers and an absence of a time-frame for the duration of judicial management. The current law does not stipulate a time-frame for the duration of that management. He said judicial managers have been criticised for taking too long to conclude cases and the current legislation did not provide a mechanism for judicial managers to restructure ownership of the company such as diluting shareholding and allowing new shares to be issued to creditors in lieu of payment.
Sibanda said there was lack of qualified judicial managers and there was need for specialised judges to handle matters relating to judicial management.
Former Cairns and Blue Ribbon judicial manager, Reggie Saruchera, said judicial management helped to protect companies and stakeholders, including creditors by ensuring the company was given a chance to return to viability or find an investor and or raise money to pay off the creditors.
He said the legal framework protected the company from a free-for-all scenario where creditors and banks could move in to attach and remove key productive assets, that left otherwise viable companies in liquidation.
“Judicial management helps the small creditors who do not have the resources to hire lawyers to recover the amounts owed to themselves and protect their rights in the same way large creditors and banks are able to. Employees are given a second chance when the company is turned around, as is the case with Cairns, Blue Ribbon Foods and many others,” Saruchera said.
Saruchera said a healthy economy should allow distressed and unviable businesses — on which the prospects of being turned around are limited — to be placed under liquidation so that creditors can recover from whatever assets are remaining on a timely basis.
