Company rescue proceedings initiated by shareholders
God knows Hofisi
Following my article of Thursday, May 2022, 19 entitled “Request for company rescue procedure by employees” I received many requests.
I have been asked to explain when shareholders can cause a company to be placed under corporate bailout proceedings. I sensed that some might be disgruntled minority shareholders.
Company rescue proceedings caused by shareholders
My view is that shareholders can initiate voluntary or involuntary rescue proceedings for a company under the Insolvency Act (Chapter 6:07) or the “Act” as explained below.
Voluntary business rescue procedure
According to article 122 of the law, the board of directors (managers) of a company can decide that the company voluntarily starts a procedure of rescue of the company and places the company under supervision, if the board has grounds reasonable to believe that:
- The company is in financial difficulty and
- There seems to be a reasonable possibility of saving the company.
It should be noted that Article 122, as drafted, is addressed to directors and not to shareholders. However, in my view, shareholders can make use of it to the extent that:
- They are also directors of the company. This is quite common in small and medium enterprises where the shareholders are also the directors or even part of the management.
Thus, shareholders in their role as administrators can make use of article 122 and adopt a resolution for a voluntary company rescue procedure.
- Shareholders who are not directors can urge directors to use section 122. The reality is that directors are appointed by shareholders and accountable to them as appointing authorities.
Involuntary company rescue procedure
According to section 124(1) of the Act, unless a company has adopted a resolution referred to above (section 122), a person concerned may apply at any time to a court for an order placing the company under monitoring and initiating a rescue procedure for the company.
Under section 124(4)(a) of the Act, after considering an application under section 124(1), the court may make an order placing the company under surveillance and initiating salvage proceedings company, if the court is satisfied that:
(i) The company is in financial difficulty, or
(ii) The Company has failed to pay any amount under government regulation or contract regarding employment-related matters, or
(iii) It is otherwise fair and equitable to do so for financial reasons.
From the above, it is clear that the definition of “person concerned” is essential with regard to shareholders. This is explained below.
Persons concerned and shareholders
An affected person is defined in Article 121(1)(a) as meaning:
- A shareholder or creditor of the company, and
- Any registered trade union representing the employees of the enterprise, and
- If any of the company’s employees are not represented by a registered union, each such employee or their respective representatives.
According to the definition above, the shareholders of a company are therefore affected persons and can therefore bring a legal action to involuntarily place a company in the framework of a company rescue procedure by invoking article 124(4)(a)(i) or (iii).
Use of legal remedies available under Section 62 of the Companies and Other Entities Act (Chapter 24:31) or the COBE Act
In my article of April 21, 2022 entitled “Remedies for aggrieved shareholders, piercing the corporate veil”, I explained the remedies available to aggrieved shareholders.
According to Article 62(1) in a legal action brought by a member of a private business corporation (PBC) or a company, the court may order one or more of the remedies provided for in Article 62(2). ) if it is determined that:
- The officers or directors or members of the entity are deadlocked, whether by reason of a very division of their numbers or for some other reason, and irreparable harm to the entity is likely to be caused business of the entity or business can no longer be conducted with respect to the benefit member, or
- The officers, directors or anyone else in control of the entity acted in an illegal, fraudulent or oppressive manner towards the complaining (aggrieved) member.
- The legal remedies available under Article 62(2) of the COBE Act that are relevant here are:
- Section 62(2)(a) which provides for the dissolution or liquidation of the entity although the court may order that the grounds be corrected within a reasonable time.
Section 62(2)(d) which provides for the removal of any manager, director or officer, or the appointment of any person as a manager or officer.
I am of the opinion that if a shareholder, as a relevant person, can show that a company is in financial difficulty or that it is fair and just to do so for financial reasons, the court can order the appointment of a business rescue practitioner, as a neutral person, while a lasting solution is sought.
In my opinion, shareholders who are also directors, which is quite common in small and medium-sized companies, can cause a company to be placed under a voluntary company rescue procedure under section 122 of the law on insolvency. Shareholders, as affected persons, can also initiate involuntary corporate rescue proceedings under Section 124.
This simplified article is for general information purposes only and does not constitute professional advice by the author.
Godknows (GK) Hofisi, LLB (UNISA), B.Acc (UZ), CA (Z), MBA (EBS, UK) is a Disposal Solicitor/Practitioner, Chartered Accountant, Corporate Salvage Practitioner, registered tax accountant, transaction structuring consultant and business valuator. He is a director of Investacare International (Private) Limited. He writes on a personal basis. He can be contacted at +263 772 246 900 or [email protected]