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Companies, no doubt play a pivotal role in the economic growth of nations, however at some point during the existence of a company, it is possible that such a company is unable to settle its debts, having seemingly exhausted all the available means. In such a circumstance, the liabilities of the company may even exceed its assets. This is usually referred to as insolvency.
The Concept of Rescue
This a sub-theme of insolvency law and a process by which a distressed company may be resuscitated or rejuvenated. The concept of rescue therefore is based on processes, mechanisms, and steps that are carried out as interventions necessary to avert the eventual failure of the company. There are two concepts available to rescue an insolvent company; business rescue and corporate rescue
Corporate Rescue is generally described as the process of enabling companies in financial difficulties to return to a state of viability and to prevent them from sliding into insolvency while Business rescue implies the termination of the old company, but the actual business and its activities will remain as a cohesive, productive unit under new ownership.
Corporate rescue works towards the restoration of a company in difficulty, which leads to the preservation of the legal entity itself so that the company can continue operations after reorganization while in business rescue, the old company (the shell) is terminated but the core business and its activities will remain intact and thriving unit under a new leadership. These differences often stem from divergent standpoints regarding the approaches and purposes of rescue action in response to companies’ financial troubles.
In this article, we will focus on cooperate rescue and subsequently expound on the concept of business rescue.
CORPORATE RESCUE
Professor Belcher in his book “Corporate Rescue” is a major intervention necessary to avert the eventual failure of a company. This involves any fundamental remedial action for a company during a period of corporate crisis, which includes both the formal and informal strategic rescue mechanisms. Corporate rescue could also be regarded as an alternative to immediate liquidation of the company, to prevent the death of the company and often involves changes in the management of the company and is usually achieved through reorganising methods such as refinancing, debt composition, or rescheduling, downsizing activities, and making redundant part of the workforce to offer temporary relief.
At this stage, there is still potential for the business to recover but it often needs external help. This involves any fundamental remedial action for a company during a period of corporate crisis, which includes both the formal and informal strategic rescue mechanisms. This concept aptly seeks to give a form of lifeline to a financially distressed company, so that instead of opting for the traditional or more conventional approach of a company’s liquidation, efforts are geared towards reviving the said ailing company.
ESSENTIAL ELEMENTS OF CORPORATE RESCUE
There are various elements of corporate rescue but three essentials which shall be are: (i) the rescue decision (ii) the rescue finance and (iii) the rescue plan.
Rescue Decision-
Reorganization practice and modern management support the position that the primal element of rescue is the decision on the desirability of preserving the company and/ or its business rather than liquidation and eventual dissolution.
It is of importance that the law is structured to ensure that the representatives of all tiers of investors are consulted at the negotiations because it just appears unclear who the actual residual claimant is.
Rescue Finance
Rescue finance means financing provided to the company or any of its subsidiaries, which financing is reasonably required to: (i) remedy a breach or default by the company or any of its subsidiaries under any debt financing agreements to which the company or any of its subsidiaries are party; (ii) provides liquidity to the company or any of its subsidiaries to the extent necessary to fund their then-current operations, under circumstances where the failure to provide such liquidity would reasonably be expected to be materially adverse to the company, or (iii) comply with applicable capital requirement laws, rules or regulations.
The Rescue Plan
A rescue plan aims to restructure the affairs of a company in such a way that either maximizes the likelihood of the company continuing in existence on a solvent basis or results in a better return for the creditors of the company that would ordinarily result from the liquidation of the company.
Corporate Rescue: The Nigeria Perspective
The previous insolvency law and practice regime focused more on the company’s liquidation than the company’s revival. The closest to the concept of corporate/business rescue is the principle that underlies mergers and acquisitions. CAMA 2020 introduced salient business rescue options including company voluntary arrangement (CVA) and administration.
Company Voluntary Arrangement
A Company Voluntary Arrangement, or CVA, is a commonly used procedure for companies experiencing a temporary setback, and which are expected to trade their way out of further problems once the existing debts have been renegotiated.
A Company Voluntary Arrangement offers many benefits to companies in distress, not least of which is writing off any debt that remains at the end of the term. Additionally, all interest and charges are stopped, and creditors cannot take further legal action against you about any of the debts included in the agreement.
Under Chapter 17 of CAMA 2020, a company may propose its director, liquidator, or administrator, as the case may be, and enter into a binding arrangement with all its unsecured creditors in respect of the restructuring and payment of outstanding debt in a bid to forestall liquidation. This arrangement, popularly referred to as a CVA, helps a distressed entity manage its cash flow insolvency and does not require prolonged court or regulatory engagement as it is supervised by an insolvency practitioner, save where there are judicial challenges to the CVA proposal.
Where the proposal is approved at both the court-ordered creditors’ meeting and members’ general meeting, the proposal becomes effective and binding on all unsecured creditors. However, a CVA cannot compromise the rights of a secured creditor without his express consent and is limited concerning the treatment of preferential debt and creditors. Therefore, secured and preferential creditors can defeat the object of the arrangement by immediately proceeding with enforcing their rights. Another drawback of this business rescue mechanism is that it does not provide any automatic statutory moratorium which wards off immediate enforcement by the creditors pending the effective date of the arrangement.
Section 443 of the 2020 CAMA highlights this option of rescue. Under this option, an Administrator will be appointed for the company and the powers of the directors immediately cease. The appointment of the Administrator can be by any of the following: (i) the holder of a floating charge (ii) The court upon a petition made by the company, the directors, one or more creditors, a designated officer of the court or a combination of the persons listed and (iii) the company and its directors.
The Administrator, who must also be an insolvency practitioner is mandated to achieve one of three outcomes; rescuing the company as a going concern, or achieving a better result for the company than if it was liquidated, or realizing company property for the benefit of secured or preferential creditors his option provides for re-organization
The Administrator identifies the problem with the company and proffers a viable solution to it. Such solutions can come in any form such as, appointing an expert business management personnel, importing funds into the business, etc. In addition, an Administrator is expected to represent all the company’s creditors equally and perform his/her functions in the creditors’ interest as a whole, albeit his/her appointment was by just one of the creditors. This implies that, as funds flow into the company, every creditor (in addition to the creditor that appoints the Administrator) will be refunded a portion of the debt owed to them. It is only where it is practically impossible to rescue the business that an Administrator considers liquidating the assets of the company as a last resort to settle the company’s debts.
The benefits of Corporate Rescue-
The benefits of corporate or business rescue far outweigh its seeming demerits. Some of these benefits are highlighted below:
Sometimes rescue is just not possible
It is always the hope that business recovery is possible, but the reality is that sometimes companies cannot be rescued. In these cases, Liquidation may be the best or only option.
If your company is insolvent, you have a number of legal responsibilities that you must adhere to. Taking steps to protect creditors from further losses by contacting a licensed insolvency practitioner can help ensure you adhere to these duties.
REFERENCES
Written by Adenike Badaru for The Trusted Advisors
Email us: info@cms.trustedadvisorslaw.com