Stigma of judicial management growing

SINCE the stabilisation of the economy in 2009, when the multiple-currency system came on board, various companies that were under economic stress have been invoking different methods to rehabilitate their businesses and grow them.

Anxious creditors of the distressed companies have also been exploring ways to ensure that not only do they recover their dues, but their trading partners recover as well.

And it is not surprising that judicial management has been one of the favoured instruments.

Essentially, the application of judicial management, which is made in terms of Section 299 of the Companies Act, is meant to rescue the affected company through a reconstruction plan.

Though largely construed as a reasonable process, there is now a growing trend where companies that are undergoing this process are stigmatised.

Over the years, the efficacy of judicial management has been proven beyond doubt, as some of the companies have emerged stronger, more robust, responsive and profitable.

So this makes it imperative for such kind of businesses to be supported at all costs.

However, the stigmatisation of companies under judicial management is usually driven by the assumption that they were driven to their current fate by pervasive corporate governance deficiencies, which might not always be the case.

Often such prejudice, second-class mentality and intolerance are debilitating and have a ripple effect on stakeholders.

Public tenders automatically disqualify companies under reconstruction from participating.

Also suppliers are wary of extending further support, while financial institutions are reluctant to extend loans for fear that they will not perform.

But is has to be considered that judicial management is usually under the supervision of the Master of High Court, which, to all intents and purposes, minimises risks.

The prime reason for an entity to be afforded such protection is the inherent belief that a basis or foundation exists for it to recover.

An environment that is receptive or ripe for a turnaround in therefore necessary.

Experts usually say to further buttress the scrutiny afforded by the office of the Master of High Court, the appointment of a competent and able judicial manager is contributory to the likelihood and possibility of a change in fortunes for the entity and, more importantly, a break in the haemorrhaging of the company under judicial management.

Additionally, a provision exists in our statutes protecting and promoting the interests of entities that support a distressed company.

If industry cannot give business to such companies, then how is a turnaround possible?

The underlying reasons of placing an entity under this arrangement include, inter-alia, the inability of debtors to settle their obligations and the concomitant ability of the company to successfully manage their debt collection, working capital challenges, the restrictive uncompetitive pricing mechanisms that define certain industries and generally the debilitating economic challenges affecting the country.

But it is not unusual for risk-averse entities to avoid dealing with companies under judicial management for fear that they will be liquidated.

However, it needs to be acknowledged that the framework that governs companies under reconstruction is often watertight.

Yes, the going concern of such businesses might be of concern but choosing not to trade with them is simply too harsh and not in the interests of the greater good.

While risk aversion and avoidance might be key tenets of business practice, it has to be borne in mind that businesses under rehabilitation have to transact in order to survive.

How do they survive without generating revenue? And how can Zimbabwe prosper, grow and be competitive when the cornerstone of that growth, being the companies, are not adequately and fairly supported in their quest of sustainability and profitability?

In essence, being under judicial management means that there is a chance (a reasonable and factually justifiable chance) of survival, and this does not mean that the company has collapsed (as is the perception and widely acknowledged, albeit wrongly).

It is also commonplace that it is not only companies under judicial management that have a stigma attached to them, but such negative perceptions are extended to entities that adopt a less formal mechanism to re-structure, being another court-guided process called a Scheme of Arrangement in terms of section 191 of the Companies Act (24:03).

Such a scheme is predicated on the foundation that a compromise will be reached with the creditors. Though it is a transparent process, it is often met with scepticism and, in some cases, downright condemnation.

It is now time to shift from our pre-conceived, skewed and or perceptual understanding of court-governed and supervised processes and support entities that are making a firm commitment to ensure their existence, sustainability and eventually their profitability for the benefit of all stakeholders.