INTRODUCTION

When a business faces financial headwinds, many business leaders think only of the worst-case scenario: Liquidation. However, there is a powerful, proactive alternative known as Corporate Rescue. Think of Corporate Rescue not as a sign of failure, but as a strategic, professional timeout and a restructuring roadmap designed to save the company. It’s the difference between closing the doors immediately and building a plan for a comeback. This article explores what corporate rescue is, what it entails, and its significant benefits, aiming to demystify the process and highlight why it is a powerful tool for revival. It’s about looking past the stigma and seeing the opportunity for a professional turnaround.

WHAT EXACTLY IS CORPORATE RESCUE?

Corporate Rescue is the sophisticated strategy that empowers companies to look past immediate crisis, implement necessary changes, and ultimately emerge stronger and fully solvent. It is not about delaying the inevitable; it is about rehabilitation. It’s a legal shield that stops the chaos and provides the time and expertise needed to restructure a business’s affairs, debts, and operations.

In simple terms, corporate rescue is a formal, legal process for rehabilitating a financially distressed company. The legal foundation of corporate rescue isintroduced by Zimbabwe’s Insolvency Act [ Chapter 6:07], enacted in 2018, which modernised the country’s approach to business distress.

The Act provides a clear, three-part relief system for a financially distressed company:

1. Temporary Management and Supervision
2. Litigation Moratorium; and
3. Rescue Plan Implementation

THE RATIONALE FOR CORPORATE RESCUE

The goal of these proceedings is to maximise the likelihood of the company continuing in existence as a solvent entity. If that proves impossible, the secondary goal is to secure a better return for creditors and shareholders than a rapid liquidation would offer.

WHO IS THE MASTERMIND OF CORPORATE RESCUE PROCEEDINGS?

The success of the process hinges on the appointment of a Corporate Rescue Practitioner (CRP). This is where expertise and objectivity enter the equation. Under corporate rescue, the CRP is expected to do the following[1]:

1. Assume full management of the company, effectively substituting the board and pre-existing management for the duration of the rescue;
2. Formulating a comprehensive, time-bound Rescue Plan, outlining the steps he/she intends to take in his rescue plan, which may include operational efficiencies, asset sales, debt-for-equity swaps, contract renegotiations or any other course of action he may deem necessary.
3. Act as a mediator and balance the often-competing interests of shareholders, employees, and creditors, ensuring that all interested parties are protected.

THE TYPES OF CORPORATE RESCUE

The decision on how to enter Corporate Rescue is the first critical strategic step. The Insolvency Act provides two distinct pathways:

1. Voluntary Proceedings, which are initiated by the company’s board of directors.
2. Involuntary Proceedings, which are initiated by an affected person.

VOLUNTARY CORPORATE RESCUE

This is the most strategic route, governed by Section 122 of the Act. It is a proactive measure initiated by the company itself.  According to the Insolvency Act, a company’s Board of Directors can pass a resolution to submit to corporate rescue if there are reasonable grounds to believe the company is financially distressed and if there are reasonable prospects of successfully rescuing the company.

INVOLUNTARY (COURT-MANDATED) RESCUE

This is a reactive measure initiated by an “affected person”(such as a creditor, shareholder, employee or registered trade union, as defined in Section 121(1)) who applies to the High Court for an order. This “forced” action is typically invoked when:

1. The company’s leadership is unwilling or unable to acknowledge or address the financial distress, or
2. An external stakeholder feels the need to intervene to protect their financial interests against a deteriorating situation.

While still achieving the goal of corporate rehabilitation, the involuntary route often results in higher legal costs, greater loss of control for the directors, and a slower timeline due to the adversarial court processes.

WHY VOLUNTARY RESCUE IS THE SMARTEST PATH

1. It bypasses lengthy High Court application procedures and legal challenges associated with placing the company under corporate rescue.
2. The company benefits from the immediate protection of the moratorium sooner.
3. The company’s directors retain more control over the process, including the ability to nominate the Corporate Rescue Practitioner (CRP) best suited to the company’s culture and specific industry challenges.
4. It offers freedom for the company to play a part in shaping the corporate rescue Plan, rather than having terms rigidly imposed by a Court.

DURATION OF CORPORATE RESCUE

According to Section 125 (1) of the Act, corporate rescue proceedings are officially initiated in one of three ways:

1. A company voluntarily files a resolution to place itself under corporate rescue.
2. An affected person applies to the High Court for an order placing the company under corporate rescue; and
3. The High Court issues an order placing the company under corporate rescue.

The proceedings are deemed to have concluded when one of the following occurs.[2]:

1. The court sets aside the initial resolution or order.
2. The court converts the proceedings to liquidation.
3. The corporate rescue practitioner files a notice of termination with the Master of the High Court.
4. When a proposed corporate rescue plan is rejected, and no further action is taken to extend the proceedings.
5. A corporate rescue plan is successfully adopted and substantially implemented.

The Act sets the duration of corporate rescue proceedings at three (3) months from commencement. However, if the Corporate Rescue Practitioner (CRP) determines that the objectives of the rescue plan cannot be reasonably achieved within this initial period, the Act imposes an obligation for the CRP to apply to the High Court for an order for an extension of time.[3]  

LEGAL CONSEQUENCES OF CORPORATE RESCUE

The most significant legal consequence of corporate rescue is the imposition of a moratorium, or “stay,” on legal actions against the company[4]. This freeze prevents creditors from commencing or proceeding with lawsuits, foreclosing on assets, or enforcing judgments against the company. It has profound and immediate effects, legally freezing the rights of creditors to pursue individual remedies. The goal of the “stay”, ideally, is to give the company a much-needed breathing room to reorganise its affairs without the constant threat of legal action.

During this period of the general moratorium:

1. A guarantee or surety made by the company cannot be enforced without the High Court’s permission.
2. Any time limit for a claim or legal proceeding against the company is suspended.
3. The authority of the company’s directors is suspended, and a corporate rescue practitioner assumes control of the company.

However, the moratorium is not absolute. Legal proceedings can still be brought against the company in certain circumstances, including:

1. With the written consent of the corporate rescue practitioner.
2. With the leave of the High Court.
3. As a set-off against a claim that the company itself has initiated.
4. In the case of criminal proceedings against the company or its directors.
5. In proceedings concerning property where the company acts as a trustee.
6. By a regulatory authority fulfilling its duties after notifying the practitioner.

THE LEGAL EFFECT OF CORPORATE RESCUE

The commencement of corporate rescue proceedings alters the legal landscape of the company and its key stakeholders and imposes immediate and significant legal consequences on employees, contracts, directors, and shareholders.

Effect on Employment and Contracts[5]

When a company enters corporate rescue, its employees generally keep their jobs on the same terms and conditions to ensure stability during a period of uncertainty. The aim is to maintain operational stability and the value of the enterprise. However, this is subject to:

1. Changes arising in the ordinary course of business (e.g., voluntary resignations or routine disciplinary actions); or
2. Consensual variation of employment terms, provided that any modification to employment contracts is effected strictly in compliance with the relevant Labour Act [Chapter 28:01] provisions.

Effect on Governance: Shareholders and Directors[6]

Corporate rescue significantly changes the dynamics within the company’s leadership and ownership. The power shifts from the board of directors to the corporate rescue practitioner[7]. These effects are as follows:

1. Suspension of Board Authority [8]
2. Directors incur a statutory obligation to obligation to fully cooperate with the CRP.
3. Limitations on Shareholder Actions[9].

DISTINGUISHING CORPORATE RESCUE FROM OTHER PROCEDURES

Understanding the distinctions between Corporate Rescue and other procedures for financially distressed or reorganising companies is critical for corporate decision-makers. While all may offer a path forward, their legal purposes, triggers, and outcomes differ significantly.

Corporate Rescue Proceedings vs Liquidation Proceedings

The key difference between corporate rescue and liquidation lies in their fundamental purpose. Corporate rescue aims to save a company and is mainly focused on the revival and rehabilitation of a company, enabling a company to restructure its affairs and recover from financial distress.  In stark contrast, Liquidation (also known as “winding up”) is an insolvency procedure focused on the final and irreversible winding down of a company’s operations. It involves the sale of a company’s assets to pay off its debts before it is legally dissolved. It is ideally the ultimate last resort “exit strategy” when a company can no longer be salvaged, particularly when a company’s debts are insurmountable and its assets are insufficient to cover its liabilities.  

Corporate Rescue vs. Judicial Management?

The current regime of Corporate Rescue has functionally superseded the older system of what was formerly known as Judicial Management. While both shared the objective of preserving a financially distressed company, the Insolvency Act (Chapter 6:07) has introduced a streamlined approach. Judicial Management was a more rigid, court-driven process where a court-appointed “Judicial Manager” took complete control of a company’s affairs and was more reliant on the court’s involvement, often leading to complex and sometimes costly interventions. Whereas Corporate Rescue is designed to be more flexible and commercially-focused, and more efficient. The role of the corporate rescue practitioner is now more defined, which encourages a swifter and more effective resolution to financial distress, providing a modern alternative to the previous, often cumbersome, judicial management system.

Corporate Rescue Proceedings vs Scheme of Arrangement?

The distinction between these two procedures is based on the purpose and trigger of the proceedings. Corporate Rescue is a procedure triggered exclusively by a state of actual or impending financial distress, whereas a Scheme of Arrangement is a tool for corporate restructuring and can be initiated by a solvent company for various strategic purposes, such as facilitating mergers, takeovers, or proactive re-negotiation of debt terms to avoid future insolvency. The ultimate goal of Corporate Rescue is to rehabilitate a company that is struggling financially to avoid liquidation, whereas a  Scheme of Arrangement is primarily aimed at being a proactive strategic tool for corporate change. In essence, while both mechanisms offer a path forward, a scheme of arrangement is a tool for corporate strategy, while corporate rescue is a specialised procedure for companies facing imminent financial collapse.

While Corporate Rescue can serve as a genuine lifeline for a struggling company, like any other process and procedure, it is a path which is characterised by its own challenges and complexities. Though it offers a structured second chance to avoid liquidation, the process involves some limitations that management, creditors, and other stakeholders must be aware of.

ADVANTAGES

1. Corporate Rescue offers a genuine opportunity for a company to regain its footing and avoid liquidation.
2. The temporary moratorium halts legal proceedings and allows the company to regroup without the constant threat of action.
3. A corporate rescue practitioner brings an objective and professional perspective to the business;
4. The process provides a better return for creditors than immediate liquidation;
5. Corporate rescue may help the company achieve solvency.
6. Preservation of employees’ jobs and company assets;
7. Provides comprehensive and specific solutions to the company’s problems;
8. Successful corporate rescue helps the company achieve solvency and long-term viability.

DISADVANTAGES

1. The Board of Directors lose control of the company’s operations to the corporate rescue practitioner;
2. Reputational Damage, seeing that the mere act of entering corporate rescue can negatively impact public perception, potentially scaring away customers, suppliers, and investors;
3. The process can be expensive and complex;
4. There is no guarantee of success, and the company may still end up undergoing liquidation;
5. Court-initiated corporate rescue by a creditor is extremely cumbersome considering the fact that the requirement to serve each and every other creditor creates a near insurmountable logistical hurdle since the creditor lacks the company’s confidential creditor list;
6. The process is susceptible to abuse, with companies initiating proceedings to benefit from the temporary moratorium specifically to evade liabilities they’ve intentionally incurred; and
7. Not every financially distressed company is viable for rescue.

CONCLUSION

The bottom line is this: corporate rescue is a calculated strategic pivot which transforms a struggling enterprise into a narrative of resilience. By choosing this path over immediate liquidation, a business does not just save itself, it preserves economic value, safeguards jobs and protects its stability. It is acknowledged that while challenges are inherent, the measurable benefits of rehabilitation, offering a second chance at market relevance and profitability, far outweigh the simple acceptance of failure. While procedural challenges, such as the impracticality of creditor-initiated proceedings and the risk of abuse, require careful legal management, they ought not to obscure the broader mission. It’s time to view this process not as a last resort, but as a powerful financial and operational tool for ensuring a sustainable future.

Prepared by:     Jean C Nyamasvisva 

Associate                                

Reviewed by:    Blessing Diza                                 

Managing Partner

This article was prepared exclusively for informative purposes and general interest and should not be relied on as legal advice. Due caution was taken to ensure the accuracy and reliability of the information provided in this article. However, Diza Attorneys does not accept any responsibility or liability for the accuracy, reliability, and/or completeness of the information contained herein.

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[1] Section 133 of the Insolvency Act [Chapter 6:07]

[2] Section 125 (2) (a)-(c) of the Insolvency Act [Chapter 6:07]

[3] Section 125 (3) Ibid

[4] Section 126, Ibid

[5] Section 129 of the Insolvency Act [Chapter 6:07]

[6] Section 130, Ibid

[7] Once appointed, a CRP has significant authority to manage the company’s affairs and implement the rescue plan. The powers are extensive and designed to give them full control over the company’s operations. These include full management control; delegation of duties and formulate and implement a rescue plan.

[8] The power and authority of the board of directors are immediately suspended, and directors are legally barred from exercising their usual management functions. Any action purportedly taken by a director on the company’s behalf during the rescue period is void unless it has received the express, prior written approval of the CRP.

^[9] Any transaction or resolution seeking to alter the status, classification, or rights attached to the company’s shares is automatically invalid unless it is explicitly sanctioned by an order of the supervising court or is an integral, approved component of the final corporate rescue plan