By
COUNSEL COLLINS NKUMBWA,
ABSTRACT
This paper discusses the concept of insolvency law in the Zambian legal system. It illustrates the application of different types of insolvency proceedings in Zambia and the legal effect for each type. It looks the payment of debts for a company under liquidation in terms of secured and unsecured creditors. It also discusses the extent of liability of the members of a company. In so doing, it has also discussed the international frame work of insolvency law.
Key words or phrases – Insolvency, Liquidation, Receivership, Business Rescue, Schemes of Arrangement.
1.0 The Overview of Insolvency Law
Insolvency occurs when an individual, company, or other organization cannot meet its financial obligations for paying debts as they become due. Bankruptcy is not exactly the same as insolvency. Bankruptcy is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency. Insolvency describes a situation where the debtor is unable to meet his or her obligations. Bankruptcy is a legal scheme in which an insolvent debtor seeks a relief.
Although the insolvency laws of countries differ in important respects, it is possible to identify two overall objectives that are generally shared by most systems. The key objectives and principles of Insolvency law include:
a) The allocation of risk among participants in a market economy in a predictable, equitable, and transparent manner. The achievement of this objective plays a critical role in providing confidence in the credit system and fostering economic growth for the benefit of all participants. For example, in terms of the creditor-debtor relationship, the ability of a creditor to commence insolvency proceedings against a debtor as a means of enforcing its claim reduces the risk of lending and, thereby, increases the availability of credit and the making of investment more generally.
b) Allocation of risk among different creditors, also for the benefit of borrowers. For example, if the insolvency law affords secured creditors special treatment vis-a-vis unsecured creditors, such treatment protects the value of security, which may be particularly important for those debtors that, because of their credit risk, cannot obtain (or cannot afford) unsecured credit.
2.0 Types of Insolvency and International Insolvency Frameworks
Francis Wilks and Jones elucidate the five main types of formal corporate insolvency procedures as:
a) Receiverships – This process results in the appointment of administrative receiver(s) by a secured creditor as holder of a floating charge over on company assets under the terms of that debenture or any other security document. A floating charge is a debt secured over property or assets which are fluid, for example invoices, stock, some plant and machinery and cash. The appointment of an administrative receiver is generally preceded by demand provisions under the terms of the debenture.
An administrative receiver will manage either specific property or the main business of the company but does not normally disrupt the company’s on-going trading. This is because the secured creditor relies on the net income (after costs of trading) from the business. Whenever the administrative receiver sells a large asset of the company, they will be accountable to the secured creditor for any net proceeds arising from the disposal of such assets.
All creditors and debtors of the company must be notified of the appointment of the administrative receiver. The receiver acts in their personal name as agent for the company and has no personal liability for any of their actions. An administrative receiver can require that any individuals involved in the company’s formation or management, particularly directors, to submit a statement of affairs on the company’s assets, liabilities.
b) Company voluntary arrangements (“CVA”) - A company voluntary arrangement is a private arrangement between creditors and the company and is normally proposed at the request of directors of the company. A CVA is usually entered into with a view to rescuing a company and only paying creditors a proportion of their debts. A CVA will mostly commonly proceed on the basis of cash flow forecasts and anticipated income from the company’s continuing trading. It may treat creditors differently and once the CVA is approved, all creditors of the company are bound by the CVA regardless of whether they receive notice of the creditors meeting or not.
c) Administrations - The appointment of an administrator is intended to achieve one of three things. Firstly, it may rescue the company as a going concern, either by allowing it to trade for a short period under the benefit of a moratorium and/or by selling all or part of it to another company as a going concern business. This is often referred to as a “pre-pack”. Secondly, it may achieve a better result for the company’s creditors as a whole than would be likely in the event of a winding-up. Lastly, it may be a quicker or more cost-effective way of realising company property to make a distribution to secured and/or preferential creditors.
Once an administrator is appointed, all creditors of a company are restrained from taking any legal action against the company or continuing with any enforcement of their rights in respect of company assets. A pre-pack effectively removes all of the assets from the company and leaves a pot of funds out of which the administrator pays the administration expenses and costs, including his/her fees, amounts due to secured creditors and amounts due to preferential creditors. If there are any surplus funds available after this, then the administration may be converted to a Liquidation for the purpose of paying unsecured creditors.d) Compulsory winding-up or compulsory liquidation - A compulsory winding-up order is made upon the presentation of a petition for the winding-up of a company (a winding-up petition – “WUP”). A WUP is often presented by creditors of the company where they are unable to gain repayment of an undisputed debt. A defence for a winding-up petition may be that debt is disputed and therefore does not satisfy the statutory criteria.Once the WUP is issued by the court, the petitioning creditor must then issue and serve it at the company’s registered office and there is a requirement that it be advertised at least seven days prior to the court hearing. It is quite common that upon advertisement the company’s bank will freeze all company accounts with immediate effect and the only option available to a company who has a winding-up petition presented. Once it is wound-up, the official receiver annexed to that court will be provided with the petition details and will correspond with directors of the company to obtain further information as regards the company’s affairs and to take control of its corporate identity and accounting records.If the company has assets, then an independent liquidator may be appointed to collect in all of the assets and make a distribution to unsecured creditors. The appointed liquidator will also be required to report the Secretary of State on the director’s conduct leading up to the winding-up of the company.e) Creditors voluntary liquidation (“CVL”) - A CVL is an insolvent liquidation in a similar manner to a compulsory liquidation. A CVL is usually instigated by either the company itself or directors of the company for the purpose of winding the company up. Directors are required to sign a statutory declaration on a statement of the company’s affairs, including details of its assets and liabilities. The information is then presented to shareholders who at a general meeting would have to pass a resolution to take the company into liquidation.Although the liquidation starts at this point, a further meeting of creditors is required very shortly thereafter to confirm the identity of the Insolvency Practitioner who is appointed as liquidator of the company. Once the liquidator is appointed, he or she takes control of the company’s affairs and most often this is the point at which the company effectively ceases to trade. The liquidator begins to go about investigating past transactions, recovering the assets of the company and reporting on the directors’ conduct in an identical fashion to his/ her role in a compulsory liquidation.
3.0 Insolvency Procedures for Companies in Zambia
For purposes of Zambian law, reliance is made on the Corporate Insolvency Act , the Companies Act , The Corporate Insolvency (Insolvency Practitioner Accreditation) (Amendment) Regulations , The Corporate Insolvency (Insolvency Practitioner Accreditation) Regulations and judicial precedents discussed hereunder.
The concept of winding up in Zambia means the process of settling accounts and liquidating assets in anticipation of a company’s dissolution. Similar to the international frameworks discussed above, the procedures in the Zambian legal system are as follows:
3.1 Liquidation
Liquidation means the process of converting the property of a company into cash in order to settle the company’s’ debt and other liabilities. A liquidator is a appointed to spearhead the process, that is, a person appointed to wind up the affairs of a company. Where a winding-up order is made or a provisional liquidator is appointed, the liquidator or provisional liquidator, takes into custody or under control the property and things in action to which the company is or appears to be entitled.
The powers and duties of a liquidator include among others, during the four weeks following the date of a winding-up order, carry on the business of the company so far as is necessary for the satisfactory winding-up of the company. A liquidator may, with the authority of the Court or committee of inspection pay any class of creditors in full, or make any compromise or arrangement with creditors, persons claiming to be creditors or persons having or alleging themselves to have a claim against the company, whether present or future, certain or contingent, ascertained or sounding only in damages or through which the company may be rendered liable. A liquidator may, for the purpose of a winding-up and distributing the assets of the company bring or defend an action or other legal proceeding in the name and on behalf of the company.
The winding-up of a company in Zambia may take any of the following modes: winding-up by the Court and voluntary winding-up, being a members’ voluntary winding-up or a creditors’ voluntary winding-up as discussed below:
3.1.1 Voluntary Liquidation
A voluntary winding-up commences at the time of the passing of the special resolution for voluntary winding-up. A company shall from the commencement of winding up, as provided in section 89, cease to carry on its business, except as the liquidator considers necessary for the effective and efficient winding-up of the company. the company appoints one or more liquidators by special resolution and fix the remuneration to be paid to the liquidator. If for any reason, there is no liquidator in a voluntary winding-up, the Court may appoint a liquidator.
This takes two forms, that is, members voluntary winding-up and creditors’ voluntary winding up. The latter means a voluntary winding up of a company by the creditors where no declaration of insolvency was made. The creditors, by resolution, appoints a committee of inspection for the winding-up of a company and appoint such number of creditors and members of the company or other persons.
The term member means a shareholder or stockholder of a company or a subscriber to a company limited by guarantee. Thus, members voluntary winding-up means the termination of a corporation, initiated by the board of directors and approved by the shareholders.
3.1.2 Winding-up by the Court
The Zambian courts have jurisdiction to wind-up a body corporate incorporated in Zambia, a foreign country and registered as a foreign company in Zambia. The Zambia courts also have jurisdiction to wind up a company having any business, undertaking or assets in Zambia.
A company may be wound-up by the Court on the petition of the company, a creditor, including a contingent or prospective creditor of the company, a member, a person who is the personal representative of a deceased member, a trustee in bankruptcy of a bankrupt member, a liquidator of the company appointed in a voluntary liquidation or the Registrar or Official Receiver.
The court may order the winding-up of a company on the petition of a person other than the Official Receiver under the following circumstances:
the company has by special resolution resolved that it be wound-up by the Court; the company is unable to pay its debts;
the number of members is reduced below two;
the company was formed for an unlawful purpose;
the incorporation of the company was obtained fraudulently; and
in the opinion of the Court, it is just and equitable that the company should be wound-up.
The Court may provisionally appoint the Official Receiver or any other person to be the liquidator after the presentation of a winding-up petition and before the making of a winding-up order. A provisional liquidator exercises all the powers and perform the function of a liquidator subject to such limitations and restrictions as may be prescribed, or as the Court specifies in the appointing order.
It is vital to note that where a winding-up order makes no direction as to the appointment of a liquidator, the Official Receiver shall be the liquidator of the company. A provisional liquidator continues to exercise the powers and perform the functions of a liquidator until the appointment of a liquidator. It is also vital to note that where a provisional liquidator is not appointed, the Official Receiver is deemed to be the provisional liquidator until the appointment of a liquidator.
In terms of liability, where a company is wound-up, every member at the time of the commencement of the winding-up is liable to contribute to the assets of the company an amount sufficient for payment of its debts and liabilities and the costs, charges and expenses of the winding-up and for the adjustment of the rights of the members among themselves. However, a member is not required to make a contribution exceeding the amount, if any, unpaid on the shares in respect of which the person is liable as a member. In the case of a company limited by guarantee, a member is not required to make a contribution exceeding the amount that the member undertook, in the declaration of guarantee, to contribute to the assets of the company in the event of its being wound-up.
An individual is eligible for appointment as a liquidator if that person qualifies to be appointed as a receiver. A person is not eligible for appointment or competent to act or to continue to act as liquidator of a company if that person:
is a body corporate;
has a mental or physical disability that would make the person incapable of performing the functions;
is prohibited or disqualified from so acting by any order of a court;
is an undischarged bankrupt;
is a director or secretary of the company or any related company or any person who has been such a director or secretary within the two years before the commencement of the winding-up, save with the leave of the Court;
has at any time been convicted of an offence involving fraud or dishonesty; or
has at any time been removed from an office of trust by order of a Court.
3.2 Administration
Business rescue proceedings refer to the process of facilitating the rehabilitation of a company that is financially distressed. There are a number of measures that can adopted to rescue a business under this mode. The methods include:
• the temporary supervision of the company and management of its affairs, business and property;
• a temporary moratorium on the rights of claimants against the company or in respect of property in its possession;
• the development and implementation of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis; or
• if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result if the company was to be liquidated;
The member may pass a special resolution to place a company under business rescue under the following circumstances:
the company is financially distressed;
there appears to be a reasonable prospect of rescuing the company; and there is need to maintain the company as a going concern, achieve a better outcome for the company’s creditors as a whole than is likely to be the case if the company were to be liquidated;
realise the property of the company in order to make a distribution to one or more secured or preferential creditors.
An affected person may also apply to the Court for an order to place the company under supervision and begin business rescue proceedings, unless a company has adopted a resolution to commence business rescue proceedings. The Court appoints the Official Receiver as the interim business rescue administrator pending an appointment of a business rescue administrator by an affected person or the creditors.
Business rescue proceedings commences when court makes an order placing the company under supervision in accordance with this Act. A legal proceeding cannot not be brought, against a company or in relation to any property belonging to the company or lawfully in its possession, during business rescue proceedings, except:
• with the written consent of the business rescue administrator; and
• with the leave of the Court and in accordance with any terms and conditions the Court considers suitable in any particular matter related to the business rescue proceedings;
• as a set-off against any claim made by the company in any other legal proceedings, irrespective of whether those proceedings commenced before or after the business rescue proceedings began;
• criminal proceedings against any of the company’s directors or officers;
• proceedings concerning any property or right over which the company exercises the powers of a trustee.
A person may be appointed as a business rescue administrator if that person qualifies to be appointed as a receiver. A business rescue administrator, during business rescue proceedings, may exercise the following powers and duties:
full management control of the company without the board and management;
the power to delegate any power or function to a person who was part of the board or management of the company;
the power to remove any person from office who was part of the management of the company;
appoint a person as part of the management of a company;
the responsibility to develop a business rescue plan to be considered by affected persons;
implement a business rescue plan that is adopted in accordance with this Part; and
issue any notices required to be issued in relation to the business rescue proceedings.
3.3 Receivership
Where a charge over property of a company has become enforceable, the Court may, on the application of the chargee, appoint a receiver of the property. A person may appoint a receiver under deed of appointment. A person cannot be appointed as receiver as a means of enforcing a debenture where there is no secured interest. A person who obtains an order for the appointment of a receiver, or who appoints a receiver under a deed of appointment.
The directors of a company are required within three months of the appointment of the receiver, to prepare and submit to the receiver a statement as to the affairs of the company as at the date of the appointment of the receiver.
An individual is eligible for appointment as a receiver if that individual has been practicing as a chartered accountant or a legal practitioner for a period of at least seven years and is accredited by the Registrar as an insolvency practitioner. A body corporate or firm is not qualified for appointment as a receiver. A receiver is entitled to the payment of a fee which shall be a percentage of the proceeds of the receivership. The Court may, on the application of a company, liquidator or receiver by order, fix the amount to be paid by way of remuneration to a receiver.
A receiver appointed by the Court is deemed to be an officer of the Court and is considered, in relation to the property or undertaking, not to be an officer of the company. This type of receiver is expected to act in accordance with the directions and instructions of the Court. A receiver appointed under a deed of appointment is considered to be an agent and officer of the company, and not an agent of the persons by or on behalf of whom the receiver is appointed. This type of receiver is expected to act in accordance with the deed of appointment under which the receiver is appointed, and with any directions of the Court specified in an order of the Court.
The office of a receiver becomes vacant where the receiver:
dies;
becomes ineligible for appointment
is removed by order of the Court; or
is removed from the Register of Insolvency Practitioners;
receiver may resign from office by giving one month’s notice, in writing, to the appointing authority or the Court, of the receiver’s intention to resign; or
receiver may be removed by the Court, on application to the Court by the holder of a charge by virtue of which the receiver was appointed, or by revocation of the deed of appointment.
The term Official Receiver means the person appointed as official receiver under the Bankcruptcy Act . The term receiver means a disinterested individual appointed as a receiver, receiver manager or judgment receiver, in accordance with the law, for a corporate or other person. The powers and duties of a receiver include protection or collection of property that is the subject of diverse claims, is litigated or has been litigated or income arising from the property of the corporate or other person, and includes the Official Receiver.
3.4 Voluntary Arrangement
This means an arrangement entered into by a company and that company’s creditors by way of:
composition for the satisfaction of the company’s debts;
a scheme; or
arrangement of the company’s affairs.
Any arrangement entered into between a company about to be or in the course of being wound-up voluntarily and its creditors is binding on the company and the creditors, if approved by respective resolutions.
4.0 Rights and Payment of Creditors
In a winding-up, the following creditors are paid in priority to all other unsecured debts:
a) costs and expenses of a winding-up including the payable taxed costs of a petitioner, the remuneration of the liquidator, and the costs of an audit carried out;
b) amounts due, including: (i) wages or salary accruing to every employee within the period of three months before the commencement of the winding-up; (ii) leave accruing to every employee within the period of two years before the commencement of the winding-up; (iii) paid absence, not being leave, accruing to every employee within the period of three months before the commencement of the winding-up; (iv) recruitment or other expenses or other amounts repayable under a contract of employment;
c) severance pay to each employee, equal to three months’ wages or salary;
d) all amounts due in respect of workers’ compensation which accrued before the commencement of the winding-up;
e) any tax, duty or rate payable by the company for any period prior to the commencement of the winding-up;
f) Government rents less than five years in arrears at the commencement of the winding-up;
g) rates payable to a local authority that were due and payable within three years before the date of commencement of the winding-up; and
h) any other creditors.
The above debts are ranked as follows: Firstly, are the debts referred to in subsection (1) (a). secondly, debts referred to in subsection (1) (e), (f) and (g). Thirdly, debts referred to in subsection (1) (b), (c) and (d). Lastly, the debts referred to in subsection (1) (h).
It is vital to note that debts with the same priority shall rank equally between themselves, and are expected to be paid in full. Where the property and assets of a company are insufficient to meet the debts, the debts abate in equal proportions between themselves.
5.0 JUDICIAL PRECEDENTS IN ZAMBIA
The Court of Appeal of Zambia in Konkola Copper Mines PLC and another vs Milingo Lungu (sued in his capacity as Provincial Liquidator of Konkola Copper Mines PLC) and others held that, on a proper construction of section 331 of the Companies Act, it is evident, that a director or an entitled person cannot bring or intervene in any proceedings in the name of, or on behalf of, a company or its subsidiary, without the leave of the court. In casu, the court was confronted with a company in liquidation at the control of a Provisional Liquidator, who is the alleged wrong doer, and who allegedly sanctioned a questionable consent order in which his own conduct was being impugned. The appellants sought to set aside the said consent order. At stake too were the company's surface rights over 694/M and its remaining extent which have been allegedly sold in an obscure transaction contrary to the law.
In arriving at its holding, the court enunciated the concept of corporate insolvency law in Zambia and cited a number of previous decisions as follows:
In the case ZCCM Investments Holdings v First Quantum Minerals and 6 others , it was stated that the disadvantage of the rule is that it could allow the majority to plunder the company, leaving the minority without a remedy. It was noted that exceptions to the rule have therefore been developed as pronounced in the Foss v Harbottle . It was further stated that a shareholder may bring a claim by way of a derivative action seeking relief on behalf of a company for a wrong done to it. A derivative claim is one where the right of action is derived from the company and is exercised on behalf of the company;
The case of John Mukuma Kasanga and 2 Others v Development Bank of Zambia and 3 Others dealt with a company in receivership. The alleged wrong doer was also in control of the company and not willing to bring an action where his decision to sell the company's most important real estate asset was alleged to be in bad faith and contrary to the law. It was held that on the principles in Foss v Harbottle, the derivative principle applies equally to this case in that the receiver and manager, who has control of the company is the alleged wrong doer against the company. It was stated that it would be unreasonable to think that the receiver and manager, in the circumstances would take action against himself for the benefit of the company. It was stated in obiter dicta that such a circumstance should have been provided for under the Corporate Insolvency Act No. 9 of 2017. Therefore, the only avenue available in such circumstances is section 331 of the Companies Act and case law; and
In the case of Avalon Motors Limited (in receivership) v Bernard Leigh Gadsden, Motor City Limited , there were allegations to the effect that the receivership was being conducted in a delinquent fashion to the serious disadvantage of the company, the shareholders and all concerned. As a result, a new receiver was appointed. Meanwhile, an action was commenced against the former receiver, who was the first respondent and also against the second respondent who sold the company's properties and assets allegedly at a grossly undervalued or give-away price. An action was commenced in the company's name and a preliminary objection was taken by the defendants that the director and shareholder was not entitled to sue in the name of the company; only the new receiver could do so. The objection was sustained; the action was dismissed leading to this appeal. On appeal, the Supreme Court held inter alia that receivers as well as liquidators occupy a fiduciary relationship and are liable for their wrongdoing. The same principle was followed in the Robert Mbonani Simeza case. Of note in the above cases is that they were not derivative actions in which a similar provision to the now section 331 of the Companies Act supra was considered. They are therefore distinguished from the instant case which merits a consideration of the law as it stands today.
6.0 CONCLUSION AND RECOMMENDATIONS
From a conspectus of a host of authorities cited herein, it is evident that Insolvency occurs when an individual, company, or other organization cannot meet its financial obligations for paying debts as they become due. It is also evident that despite insolvency laws of countries differing in important respects, the main objectives of insolvency law include the allocation of risk among participants in a market economy in a predictable, equitable, and transparent manner and also allocation of risk among different creditors, also for the benefit of borrowers. While different nomenclature is used for different types of insolvency proceedings in different jurisdiction, it can be deduced that the main types include receivership, liquidation and business rescue proceedings. It is vital for the law to enhance the professional ethics in form of stringent rules to regulate the insolvency practitioners charged with the huge mandate to wind up companies to promote accountability and transparency. There is also need for the law to enhance the protection of unsecured creditors in an event that a company’s assets are not insufficient to meet all the debts, where necessary, lifting the corporate veil as a necessary evil.
About Author
COUNSEL COLLINS NKUMBWA, Esq.
CIP (NIPA), LLB (UNZA), LLM (UNZA), AHCZ, ASCZ, PhD Cand.
Lecturer of law and Commissioner of Oaths
REFERENCES
STATUTES
1) Bankcruptcy Act Chapter 82 of the laws of Zambia
2) Companies Act, 2017
3) Corporate Insolvency (Insolvency Practitioner Accreditation) (Amendment) Regulations, 2022
4) Corporate Insolvency (Insolvency Practitioner Accreditation) Regulations, 2019
5) Corporate Insolvency Act, 2017
CASE LAW
1) Avalon Motors Limited (in receivership) v Bernard Leigh Gadsden, Motor City Limited (1998) SJ 26
2) Foss v Harbottle (1843) 2 Hare 461, 67 ER 189
3) John Mukuma Kasanga and 2 Others v Development Bank of Zambia and 3 Others Appeals Nos. 59 of 2020 and 94 of 2019
4) Konkola Copper Mines PLC and another vs Milingo Lungu (sued in his capacity as Provincial Liquidator of Konkola Copper Mines PLC)Appeal No. 128 of 2021
5) Robert Mbonani Simeza (Sued as Receiver/Manager of Ital Terrazo Limited), Finance Bank (Z) Limited and Ital Terrazzo Limited (2018) ZR 105
6) ZCCM Investment Holdings Plc v First Quantum Minerals and 6 others CAZ Appeal No. 92 of 2020
ONLINE SOURCE
1) Francis Wilks and Jones. Different types of company insolvency explained. SMEs, Directors & Shareholders. https://www.franciswilksandjones.co.uk/wp-content/uploads/2022/03/28_Different_types_of_company_insolvency_explained.pdf
2) International Monetary Fund. General Objectives and Features of Insolvency Procedures. file:///C:/Users/HP/Downloads/9781557758200-ch02.pdf
3) The Institute of Company Secretaries of India. Insolvency – Law and Practice.
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isation with which I am affilia
ted.
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