In April 2020, the Corporate Insolvency and Restructuring Act came into force. This note considers how companies in distress may take advantage of the Corporate Insolvency and Restructuring Act.
Previous notes have discussed the fact that once a person opts to go into administration or insolvency, creditors rights to go to court or use any other means to enforce their claim is put on hold.
Distressed companies share a common fate: Suppliers are unwilling to supply credit; Banks and financial institutions are unwilling to advance more financing; Employee obligations hang in the balance. So it’s fair to say that by this point, the company may have exhausted all of its goodwill with suppliers, creditors, financiers, employees and basically everyone.
The big question is: how does an administrator proceed under these circumstances?
Let’s refresh our memory on the role of the administrator. The administrator takes over the role of the directors and aims to steer the company towards profitability. The challenge for many administrators would be regaining the trust of suppliers and other stakeholders. In the absence of such trust, it is almost impossible for an administrator to turn the fortunes of the company around. The administrator may have to convince suppliers to continue trading with the company. The administrator may have to renegotiate credit and debtor terms, and of course the elephant in the room – access to liquidity or cash to run the business while the administrator puts things in place to place the company back on its feet. Banks, savings and loans companies, microfinance institutions and high net worth individuals who are in a position to offer financing would most likely not invest in a company which is plagued by financial difficulties, lack of collateral, and ‘bad PR’.
The Corporate Insolvency and Restructuring Act caters for such a scenario by introducing what the Act calls “post-commencement financing”. So, what is post-commencement financing? “Post-commencement financing” refers to the financing of the activities of a distressed company after it has been placed in administration. Some industry persons call it “turn-around” finance.
Post commencement financing, therefore, comprises monies borrowed or obtained by the administrator to enable the distressed company to carry on its activities and turn its fortunes around. These borrowed monies could be bank loans, trade financing, venture capital financing, or any other financing obtained by an insolvency practitioner to enable her to carry out the job of restructuring the company to ensure viability.
Post commencement financing is, therefore, a revolutionary addition to our law that allows lenders to lend money to companies in administration without fear of an inability to recoup the funds.
So, the big questions are: What is in for a person who invests in such a risky venture? Are there guarantees in the law that ensures that a person who invests in a company in such a bad time has something to hold on to? The plain answer to the question is “Yes!” Post-commencement financings are ranked as Class A priority debt. This means that they rank above all other creditor claims including government debts to the revenue authorities, secured creditors, and preferential creditors. This further means that sums of money advanced as post-commencement financing would be paid in full before all other creditor claims. Banks, financial institutions and other lenders who would give loans to insolvency practitioners to carry out an administration are ensured to completely recover their money and interest in full before any other debt is paid out to anyone else the company owes.