A company is deemed to be financially distressed if it is reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months or the company will become insolvent within the immediately ensuing six months. In the Lesotho context, business rescue proceedings have not been legislated and are not available to financially distressed companies. The Companies Act of 2011 (the “Companies Act”) however, has made provision for Judicial Management proceedings in the circumstances.
Judicial management is a statutory corporate rescue procedure for companies to be used before the liquidation process, where appropriate. It is a method of debt restructuring where an independent judicial manager is appointed to manage the affairs, business and property of a company under financial distress. The company in question will also be protected temporarily from legal proceedings by third parties. This will in effect allow the company to rehabilitate.
How is a company placed under Judicial Management in Lesotho?
The Lesotho the High Court (Commercial Division) may order judicial management under section 125 of the Companies Act which states the following:
- A company shall be regarded as financially distressed if it is unable to pay its debts; or
- If 75% of the issued share capital of the company has been lost or has become useless for the business of the company.
Grounds for judicial management
In light of the above, the Court may order the judicial management under section 125 or upon application by any shareholder, director or creditor if it appears to the Court that:
- By reason of mismanagement or any other issue, it is desirable that the company be put under judicial management;
- The directors or other offices of the company have acted in a way that is contrary to the provisions of the Companies Act;
- The assets of the company are being misapplied or misused and the viability of the company is threatened
Effect of the commencement of judicial management
As from the commencement of the judicial management, the judicial manager shall have custody and control of the company’s assets and the provisions of section 128 relating to the effect of commencement of liquidation shall apply and reference to the liquidator and liquidation shall be taken as reference to the judicial manager and judicial management, as the case may be.
Once the order granting judicial management has been handed down, all legal proceedings including execution steps will be stayed and the judicial manager will be empowered in terms of the Companies Act to take custody of the assets, prepare a creditors payment schedule and manage the company in the most economic and conducive manner in the interest of the shareholders and creditors.
Conversion from judicial management to liquidation
If, at any time during the judicial management, the judicial manger is of the opinion that the continuance of the judicial management will not enable the company to wither meet its obligations or remove the need the need for judicial management, he judicial manager shall apply to court for the cancellation of the judicial management order and the issue of a liquidation order. Provided that the judicial manager shall notify the shareholders and the creditors of his or her intention to make such an application.
Completion of judicial management
If at any time, on application of the judicial manager or any person interested, it appears to the Court that the purpose of the judicial management order has been fulfilled, or that for any reason it is undesirable that such an order should remain in force, the court may cancel such order and thereupon the judicial manager shall be divested of such management.
In cancelling such order, the court shall give such directions as may be necessary for the resumption of the management and control of the company to the directors thereof, which directions may include directions for the summoning of a general meeting of shareholders for the election of directors.
Our corporate commercial team have assisted clients with lodging applications for judicial management proceedings in Lesotho. Please contact us if you need legal advice on whether your company will benefit from being placed under judicial management.
This article was written by Albertus Kleingeld. Albertus is a director at Kleingeld Mayet. He regularly acts as a litigator in the High Court and advises on commercial and corporate matters including the formation of corporations. He’s specialist legal services include corporate, commercial law and business law.