AS more and more companies head towards the corporate graveyard after succumbing to the harsh economic conditions, there is one group of individuals who are rubbing their hands with glee — liquidators and judicial managers.
Like undertakers, they thrive on the collapse of companies, and with the turbulence in industry, they are at the beck and call of those who find the going tough.
Judicial managers and liquidators, who take over management of firms under liquidation, charge either a percentage of the portfolio or asset value of the company which is negotiated up to about 5,5 percent.
They can also charge hourly commission, which is more like a moving target as they can earn more than the shareholders and creditors.
Despite economic recovery following dollarisation of the economy in 2009, Zimbabwe’s industrial sector has been shrinking.
While dollarisation brought stability after years of hyperinflationary crisis, that stability in fact exposed the country’s manufacturing sector companies, which had not retooled for close to a decade due to foreign currency shortages.
Initially, it had been expected that a hard currency regime, which dismantled most exchange control restrictions, would bring with it relief to the country’s economy through increased foreign currency inflows, but the situation has remained dire.
A liquidity crunch meant Zimbabwe’s economic players were starved of cash to recapitalise, resulting in a number of companies closing or being placed under judicial management in the past four and half years.
More than 25 companies have been placed under judicial management since 2010. A total of 10 other companies have been liquidated.
Five companies were placed under judicial management in 2010 while eight companies faced a similar fate in 2011.
Last year, more than six companies were placed under judicial management.
This year, the Zimbabwe Stock Exchange-listed Phoenix Consolidated voluntarily applied for judicial management; Steelnet was placed on final liquidation while Valley Technologies was placed under provisional liquidation.
The list of companies which folded include Karina Textiles, Cairns Foods, Pine Products, PG Safety Glass G & D shoes, National Blankets, Belmont Leather, Textile Mills, Archer clothing, Security Mills and Mutare Board and Paper Mills, which used to be the country’s only manufacturer of newsprint
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The list also includes Radiator and Tinning, Safety Africa, Lion Matches, Hunyani Mill and Baobab Industries.
Many companies are struggling to remain afloat, and are operating way below 50 percent capacity due to high utility bills, high interest rates and shortage of working capital.
These, analysts say, could potentially go the judicial management route and possible liquidation.
Julius Chikomwe, a corporate lawyer with Thompson Stevenson & Associates, said Zimbabwe was experiencing systemic corporate distress, that is widespread financial difficulties involving a larger than normal percentage of its commercial community.
“This has created a serious weakness in the financial sector that is essential for the restoration of the normal flow of credit which underpins a healthy economy. If firms do not make it out of judicial management or fail to implement a successful scheme of arrangement, incidents of non-performing loans will increase and this will undermine the viability of the banking industry,” he said.
Chikomwe said policy makers needed to address the cause of the systemic corporate distress that Zimbabwean companies were facing.
“Do our insolvency laws strike a fair balance between protecting creditors on the one hand (which is necessary for the mobilisation of investment capital), and obviating the premature liquidation of viable businesses on the other hand?
Is the insolvency process efficient?” asked Chikomwe.
He said insolvency dissipates value to the detriment of both creditors and shareholders.
“The entire process should thus be efficient to minimise value dissipation,” said Chikomwe.
Zimbabwean companies are certainly struggling. As a result, backyard industries have emerged, giving some businesses a run for their money.
Bulawayo, once the country’s industrial hub, is now desolate; its towering chimneys last gusted industrial smoke years ago.
The situation has meant that only judicial managers and liquidators are smiling all the way to the bank.
Analysts say other judicial managers and liquidators end up stripping the companies.
“Some will actually mismanage the company and lead to closure. This is possible since usually they have access to all information and can see the company’s financial position and whether it can be resuscitated or not then give their professional views,” said one analyst.
A liquidator last year came under fire for his role in the liquidation of a stockbroking firm. There were allegations he could have inflated the asset base of the securities trading firm to get a handsome payout for his services as liquidator, to the prejudice of creditors.
He had also been blamed by a Parliamentary Committee for mismanaging another company in which he was a liquidator.
In 2011, government came up with the Distressed Industries and Marginalised Areas Fund (DiMAF) under which it was expected to contribute US$20 million, with Old Mutual chipping in with the other US$20 million.
DiMAF was established to rescue struggling companies particularly from Bulawayo. The fund did not achieve much due to bickering in the inclusive government.
Government also came up with the Zimbabwe Economic Trade Revival Facility, which was allocated US$70 million. But the companies identified for assistance struggled to access the money because of stringent conditions attached to the loans.
The African Development Bank (AfDB) says most Zimbabwean firms were highly geared and lacked creditworthiness, leading to their failure to access credit lines.
The regional lender said while there were bank facilities created to bail out distressed companies, most of them “generally fail the due diligence test”.
“Although the facilities are intended for distressed firms, such firms also have to demonstrate that they are creditworthy and their proposals are bankable,” AfDB said, adding that firms with weak balance sheets, unviable proposals and low prospects for recovery do not pass the test.
The group said the scenario led to low uptake of funds under DIMAF.
Industry Minister, Mike Bimha, said Zimbabwe needs at least US$10 billion to revive its distressed manufacturing sector.
The Confederation of Zimbabwe Industries 2013 manufacturing sector survey says capacity utilisation in the manufacturing sector dipped this year from 44,2 percent last year to 39,6 percent due to lack of affordable credit lines, ageing equipment and acute power and water shortages.
Bimha said the influx of cheap Chinese goods had negatively affected the manufacturing sector and “government will do something immediately”.
“Wherever I go, people talk about these cheap goods coming into this country. People also ask me questions why are we importing almost everything. This issue really requires urgent government attention,” said Bimha.