Restructuring of companies in financial distress is on the increase globally. In line with this trend, Mozambican Insolvency Law (Decree law No 1/2013) provides greater protection to debtor companies in financial distress and gives them an opportunity to reorganise and restructure while continuing to operate their businesses.
The law covers three procedures namely judicial reorganisation (Recuperação Judicial), extrajudicial reorganisation (Recuperação Extrajudicial) and liquidation.
These procedures provide protection for both debtors and creditors, and increase the role of creditors thus creating a more attractive business environment.
The law is still evolving and will entail a learning curve for judges, practitioners and society in general to apply the law efficiently and understand its boundaries.
Judicial Reorganisation (Recuperação Judicial)
A debtor proposes a two year reorganisation plan which must be approved by a vote of creditors and by the court. A debtor is afforded 90 days to provide its plan which must contain evidence of the viability of the business, a detailed description of the recovery process and the proposed reorganisation mechanisms. Should the reorganisation plan be approved, the debtor receives a stay of 180 days from legal action by its creditors.
Tax claims are excluded from the judicial reorganisation and payment of tax claims can be made through instalments. Labour claims must be paid within limited periods.
The establishment of creditor committees and the participation of creditors, with important veto rights, in the reorganisation process encourages constructive participation in the process.
Voting creditors are divided into three classes: holders of labour-related claims; holders of secured claims (mortgagees, pledges); and holders of ordinary claims.
The plan must be approved in each class by the majority of creditors present or represented by number (all classes) and value (the first two classes).
The plan may still be confirmed by the court even if it is not approved by all creditors.
Once the plan is approved and confirmed by the court it is binding on all creditors, including the dissenting ones. The debtor will then remain under judicial restructuring for a period of two years. But the non-performance of any obligation under the plan entitles any creditor to enforce its rights or file for liquidation.
In the event of liquidation, credits from suppliers of goods and services and from loans made during the reorganisation period will enjoy preference over other claims. This is a welcome provision because new funding and supplies are critically important to successfully restructure a business. In practice it remains to be seen whether creditors will be comfortable taking such risks with a debtor that has already defaulted.
Extrajudicial Reorganisation (Recuperação Extrajudicial)
The requirements for extrajudicial reorganisation are similar to those for judicial reorganisation. The plan for the extrajudicial reorganisation is governed by the rules set out in the Mozambican Arbitration, Mediation and Conciliation Law (Law No 11/99).
A reorganisation approved by at least 60% of claims belonging to any class or group of creditors (except for labour and tax related claims) will become binding on all the creditors in that class.
A stay of actions imposed by the court is not available to a debtor in an extrajudicial reorganisation. The plan will not suspend the creditors’ rights or the execution proceedings against the debtor’s assets before approved, nor will it protect the debtor against liquidation requested by creditors not affected by the plan. It has limited use, therefore, if creditors do not co-operate.
Liquidation Procedure (Insolvência)
The law also provides for liquidation procedures. Either the debtor or the creditor (once certain requirements are met) may apply to court to declare that the debtor is to be liquidated.
A declaration of liquidation results in all debts being accelerated and all assets being collected and sold to pay creditors. Certain claims such as the remuneration for the judicial administrator, amounts supplied to the insolvent estate and legal costs of lawsuits involving the insolvent estate are given priority.
Thereafter labour related claims are paid first followed by secured claims (up to the value of the security) and tax claims (except for tax fines) and claims for social security. Only then are ordinary claims, contractual and tax fines and subordinated claims paid.