Don’t give up on distressed firms

Taurai Changwa 
FOR local companies, the battle to stay afloat is real. The economy is still in distress and the market dislocation that this is causing is having a contagion effect on those firms that are still in good health.Though Government is largely considered a good debtor as it is rare for it to default, there are many companies that are owed a lot of money by State-owned entities.

In an ecosystem where interparty transactions largely lead to interdependence, affected companies are naturally expected to fail to pay their creditors as well.

For example, a company that is owed by Government or a State department is likely to default on its obligations to both statutory bodies and other creditors.

But the Zimbabwe Revenue Authority could care less.

In fact, tax authorities actually charge penalties and interest without regard of the role of Government in the indebtedness of the affected company.

With time, the debt and interest grows to such an extent that it becomes unsustainable.

A principle debt of US$2,5 million, for instance, can easily balloon to US$10 million.

In extreme cases, especially where the distressed company is generating relatively less revenues, the interest accruing on the principal debt might be considerably more.

It simply becomes impossible for the company to survive.

This is the sad reality visiting most local companies.

While strict adherence of the law is expected, the unique circumstances of some of the companies have to be considered so that their situation is dealt with on a case-by-case basis.

It might be prudent to look at the bigger picture.

Understanding the reasons why a company is in distress is important, and any solution needs to be in the interest of all stakeholders – workers, employers and other stakeholders.

An indifferent approach is likely to be catastrophic, particularly for workers.

So, any solution needs to focus on reviving the company rather than bleeding it further.

However, the VAT Act can be used by the Commissioner General of Zimra to assist any such companies.

According to the law, “where the Commissioner is satisfied that the failure on the part of the person concerned or any other person under the control or acting on behalf of that person to make payment of the tax within the period of payment contemplated in paragraph (a) of subsection (2) or subsection (3) or (4) – (b) such person did not benefit financially, taking interest payable into account, by not making such payment within the said period or the said date; was not due to an intent to avoid or postpone liability for the payment of the tax , he may remit in whole or in part any penalty or interest payable in terms of this section.”

If indeed there is adequate proof that the company is owed by the State and this is the main reason for it to default, surely Zimra will have to consider a moratorium on the said penalties and interest.

It’s not only humane way of dealing with the problem, but a logical one too.

Liquidating companies is not in the interest of both Zimra and the affected companies.

At times all it takes to turn around struggling companies is dialogue.

It takes a team of people who have the same vision, the same perseverance, the same courage of conviction, who are willing to walk in the darkness, every day, one foot in front of the other, until they see the light.

Zimra should not always be too strict and too hard on tax payers because at times it is not their fault that they failed to pay.

There is clearly an urgent need to stop the bleeding, and Zimra has a role to play in this.

Companies that are struggling are always racing against time.

Therefore, during a turnaround situation, the steps that are taken to manage a company have to be expeditiously persued.

But as in any financial turmoil, there are no guarantees of success.

A well-thought-out plan will present a greater likelihood of a positive outcome. In business, success is measured in many ways.

For some, success is improving operations to a point at which the business thrives again.

For others, success is limiting the financial hardship caused to family members, banks, surety companies and employees.

At the moment, Zimbabwe needs more, not less, companies; the solution cannot lie in winding up distressed firms.

If anything, every possible option needs to explored to ensure the business is nursed to health.

And Zimra has a critical role to play in all this.


Taurai Changwa is a member of the Institute of Chartered Accountants of Zimbabwe and an estate administrator. He has vast experience in tax, accounting, audit and corporate governance issues, and is a director of Umar & Tach Advisory who writes in his personal capacity. Feedback: [email protected] and WhatsApp +263772374784

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