The 5% Fallacy: How Fee Caps Impede Business Rescue for Financially Distressed Companies in Zambia

Abstract

This study examines the potential drawbacks of the 5% net asset cap on business rescue practitioner (BRP) fees enshrined in Zambia’s Corporate Insolvency Act (Act No. 9 of 2017). We argue that this “one-size-fits- all” approach disregards the inherent complexities and unpredictable costs associated with business rescue proceedings. The research analyses the limitations of the fee cap through the lens of minimal net assets in financially distressed companies, the challenges of unforeseen expenses and disbursements, and the inflexibility in accommodating exceptional circumstances. Our findings suggest that the capped fee structure discourages qualified BRPs from undertaking high-risk cases, ultimately hindering the rehabilitation of financially distressed companies and potentially increasing company liquidation rates. The paper concludes by proposing alternative approaches, such as success-based fees, capped hourly rates, and a pre-approval process for exceeding the cap in exceptional cases. These alternatives aim to ensure fair compensation for BRPs while safeguarding against excessive fees, fostering a more effective business rescue ecosystem in Zambia.