In a landmark decision, the Supreme Court of Appeal (“SCA”) recently addressed a pivotal issue in company law – whether post-commencement creditors are entitled to vote on a business rescue plan.
Business rescue, unlike its predecessor, judicial management, which is also distinct from liquidation and sequestration proceedings, does not create a concursus creditorum. This means that pre-commencement creditors do not receive specific preference during the business rescue process, and the claims against the company (as well as the debts owed by it) remain active and unaffected.
Furthermore, it is essential to recognise that the voting dynamics may change before a meeting is convened to approve a business rescue plan. Often, a financially distressed company has very few unsecured assets to offer as security for post-commencement financing. This poses a significant risk for post-commencement financiers and creditors, as they may find themselves unsecured and lacking the “payment priority” that is afforded to similar creditors in other jurisdictions.
For example, secured creditors, who possess collateral for claims that arose before the business rescue began, are protected under section 134 of the Companies Act 71 of 2008, as amended (the “Companies Act”). Due to their secured status, these creditors typically receive the majority of the distributions during business rescue, ahead of any unsecured creditors—both pre-commencement and post-commencement. Additionally, secured creditors have voting rights in the business rescue plan based on the full value of their claims.
As a result, when it comes to the limited unsecured funds available during business rescue, payments are first allocated to the business rescue practitioner and the associated costs. This is followed by payment to post-commencement employees, and only after these obligations are met can unsecured post-commencement financiers expect to receive any distributions. The judgment, delivered in the case of Mashwayi Projects (Pty) Ltd and Others v Wescoal Mining (Pty) Ltd and Others, has significant positive implications for the interpretation of the Companies Act, particularly Chapter 6, which deals with business rescue proceedings.
Background of the Case
The case revolved around the business rescue proceedings of Arnot Opco (Pty) Ltd, a joint venture that operates the Arnot coal mine. The central legal question was whether creditors whose claims arose after the commencement of business rescue (post-commencement creditors) could vote on the business rescue plan. A dispute pertaining to the adoption of the business rescue plan of Arnot Investco (Pty) Ltd (in business rescue) arose after the results of the voting on the plan came into question.
The legal issue to be determined was whether, on a proper interpretation of the relevant provisions of Chapter 6 of the Companies Act, post-commencement creditors may vote on a business rescue plan. Controversially, the court a quo held that only pre-commencement creditors were entitled to exercise voting rights in respect of a business rescue plan. The High Court interpreted the relevant provisions of Chapter 6 of the Companies Act. It concluded that voting interests under section 152 are assigned only to creditors who were creditors at the commencement of the business rescue proceedings.
In upholding the appeal against the judgment of the High Court, the SCA inter alia considered the correct interpretation of the term ‘creditor’ and whether the absence of an express reference to post-commencement creditors in various sections of the Companies Act means that those sections apply only to pre-commencement creditors.
The appellants contended that the High Court’s interpretation disregarded commercial realities and resulted in an unbusinesslike result. They further contended that the High Court’s interpretation would inevitably discourage post-commencement financing, which is often a critical component in rescuing financially distressed companies.
Conversely, the respondents contended inter alia that the word ‘creditor’ should be interpreted with reference to insolvency legislation and that post-commencement creditors hold no voting rights as Chapter 6 of the Companies Act does not contain an express reference to post-commencement creditors and their voting rights.
Key Legal Principles
Interpretation of ‘Creditor’: The SCA emphasised that the term ‘creditor’ should be understood in its ordinary grammatical sense, which includes any person or entity owed an unpaid debt. The court rejected the idea that ‘creditor’ should be limited to those owed debts before the commencement of business rescue, as this would contradict the text and purpose of the Companies Act.
Purpose of Business Rescue: The court highlighted that the primary goal of business rescue is to save financially distressed companies and avoid liquidation. This objective would be compromised if post-commencement creditors, who provide essential financing during the rescue process, were excluded from voting on the business rescue plan.
Equality of Stakeholders: The judgment emphasised the importance of treating all creditors equally, as mandated by Section 7(k) of the Companies Act, which aims to balance the rights and interests of all relevant stakeholders. The court found no justification for differentiating between pre-commencement and post-commencement creditors regarding their voting rights.
Legislative Intent: The SCA noted the absence of explicit provisions excluding post-commencement creditors from voting, indicating that the legislature did not intend to create such a distinction. The court highlighted that any interpretation imposing unequal rights among creditors, without clear legislative support, would violate the equality provisions of the Constitution.
Commercial Realities: The court recognised the practical realities of business rescue, where post-commencement financing is vital for the survival of distressed companies. Excluding post-commencement creditors from voting would discourage such financing and impede the rescue process.
Conclusion
The SCA’s judgment in this case reaffirms the inclusive approach of the Companies Act towards all creditors, ensuring that post-commencement creditors have a say in the business rescue process. This decision not only clarifies the legal position but also promotes the efficient rescue and recovery of financially distressed companies by encouraging post-commencement financing. This landmark ruling is a significant step towards a more equitable and effective business rescue regime in South Africa, aligning with the broader objectives of the Companies Act to balance the interests of all stakeholders and promote economic stability.
Contact us at SchoemanLaw today to schedule a consultation and learn more about how we can assist you in navigating the complexities of business rescue and creditor rights.
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