OPINION | THE recent decision by the Gauteng High Court denoting that creditors who have acquired their claim in a business after business rescue has commenced are not entitled to vote on business rescue plans could set a significantly risky precedent for any future organisations facing business rescue, says Riza Moosa, director, head of banking & finance and Karabo Kanapi, associate, banking & finance at CMS South Africa.
This ruling, could result in the potential for a negative impact on the financial health of a company in business rescue, calling for the business and legal community to carefully consider ways to address any unintended consequences thereof.
Prompted by disputes over the validity of certain creditor votes in the approval of a business rescue plan for Arnot Opco Proprietary Limited (aimed at selling the company to Ndalamo Coal Proprietary Limited), the court found that post-commencement creditors are not creditors as contemplated in Chapter 6 of the Companies Act and are therefore not entitled to vote on a business rescue plan.
This is because the business rescue practitioner managing the company’s rehabilitation had raised concerns that votes on a viable business rescue plan which had acquired the support of the majority of the company’s creditors had been improperly counted. The practitioner then requested that the votes be forensically recounted, revealing that the votes counted had not met the statutory 75% threshold as one post-commencement creditor’s vote had been included in the tally.
While it is typical for post-commencement creditors to insist they receive a vote or that their funding is taken into account in the business rescue plan, the Wescoal Mining (Pty) Ltd v Mkhombo NO and Other judgement could abruptly put an end to that practice with severe implications for creditors who support distressed companies once they’ve entered business rescue.
According to the full judgement by the Gauteng High Court, these findings were reached because the court asserted that under section 150(2)(a)(ii) of the Companies Act, which requires that a business plan contain a complete list of the creditors of the company when the business rescue proceedings began, the express exclusion of post-commencement creditors within that section only made sense if they had no votable interest in the plan.
The judge also reasoned that the definition of affected persons should be interpreted to refer to people affected by the business rescue itself. And, if post-commencement creditors were allowed to vote, there would be little to stop speculators or asset strippers from preying on business rescue proceedings, blocking the adoption of appropriate business rescue plans, and forcing liquidations where they could be avoided. Meanwhile, the court noted that section 135 of the Companies Act (dealing with post-commencement finance) referred to ‘lenders’ and not ‘creditors’. The court found that this indicated that post-commencement financiers are not to be treated as the type of creditor to which business rescue would apply, stating that they were rewarded with enhanced security rather than the right to vote on business rescue plans.
However, while the court’s ruling may have been intended to safeguard the integrity of the business rescue process, it will also inadvertently lead to the disenfranchisement of any creditor who acquires the claim of a pre-business rescue creditor after the company went into business rescue.
When a company goes into business rescue, it is common for interested third parties to acquire claims in distressed companies to gain a seat at the table and assist in the restructuring or rescue of the company once business rescue proceedings have begun. The success of a business rescue process or plan can often be dependent on the availability of post-commencement finance and therefore these creditors play a critical role in keeping the company afloat while the rescue is being planned.
But the possible exclusion of individuals or entities acquiring the claims of pre-business rescue creditors means that potential funders of distressed companies will have no voting rights to any claims they have a stake in and therefore no incentive to inject liquidity, support or sustain operations and thus exacerbate the company’s financial distress.
The court’s stance to exclude post-commencement creditors from voting in business rescue proceedings and its narrow interpretation of what constitutes a creditor during business rescue not only overlooks the evolving nature of post-commencement creditors’ involvement and financial obligations and their vital contributions to the company’s prospects for recovery but also undermines their stakeholder status.
Additionally, the amount of post-commencement finance is usually a fraction of the total pre-business rescue debt of the company and therefore a post-commencement creditor alone would never be able to have the statutory percentage to approve a plan.
It’s clear then that the accrual of additional claims post-commencement of business rescue should be treated the same as pre-business rescue claims. To not do so would inadvertently prejudice some creditors over others as not all creditors providing goods or services after the commencement of business rescue will be considered lenders under section 135. The fact that post-commencement creditors might receive priority ranking or even security should not be sufficient to distinguish them so materially by removing their ability to vote on a rescue plan.
