#25 Post-Commencement Creditors’ Voting Rights and the Rejection of a Business Rescue Plan
1. Introduction
This judgment arises from an appeal before the Supreme Court of Appeal of South Africa in the matter between Mashwayi Projects (Pty) Ltd, Phahlani Lincoln Mkhombo NO, and Arnot Opco (Pty) Ltd (in Business Rescue) on the one hand, and Wescoal Mining (Pty) Ltd, Salungano Group Ltd, and Ndalamo Coal (Pty) Ltd on the other. The proceedings concern the interpretation of Chapter 6 of the Companies Act 71 of 2008, particularly regarding whether post-commencement creditors possess voting rights in the adoption of a business rescue plan. The court examined multiple sections of the Act, including those dealing with the nature and extent of creditors’ claims, post-commencement finance, and the threshold required for approving a business rescue plan. The judgment also addressed factual disputes surrounding vote tallies at a creditors’ meeting. The court ultimately considered whether the plan presented had been duly adopted, and it provided guidance on how to interpret the term “creditor” in the context of business rescue proceedings..
2. Acts and Related Case Law References
Companies Act 71 of 2008
Section 5: Instructs that the Act must be interpreted in a manner that gives effect to its purposes, including the alignment with the Constitution.
Section 7: Sets out the purposes of the Act, which include promoting compliance with the Bill of Rights and ensuring the efficient rescue and recovery of financially distressed companies.
Section 128: Defines key terms, including “affected person,” “business rescue,” “business rescue practitioner,” and “financially distressed.”
Section 135: Regulates post-commencement finance, setting out priorities for repayment of costs and financing incurred during business rescue.
Section 144: Identifies employees’ rights and claims during business rescue, distinguishing between pre-commencement and post-commencement entitlements.
Section 145: Specifies the rights of creditors during business rescue, including voting rights on a proposed rescue plan.
Section 150: Sets out the requirements for the content of a proposed business rescue plan, including background information and projected outcomes.
Section 151: Prescribes the meeting procedure for creditors to consider and vote on the proposed business rescue plan.
Section 152: Establishes the criteria for approval of a business rescue plan, requiring at least 75% of the creditors’ voting interests and at least 50% of the independent creditors’ voting interests to vote in favour of the plan.
Section 153: Regulates the steps to be taken if a business rescue plan is rejected, including the option to propose a revised plan or seek court intervention.
Section 154: Addresses the enforcement of pre-commencement debts after a business rescue plan has been approved and implemented.
Section 155: Provides for compromise between a company and its creditors outside of business rescue, subject to court sanction, but excludes companies that are in business rescue.
Industrial Development Corporation Act 22 of 1940
Section 2 and Section 3: Establish the Industrial Development Corporation, outline its objectives, and set out its mandate to facilitate industrial development and economic growth.
Cases
Oakdene Square Properties (Pty) Ltd v Farm Bothafontein (Kyalami) (Pty) Ltd and Others [2013] ZASCA 68; 2013 (4) SA 539 (SCA): Addresses the purpose of business rescue, emphasising that the main objective is to facilitate the rehabilitation of financially distressed companies.
Emontic Investments (Pty) Ltd v Bothomley NO and Others [2024] ZASCA 1: Discusses the nature and effect of a concursus creditorum in insolvency and the distinction from business rescue proceedings.
Ragavan and Others v Optimum Coal Terminal (Pty) Ltd and Others [2023] ZASCA 34; 2023 (4) SA 78 (SCA): Illustrates the interpretive approach to the Companies Act, emphasising context and purpose.
Road Traffic Management Corporation v Waymark Infotech (Pty) Ltd [2019] ZACC 12; 2019 (6) BCLR 749 (CC); 2019 (5) SA 29 (CC): Highlights the unitary approach to statutory interpretation in South African law.
Commissioner for South African Revenue Service v Beginsel NO and Others [2012] ZAWCHC 194; 2013 (1) SA 307 (WCC); 75 SATC 87: Demonstrates how courts compare potential outcomes under business rescue with those under liquidation.
Peninsula Eye Clinic (Pty) Ltd v Newlands Surgical Clinic and Others [2013] ZAWCHC 156; 2014 (1) SA 381 (WCC); [2014] 1 All SA 592 (WCC): Considers the interplay between comparative foreign law and domestic legal provisions in interpreting business rescue legislation.
Ex Parte Kaplan and Others NNO: In re Robin Consolidated Industries Ltd 1987 (3) SA 413 (W): Explores the concept of “creditor” in the context of company law and insolvency.
Body Corporate of Greenwood Scheme v 75/2 Sandown (Pty) Ltd and Others 1999 (3) SA 480 (W): Highlights that a creditor may include individuals with contingent or prospective claims.
Commissioner for South African Revenue Services v United Manganese of Kalahari (Pty) Ltd [2020] ZASCA 16; 2020 (4) SA 428 (SCA): Reflects on statutory interpretation principles and the importance of contextual reading.
3. The Facts
Arnot Opco (Pty) Ltd entered business rescue following financial distress. Wescoal Mining (Pty) Ltd had initiated the business rescue process due to outstanding liabilities owed by Arnot. The appointed business rescue practitioner, Mr Mkhombo, convened a meeting of creditors in accordance with section 151 of the Companies Act 2008.
At that meeting, the business rescue plan was presented, and creditors were asked to vote on whether to adopt it. Mashwayi Projects (Pty) Ltd, a creditor that had acquired cessions of claims from multiple parties, opposed the plan on the basis that it did not adequately address its interests. The respondents, which included Wescoal Mining (Pty) Ltd, Salungano Group Ltd, and Ndalamo Coal (Pty) Ltd, supported the plan.
During the tallying process, certain errors emerged, and the practitioner received conflicting information regarding whether the plan had achieved the 75% threshold required under section 152(2)(a). These errors included the potential double-counting of votes and the question of whether post-commencement creditors, such as Mashwayi, were entitled to vote. The practitioner considered these irregularities and notified creditors that the plan might not have met the statutory requirements. Wescoal Mining (Pty) Ltd and Salungano Group Ltd then applied for declaratory relief in the High Court, contending that the plan had been validly adopted.
4. Themes
Applicant's Arguments
The applicants, namely Wescoal Mining (Pty) Ltd and Salungano Group Ltd, argued that only creditors with claims in existence at the time of business rescue commencement held voting interests under Chapter 6 of the Companies Act 2008. They posited that the omission of any express provision for post-commencement creditors indicated a legislative intent to exclude them from voting. They relied on the requirement to interpret “creditor” in line with insolvency law principles, suggesting that post-commencement financiers did not fall within the scope of those entitled to vote, as their claims arose after the initiation of the business rescue.
They further maintained that the purpose of sections 150, 151, and 152 was to protect the rights of pre-commencement creditors, who faced the potential compromise of their claims under a plan. They asserted that no prejudice was suffered by post-commencement creditors if voting rights were withheld, because post-commencement creditors ranked higher in terms of payout preferences under section 135 and therefore had adequate protection. The applicants emphasised that the errors identified in the vote tally related primarily to the improper inclusion of post-commencement creditors.
Respondent's Arguments
Mashwayi Projects (Pty) Ltd, supported by the business rescue practitioner and Arnot Opco (Pty) Ltd, contended that the Companies Act 2008 granted voting rights to any person meeting the ordinary definition of “creditor.” They argued that the Act did not confine the term to pre-commencement creditors and that a purposive reading of Chapter 6 indicated that all creditors, including those providing post-commencement finance, were entitled to vote.
They highlighted that section 145 of the Act provided voting rights to “each creditor,” without distinguishing between pre-commencement and post-commencement categories. They further submitted that the Act explicitly limited employees’ post-commencement claims in section 144(3)(f), but made no equivalent limitation for other post-commencement claims. In their view, the absence of any express exclusion supported the conclusion that post-commencement creditors qualified as full participants in the voting process.
Mashwayi argued that excluding post-commencement creditors from the vote would undermine the central objective of business rescue, as set out in section 7(k), which seeks a balance among all stakeholders. They maintained that any other interpretation would discourage essential post-commencement financing by undermining such creditors’ rights in the rescue process.
5. The Question of Law
The legal question pertained to the interpretation of the term “creditor” in the context of business rescue proceedings under the Companies Act 2008. The pivotal issue was whether the Act permitted post-commencement creditors to vote on a proposed business rescue plan. The court engaged in a textual and purposive reading of the Act, particularly sections 128, 135, 144, 145, 150, 151, and 152, to determine the scope of the term “creditor.”
The court considered that a limitation on voting rights required clear legislative language. The absence of any explicit restriction in sections 145 and 152 weighed against the argument that post-commencement creditors were excluded. The court also examined the deliberate manner in which the Act granted, or withheld, rights to certain categories of creditors, noting that employees’ claims were specifically regulated, whereas no analogous limitation appeared for post-commencement financiers. This indicated a legislative choice not to restrict the term “creditor” to those with pre-existing claims.
6. The Reasoning Employed by the Court
The court adopted a strict interpretive approach, focusing on the ordinary grammatical meaning of “creditor” and the purpose-driven ethos underpinning Chapter 6 of the Act. It scrutinised each relevant section to identify whether the legislation drew any explicit distinction between pre-commencement and post-commencement creditors. It found that section 145 conferred voting rights on every creditor, while section 150 and section 151 did not carve out exceptions.
The judgment also scrutinised comparative references to insolvency law, noting that business rescue and liquidation serve different objectives. The court reasoned that certain principles of insolvency law, such as the concept of a concursus creditorum, did not automatically transfer to business rescue scenarios. The court held that any narrowing of “creditor” to pre-commencement claims would require a more specific legislative directive.
In concluding that post-commencement creditors were entitled to vote, the court indicated that its interpretation aligned with the broader aim of business rescue, which seeks to facilitate corporate recovery through new financing arrangements and preserve all stakeholders’ interests.
9. The Outcome
The court set aside the High Court’s declaration that the plan had been validly adopted. By recognising that post-commencement creditors had voting rights, the court recalculated the support for the plan and found that the 75% threshold was not met once all eligible creditors were considered. This led to a conclusion that the plan was rejected under section 152(3)(a), which necessitated further steps under section 153 if the practitioner wished to revive or revise the plan.
This outcome has significant implications for future business rescue proceedings. It clarifies that both new and existing creditors have a say in determining the terms of a proposed plan. This development may foster greater willingness from financiers to provide post-commencement funding, as they are not relegated to a subordinate role. However, it may also prompt caution among pre-commencement creditors, who may perceive an increased risk of having their claims diluted or outvoted.
10. Moral of the Story
The judgment highlights the importance of ensuring procedural fairness and inclusive participation in business rescue proceedings. It underscores the principle that statutory language should be interpreted in a manner consistent with the overall legislative purpose, which, in this case, involves balancing the rights and interests of all affected stakeholders. The decision suggests that courts will read the Companies Act 2008 in a way that supports corporate rehabilitation and encourages post-commencement financing, provided the Act does not explicitly exclude particular creditors from voting rights.
11. What Questions Remain Unanswered?
While the judgment clarifies that post-commencement creditors generally hold voting rights, it does not comprehensively address scenarios in which multiple categories of post-commencement creditors may claim different priorities or security interests. It also does not specify the precise method for resolving complex vote-counting disputes, beyond requiring accurate tallies and clear evidentiary proof. Moreover, the judgment leaves open the question of whether certain unique creditor arrangements might require tailored mechanisms for vote valuation or weighting. These issues could prompt further judicial consideration in cases where the extent and nature of post-commencement funding are more complex.
