MHA’s Corporate Law practice* recently acted for the applicants in the matter of Wescoal Mining (Pty) Ltd Another v Mkhombo NO [2023] ZAGPJHC 1097, where the High Court had occasion to provide much needed clarification regarding the status of post-commencement creditors in the approval process of a business rescue plan.
*Ehi Enabor acted for the applicants in the matter.
Once a company in financial distress begins business rescue proceedings, a business rescue practitioner is appointed to oversee the rehabilitation of the company. In pursuance of this objective, the business rescue practitioner is mandated to prepare a business rescue plan which, at a high level, details how the affairs of the company will be restructured to maximize the likelihood of the company continuing its existence on a solvent basis; or at the very least, details how business rescue proceedings will result in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
Once prepared, the business rescue plan is published by the practitioner and within 10 business days thereof, must be considered for possible adoption by creditors and (if applicable) various other stakeholders of the company, at a meeting called for this purpose.
Section 152(2)(a) of the Companies Act, 71 of 2008 (“the Act”) requires that a business rescue plan be supported by the holders of at least “75% of the creditors’ voting interests that were voted” to be approved at said meeting. Votes are allocated according to the value of a particular creditor’s claim. That claim must be proved to, and accepted by, the business rescue practitioner before the commencement of the meeting.
The process outlined above is fairly well-established and uncontentious.
It says a lot about the relative youth of the business rescue mechanism introduced by the provisions of the Act that there are still matters on which no court has yet had an opportunity to provide guidance. This case is but one of those novel matters for interpretation which inevitably arise as a result of the clash between the opacity of some of the provisions of Chapter 6 of the Act and the practical application thereof.
Some clarity has recently been provided by the Gauteng Division (Johannesburg) in relation to one aspect. In the matter of Wescoal Mining (Pty) Ltd Another v Mkhombo NO [2023] ZAGPJHC 1097, the High Court had an opportunity to determine whether creditors who only become creditors after the commencement of business rescue proceedings (i.e., post-commencement creditors) are classified as ‘creditors’ with ‘voting interests’ in the approval or rejection of a business rescue plan, within the meaning of section 152(2)(a).
The facts of the matter are straightforward. A meeting was called to consider a business rescue plan that proposed the sale of a company in business rescue, Arnot Opco (Pty) Ltd (“Arnot”) to another coal mining company, Ndalamo Coal (Pty) Ltd (“Ndalamo”). At the meeting there was a vote and, initially, it appeared that the statutory threshold of 75% had been reached, and the plan was declared to have been adopted. In the following days, however, it became apparent to the business rescue practitioner that the tally of the votes had been erroneously calculated and the votes cast in favour of the plan did not meet the 75% threshold.
This led to a dispute over the validity of the plan’s approval between, on the one hand, two creditors of the company who were creditors at the time of commencement, Wescoal Mining (Pty) Ltd (“Wescoal”) and
Salungano Group Limited ( “Salungano”), and on the other hand, the Business Rescue Practitioner, and a post-commencement creditor, Mashwayi Projects (Pty) Ltd (“Mashwayi”). Wescoal and Salungano (the
applicants) applied to the High Court on an urgent basis for confirmation that the business rescue plan voted on and adopted was valid, binding, and enforceable.
The fact that the revised calculations indicated that the 75% threshold had not been met was not disputed by the parties. What was disputed, however, was whether the votes made by Mashwayi should have been counted in making this determination. The applicants argued that they should not, and that if those votes were excluded from the tally, the votes in favour of the business rescue plan achieved the 75% threshold. The central dispute in the matter, therefore, concerned whether the votes made by Mashwayi should have been counted. In Court, the parties accepted that if it was found that the votes should not have been counted, it followed that the plan presented at the meeting would have been adopted by at least 75% of the creditors’ voting interests that were voted. The plan would, therefore, be valid, binding, and enforceable.
The basis of the applicants’ case was that, on a proper interpretation of the business rescue provisions of the Act, “post-commencement creditors” are not “creditors” with “voting interests” in the approval or rejection of a business rescue plan. As a matter of law, therefore, Mashwayi’s votes should not have been counted.
At the hearing of the matter, the applicants did not persist with their arguments regarding whether Mashwayi was a post-commencement creditor. However, the issue regarding whether Mashwayi’s status as such secured it the right to vote at a meeting called in terms of section 152, was vigorously contested.
Recognising that the answer to this question required an act of interpretation, the High Court turned to analysing various provisions in Chapter 6 of the Act (which deals with business rescue and compromise with creditors) to decipher whether the meaning of the word “creditor” used in the chapter includes post-commencement creditors, or whether it is limited to those creditors who were creditors of the company at the time that the business rescue proceedings commenced (pre-commencement creditors).
The court noted that in terms of section 145, “creditors” have the right to participate in business rescue proceedings. Such a right includes the right to cast a vote to approve, amend or reject a business rescue plan at a meeting called under section 152 of the Act. It noted further that section 128 does not define the meaning of “creditors” but includes creditors in the definition of “affected persons”, together with employees and shareholders.
The primary question for determination was whether the Act extends the rights enumerated in section 145 – including the right to vote in a meeting called under section 152 – only to the company’s existing creditors at the commencement of the business rescue process (the narrower category), or whether someone to whom the company under business rescue incurs obligations during the business rescue process (the broader category) also acquires section 145 rights, including a say in whether a business rescue plan should be adopted.
The Court outlined the applicable rules of interpretation:
- The meaning of a statute must be determined by considering the ordinary grammatical meaning of its text, the context in which a particular provision appears, and the purpose of that provision read in light of the overall purpose of the statute in which it appears.
- The meaning ascribed to the statute must be “sensible and businesslike” but only if a sensible and business-like construction is consistent with the words actually used.
Applying these interpretive tools to the Act, the Court held that the business rescue provisions of the Act assign voting interests under section 152 of the Act only to pre-commencement creditors, finding that there were several indications of this in the text of the statute.
The Court made the following important observations:
- The definition of “affected persons” in section 128 includes “creditors” but groups them alongside unions, employees, and shareholders, being classes of stakeholders that are affected by business rescue proceedings at the time of commencement.
- The overall purpose of business rescue is to “preserve the social value of a business as a going concern and to avoid the destruction of that value that would come about if the company was liquidated”. It would be inconsistent with the underlying purpose of the business rescue process and the Act itself to find that ‘just any creditor’ could vote at a section 152 meeting, as this would allow speculators or asset strippers preying on business rescue proceedings to block the adoption of appropriate business rescue plans, and force liquidations where they could be avoided.
- Section 150(2)(1)(ii) of the Act requires that a business rescue plan contains “a complete list of the creditors of the company when the business rescue proceedings began”. The express exclusion of post-commencement creditors only makes sense if those creditors have no voteable interest in the plan, which is not required to say anything about them.
- The Act could have made it clear that post-commencement creditors have a voting interest, but it does not do so. Section 135 of the Act, which deals with post-commencement finance, does not describe post-commencement financiers as “creditors” at all, but as “lenders”. It provides that creditors that advance finance to a company in business rescue are accorded a preferent claim against the company. This indicates that “post-commencement finance creditors” are rewarded with enhanced security, not a say in whether the business rescue plan should be
adopted.”
In conclusion, the High Court held as follows:
“Creditors who vote an interest at a section 152 meeting must be pre-commencement creditors. The Act, at least by necessary implication, places post-commencement creditors in a different category and, where it extends protection to their interests, it does so in a different way.”
Having found that, on a proper application of the statute, the votes of Mashwayi (as a post-commencement creditor) should not have been counted, it followed that the business rescue plan did in fact reach the required statutory threshold for approval. The court accordingly declared that the business rescue plan was duly approved and finally adopted, and the business rescue practitioner was ordered to implement the business rescue plan and give effect to Ndalamo’s bid to purchase Arnot.
The judgment is far-reaching in that it provides much-needed clarity by excluding post-commencement creditors from voting in relation to adoption of a business rescue plan. The upshot of the case is that the rights of post-commencement creditors in relation to business rescue proceedings are limited to a preferent claim against the company (which preference survives even in the event of liquidation). Although post commencement creditors are considered “affected persons” and are entitled to be involved in engagements with other stakeholders of the company undergoing business rescue to achieve – insofar as this is possible – the rescue or rehabilitation of the business, post-commencement creditors do not have any say insofar as the adoption or rejection of the business rescue plan is concerned.