Earlier this month, the Constitutional Court delivered a significant unanimous judgment in the context of insolvency law: Post-commencement creditors are not statutorily entitled to vote on the adoption of a financially distressed company’s business rescue plan. Overturning the Supreme Court of Appeal’s watershed ruling, the ConCourt’s finding is based on a holistic reading of the provisions of the Companies Act and has important practical ramifications for business rescue in South Africa.
The facts of the case: A disputed vote
In Salungano Group Ltd v Mashwayi Projects (Pty) Ltd; Ndalamo Coal (Pty) Ltd v Mashwayi Projects (Pty) Ltd, a dispute arose from a vote on the business rescue plan of Arnot Opco, which entered business rescue on 10th October 2022. At a creditors’ meeting on 28th July 2023, various options, including selling the business as a going concern, were considered – with competing acquisition bids to follow if that option was approved.
Initially, the business rescue practitioner reported that the sale option had attracted 75.4% of creditors’ voting interests with Ndalamo Coal’s bid receiving 88% support. These figures, however, did not survive scrutiny. The practitioner identified material irregularities involving duplicate votes, group and individual voting, ignored withdrawn votes, and late proxies.
Following the institution of legal proceedings, the High Court held that only pre-commencement creditors – persons who were creditors of the company at the time business rescue proceedings commenced – could lawfully vote on the adoption of a business rescue plan and declared the plan adopted.
On appeal, the SCA reversed that decision after finding that post-commencement creditors were also entitled to vote and that the July 2023 plan had not met the required statutory threshold. Although it considered a fresh vote appropriate, the SCA concluded that the Companies Act did not permit remittal and it declared the plan rejected without directing a new vote. The appellants sought leave to appeal the judgment and order before the ConCourt.
The meaning of ‘creditor’: Why the ConCourt rejected the SCA’s reasoning
According to STBB Director and litigator, Stefan Hougaard, the ConCourt was required to grapple with two primary questions in determining whether to uphold the appeal:
‘First, the Constitutional Court had to decide whether the definition of ‘creditor’ under section 152 of the Companies Act includes post-commencement creditors who are therefore entitled to vote on a business rescue plan. Second, it needed to determine whether the business rescue plan presented to the creditors in July 2023 was properly adopted in accordance with the Act’s provisions.’
In analysing the broader statutory framework and objectives of business rescue, the SCA accepted the ordinary grammatical meaning of ‘creditor’ and accordingly held that Chapter 6 of the Companies Act, which formalises the business rescue process, did not reasonably justify excluding post-commencement creditors from voting after business rescue proceedings began.
Niel Grundlingh, an experienced STBB Director and commercial litigator, unpacks the SCA’s refusal to enforce a legal distinction between pre- and post-commencement creditors:
‘The SCA concluded that differentiating between various types of creditors would amount to an infringement of section 9 of the Constitution, that is the equality clause, as well as section 7(k) of the Companies Act, which seeks to balance the competing interests of relevant stakeholders. It thus recognised post-commencement creditors as “relevant stakeholders” eligible to vote on the passage of a business rescue plan.’
The ConCourt, however, disagreed. In the absence of a statutory definition of ‘creditor’, the Court relied on the text, purpose, and contextual ambit of the Companies Act to determine the parameters of the term. Upon assessment, it found that Chapter 6 establishes a voting constituency anchored to the commencement of business rescue – an interpretation bolstered by three important statutory provisions.
First, under section 128(1)(a) of the Companies Act, an ‘affected person’ – a person directly impacted by the commencement of business rescue proceedings – is defined to include a creditor of the company. ‘In this context, an “affected person” is clearly a creditor of the company existing at the initiation of business rescue,’ says Hougaard.
Second, section 150(2)(a)(ii) of the Act requires a business rescue plan to list all the company’s creditors ‘when the business rescue proceedings began’, including each creditor’s classification as secured, statutory preferent, or concurrent in terms of insolvency law, and record which ‘creditors have proved their claims’.
For Grundlingh, the listing requirement triggered by the commencement of business rescue proceedings is telling:
‘Listing all pre-commencement creditors is essential for transparency as it enables the creditors to see where they rank preferentially. However, the qualifying phrase “when the business rescue began” demonstrates that Parliament didn’t intend for post-commencement creditors to hold a voting interest in the business rescue plan. And, as highlighted by the Court, the provision doesn’t require the plan to reference post-commencement creditors, either.’
Third, section 145 of the Act, which establishes how creditors’ voting interests must be determined during business rescue, does not include post-commencement creditors. Instead, it expressly mentions secured creditors with ‘a voting interest equal to the value of the amount owed to that creditor by the company’. While the section does not explicitly distinguish between categories of creditors, ‘owed to that creditor by the company’ – read with section 150 – supports the exclusion of post-commencement creditors.
In addition, section 145(1)(c) of the Act entitles each creditor to formally participate in business rescue proceedings ‘to the extent provided for in [Chapter 6]’, which further undergirds the interpretation that post-commencement creditors are barred from voting.
Taken together, these legislative provisions – assessed against the wider backdrop of the established insolvency law regime – confirm that the business rescue plan is ultimately structured around the body of creditors that existed at the commencement of such proceedings.
The practicalities underpinning the restriction
Acknowledging the critical importance of the commencement date for establishing voting interests, Grundlingh pinpoints the commercial impracticalities of not excluding post-commencement creditors: ‘Without the limitation, voting interests would continually change with the incurrence or reduction of post-commencement claims.’
Hougaard agrees. ‘If new debts constantly altered the voting constituency, administering the voting process would become substantially more difficult and may further complicate the objectives of business rescue,’ says the experienced litigation attorney.
Moreover, the ConCourt warned that extending voting rights to post-commencement creditors could enable speculators to ‘prey’ on proceedings and utilise their financial power to block appropriate rescue plans, which could potentially force companies into avoidable liquidation.
Importantly, these considerations are reflected in the insolvency law frameworks of foreign jurisdictions. Noting the SCA’s erroneous rejection of foreign law guidance, the ConCourt recognised that Singapore, India, the United Kingdom, and other jurisdictions with similar business restructuring regimes similar to South Africa, also bar post-commencement creditors from voting. ‘As a matter of policy, the Court found no reason to construe the position in South Africa any differently,’ notes Hougaard.
Striking a balance: Section 135 of the Companies Act
Acknowledging the importance of post-commencement financing, the ConCourt highlighted the statutory protection afforded to post-commencement creditors under section 135 of the Companies Act. This provision, which establishes preferential treatment for qualifying post-commencement finance and other specified claims arising during business rescue, is designed to encourage creditors to extend funding.
In this respect, ‘the Court recognised the significance of new finance but it located these financiers’ protection in the Act’s priority regime rather than the vote’, contends Grundlingh. Similarly, creditors with eligible pre-commencement claims don’t acquire additional voting interests for advancing further finance.
Indeed, it would prove illogical to grant post-commencement creditors a preferential claim under section 135 of the Act if the business rescue plan could suspend or terminate that claim. Instead, this statutory preference, which is preserved during liquidation (subject to liquidation costs), strongly promotes lending to ensure the recovery of financially distressed companies.
For Hougaard, enabling post-commencement creditors to vote on a plan addressing pre-existing debts may ‘undermine the balance intended by the legislation’. Furthermore, the ConCourt deemed it inconsistent to afford post-commencement financiers statutory preference while permitting the process to compromise the very claims receiving that protection.
Why did the business rescue plan still fail?
Notwithstanding the appellants’ success on the legal interpretation of a ‘creditor’, the ConCourt concluded that the July 2023 plan was not validly adopted in light of the material irregularities raised by the business rescue practitioner and the uncertainty surrounding the final tally.
Unlike the SCA, the ConCourt expressly ordered remittal to the business practitioner – supported by a holistic reading of the Act – for a fresh vote, with only eligible creditors permitted to participate.
What does the ruling mean for business rescue in South Africa?
The judgment provides greater certainty about who may vote on a business rescue plan, while carrying important implications for the structuring and protection of finance advanced to financially distressed companies.
Although the Constitutional Court reasoned that post-commencement finance claims are intended to retain their statutory protection rather than be compromised through the business rescue plan, preferential ranking does not guarantee repayment.
For Grundlingh, this makes the availability of security and the terms of financing arrangements particularly important:
‘On the plus side, financiers now have better clarity on where their protection lies. Rather than relying on voting rights, lenders should carefully consider the statutory preference afforded to their claims and the contractual safeguards available to them.’
To that end, the Court expressly recognised that post-commencement creditors may protect their interests through contractual provisions, which includes making funding conditional on the approval of a business rescue plan acceptable to them. Depending on the circumstances, lenders may also seek the implementation of finance thresholds, reporting obligations, and drawdown conditions. Such arrangements, however, are subject to applicable law and don’t confer statutory voting rights.
For lenders holding both pre- and post-commencement claims, maintaining a clear division between the two is imperative, with post-commencement advances receiving the protections contemplated by section 135 of the Act. Consequently, structuring appropriate commercial safeguards remains crucial. In particular, Hougaard emphasises the need to correctly establish pre-commencement claims, which ‘must be properly submitted, admitted, and accurately reflected in the voting schedule.’
For business rescue practitioners, the ruling reinforces the importance of identifying eligible creditors, verifying their claims and voting interests, and maintaining an accurate voting process. It also prevents creditors from increasing their voting power merely by advancing additional finance once business rescue commences.
‘In this regard, the judgment reinforces a clear distinction between protecting those who support its continuation and allowing the identified pre-commencement creditor body to decide the plan, which is vital to the integrity of the whole process,’ concludes Grundlingh.
Conclusion
The Constitutional Court’s ruling brings much-needed clarity to the balance between creditors’ voting rights and the protection of post-commencement finance. However, it also reinforces a critical lesson: In business rescue, how claims are structured, protected, and accounted for can be just as vital as the rescue plan itself. For lenders, creditors, and business rescue practitioners, the legal implications warrant careful consideration.
At STBB, our experienced insolvency and restructuring team can assist with queries on financing, navigating, or managing a business rescue.
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