Late last month, the Supreme Court of Appeal (‘the SCA’) settled a long-standing legal debate: Within the scope of business rescue proceedings, which is regulated under Chapter 6 of the Companies Act (‘the Act’), the term ‘creditor’ embraces both pre-commencement and post-commencement creditors. Accordingly, post-commencement creditors are permitted to vote on a financially distressed company’s business rescue plan.
In Mashwayi Projects (Pty) Ltd v Wescoal (Pty) Ltd, which concerned a dispute centring on the voting results of a company’s business rescue plan, the SCA was tasked with ascertaining whether Parliament’s failure to expressly distinguish between pre-commencement and post-commencement creditors in numerous provisions of the Act limits the voting rights to the former.
What did the High Court find?
In adjudicating the matter, the High Court adopted a controversially narrow approach. In interpreting the provisions governing business rescue proceedings under Chapter 6 of the Act read with section 152 of the same statute, which regulates the consideration of the business rescue plan by creditors, the court a quo found that voting rights are limited to creditors who were creditors when business rescue proceedings commenced.
What did the parties contend?
On appeal, the appellants argued that the High Court ruling ignored commercial practicalities, generates an ‘unbusinesslike result’, and ultimately depresses post-commencement financing, which is essential to the recovery of financially distressed entities. Further, they alleged that the differential treatment of these categories of creditors may violate their constitutional rights to equality and property.
Relying on the absence of an express statutory reference to post-commencement creditors, the respondents contrastingly averred that such creditors do not have voting rights. Arguing that ‘creditor’ should be interpreted in line with insolvency legislation, the respondents reasoned that balancing the rights and interests of stakeholders requires limiting voting to pre-commencement creditors. From this perspective, permitting post-commencement creditors to vote on a financially distressed company’s business rescue plan enables them to ‘potentially outvote and limit the claims of pre-commencement creditors’ when their claims were not ‘compromised’ by the implementation of the business rescue plan. To that end, the respondents argued that an alternative interpretation would constitute arbitrary deprivation of property under section 25 of the Constitution.
What did the SCA determine?
After examining the concept of ‘creditor’ within the broader context of Chapter 6 of the Act, the SCA found that Parliament did not intend to draw a distinction between pre-commencement and post-commencement creditors, which would deprive the first category of creditors from voting on a business rescue plan.
In reaching this decision, the SCA considered stakeholders’ constitutional rights and section 7(k) of the Act, which describes the purpose of the law as ‘provid[ing] for the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders.’
Crucially, the SCA interpreted ‘stakeholder’ widely to mean ‘persons who have an interest in the company.’ Accordingly, stakeholders include post-commencement creditors and are thus entitled to equal protection under section 7(k) of the Act. As such, they may vote on the adoption of a financially distressed company’s business rescue plan, putting to rest a long-standing debate and offering certainty to business rescue practitioners, creditors of financially distressed companies, and attorneys.
At STBB, we have extensive expertise in the sphere of corporate and commercial law, which enables us to advise on a plethora of company-related matters. Moreover, our litigation specialists have ample experience in the insolvency and restructuring arena.
Need expert legal advice or assistance? Contact our commercial attorneys at commercial@stbb.co.za and our insolvency lawyers at litigation@stbb.co.za.
