The Companies Act, No. 71 of 2008, makes it as attractive as possible for post-commencement financiers to provide funding to distressed companies by conferring a statutory priority to the claims of financiers over certain (other) creditors and allowing the distressed company to use its assets as security for the loans.
One benefit not expressly provided for in the Act, which has developed in practice and included as part of the security package, is that a post-commencement financier can act as a company creditor in business rescue proceedings by voting on the business rescue plan and further act in terms of section 145 of the Act. There is an opposing view, which has been the subject of various debates. One view, however, has been preferred by the South African High Court.
This is the matter of Wescoal Mining (Pty) Ltd & Another v Mkhombo NO & Others (2023-079991) [2023] ZAGPJHC 1097 (2 October 2023) in which it has declared that the meaning of “creditor” for business rescue proceedings in Chapter 6 of the Act means a creditor who was a creditor of the business rescue company at the time that the business rescue proceedings commenced.
Creditors of the business rescue company brought an application to confirm that the business rescue plan voted on and adopted on a preliminary basis at a creditors’ meeting was valid, binding, and enforceable.
What had happened was that the vote of creditors on the plan at a creditors meeting seemed to have reached the statutory threshold of 75%, and the plan was declared to have been adopted; however, some days after, the vote tally was forensically re-evaluated and it was determined that the votes cast in favour of the plan did not reach the 75% threshold. The earlier declaration that the plan had been adopted was revoked, and a further creditors meeting was to be held.
A post-commencement financier opposed the application as it expected to receive little or no benefit from the transaction contemplated in the disputed plan.
The applicants contended that the post-commencement financier votes against the plan should not have been counted and that If the votes were excluded from the tally, the plan would have achieved the 75% threshold. The applicants argued that a post-commencement financier only became a creditor of the business rescue company after the business rescue process commenced and that, on the proper interpretation of the Act, post-commencement financiers were not creditors with voting interests in the approval of a plan.
It was not disputed that the post-commencement financier was indeed a post-commencement creditor. So, the ultimate question was whether a post-commencement financier may vote at a meeting under section 152 of the Act concerning the plan’s approval.
The Court answered this question by an act of interpretation. It held that the statute’s effect 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. Using this principle, the Court held several indications of the fact that the voting interests under section 152 of the Act only referred to creditors who were creditors of the business rescue company when the business rescue proceedings commenced.
This included, amongst others:
a) the definition of affected persons, in that the term creditors is included in this broader category, joining affected persons such as trade unions, employees and shareholders, being persons who are affected by the commencement of the business rescue process itself;
b) the Act requires that the plan contain a complete list of creditors of the business rescue company when the business rescue proceedings began, which automatically excludes post-commencement financiers, which only makes sense if post-commencement financiers have no votable interest in the plan;
c) where the Act could have made it clear that post-commencement financiers may have a voting interest, it fails to do so and
d) that section 135 of the Act did not describe the post-commencement financiers as “creditors” but as “lenders”. The Court was struck by this fact and held that the word choice was significant.
The Court held further that post-commencement financers are rewarded with other enhanced security and not a say in whether the business rescue plan should be adopted.
The court concluded with the sentiment that it would have appreciated more time to consider the issue but that it was a luxury it did not have, and the finding that creditors who vote an interest at a section 152 meeting must be pre-commencement creditors and that the Act, placed post-commencement financiers, in a different category, where it extended protection to their interest, in a different way.