By Brandon Cole (6 June 2024)
In the pivotal judgment of Wescoal Mining (Pty) Ltd v Mkhombo N.O and Others ((2023-079991) [2023] ZAGP JHC 1097; 2024 (2) SA 563 (GJ) (2 October 2023)), the Johannesburg High Court has taken a significant stance on the rights of post-commencement creditors in business rescue proceedings, particularly concerning their ability to vote on a business rescue plan as outlined in Section 152 of the Companies Act 71 of 2008 (“the Act”). This judgment has critical implications, particularly for creditors providing post-commencement financing to companies undergoing business rescue, as well as those seeking the adoption of a business rescue plan.
The dispute at issue was centred around a business rescue plan for Arnot Opco (Pty) Ltd (in business rescue) (“Arnot”), a major coal mining company. The plan was initially approved at a creditors meeting on 28 July 2023. However, in the days following the meeting, the business rescue practitioner began to doubt the accuracy of the initial vote tally. After a forensic re-evaluation of the votes, which excluded post-commencement votes, it was revealed that the required 75% threshold for approval of the plan was not met and the business rescue practitioner subsequently revoked the approval of the plan. Importantly, in the event that post-commencement creditor Mashwayi’s votes had been tallied, the 75% threshold would have been met.
Section 152(2) of the Act stipulates that a business rescue plan must receive at least 75% of the creditors’ voting interests of creditors present at the meeting to be adopted. A key aspect of this provision is to determine who qualifies as a “creditor” with voting rights.
The Act, however, has no definition for the word “creditor”, which the learned Judge highlighted as a concern, and which meant the question had to be answered by an act of judicial interpretation. The court found that, evaluated as a whole, chapter 6 of the Act did not intend voting rights under section 152 to apply to post-commencement creditors.
The court was of the view that allowing post-commencement creditors to vote could lead to potential manipulations of the business-rescue process by entities that might not have actual, long-term stakes in the company’s survival.
It was determined that the intention behind the Act is to protect the company from liquidation and to ensure its survival, which might be compromised if newer creditors could influence the outcome of rescue plans disproportionately.
There is no doubt that post-commencement finance is (and will remain) of cardinal importance in business rescue by providing fast-tracked funding at critical stages when very few other finances are willing to do so. Up until now, post-commencement funders have relied on and understood that their post-commencement claims will rank above all unsecured claims and that they will be able to vote on a business rescue plan.
The judgment may very well cause hesitancy for post commencement financiers who might need to consider alternative measures to safeguard their investments in companies under business rescue. This hesitancy or possible decline in post-commencement financing may potentially lead to exactly what the learned Judge was attempting to avoid—company’s in business rescue entering liquidation The matter has been taken on appeal and will need to be closely monitored by post commencement creditors and business rescue practitioners.
The ability of post-commencement financiers to vote on a plan hangs in the balance, as chapter 6 of the Act continues to be ironed out by judicial interpretation. Understanding the nuances of who gets to vote on rescue plans is crucial for navigating this complex area.
