“The Companies Act, No. 71 of 2008 confers a statutory priority to the claims of post-commencement financiers over certain other creditors and allows the distressed company to use its assets as security for the loans,” explained Nick Veltman, co-founder and director at Beech Veltman Inc.
“One benefit not expressly provided for in the Act, which has developed in practice and is typically 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,” he added.
An opposing view was brought to the fore in the matter of Wescoal Mining (Pty) Ltd & Another v Mkhombo NO & Others. In its ruling on 2 October 2023, the South African High Court 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.
In this case, 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%,” explained Veltman, “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 The earlier declaration that the plan had been adopted was revoked.”
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’s votes against the plan should not have been counted, and that if those votes were excluded from the tally, the plan would have achieved the 75% threshold. They argued that a post-commencement financier only becomes a creditor of the business rescue company after the business rescue process commences and that, on the proper interpretation of the Act, post-commencement financiers are not creditors with voting interests in the approval of a plan.
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,” Veltman said. “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.”
Among other indicators of this position, the Court pointed out that section 135 of the Act does not describe the post-commencement financiers as “creditors”, but rather as “lenders”. The Court held further that post-commencement financiers are rewarded with other enhanced security and not a say in whether the business rescue plan should be adopted.
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