In a far-reaching recent judgement handed down in the South Gauteng High Court the Wescoal Mining (Pty) Ltd Another v Mkhombo NO and Other (2023-079991)  ZAGPJHC 1097 (2 October 2023) the meaning of the term “creditor” was interpreted for purposes of the business rescue provisions of the 2008 Companies Act (“the Act”).
The judgement will have a significant impact on the rights, structure and possible availability of post-commencement finance in business rescue proceedings. The court has in the meantime granted leave to appeal, which means that the Supreme Court of Appeal will have an opportunity to provide clarity and certainty to the issue.
The Westcoal – Judgement
During the business rescue of a coal mining company, Arnot Opco (Pty) Ltd (“Arnot”), a dispute arose about whether a business rescue plan was properly adopted at a meeting. Section 152 (2) (a) of the Act requires that a business rescue plan must be supported by the holders of at least “75% of the creditors’ voting interests that voted” at a meeting to approve the proposed plan.
Two groups of creditors of Arnot voted at the meeting. The first was Mashwayi Projects (Pty) Ltd (“Mashwayi”), which obtained its claim by way of cessions from various of Arnot’s creditors. Mashwayi was also a lessee of some of Arnot’s rail allocation. Although the judgement contained very little information on the exact nature of the claims, it was common cause that Mashwayi was a post-commencement creditor of Arnot. The second group of creditors included Wescoal Mining (Pty) Ltd (“Wescoal”) and Salungano Group Ltd (“Salungano”), who were both creditors when the business rescue proceedings commenced.
The question before the court was whether the Act intends to extend the right to vote in a meeting called under section 152 only to the company’s existing creditors at the commencement of the business rescue, or whether post-commencement creditors may also vote on a business rescue plan.
After interpreting sections 145 and 128 of the Act, the court found that only creditors who were creditors at the commencement of business rescue proceedings were entitled to vote on the business rescue plan in terms of section 152.
The court stated that there were “several indications from the text of the statute” supporting the court’s interpretation that only creditors at the commencement of the business rescue proceedings are allowed to vote on a business rescue plan. These indicators were the following:
- The definition of “affected persons” in section 128 includes “creditors” with other interested groups such as employees and shareholders. The court was of the view that this is an indication that the persons affected by the commencement of the business rescue should engage with each other to rescue and rehabilitate the business. The court was of the view that this was in “conformity with the overall purpose of business rescue: to preserve the social value of a business as going concern and avoid the destruction of that value…”. The court mentioned that if a post-commencement creditor could vote it would lead to a situation where asset strippers could prey on companies in business rescue to force them into liquidation.
- Section 150(2(a)(ii) which determines the contents of a business rescue plan states that “a complete list of creditors of the company when the business rescue proceedings began” [my emphasis] must be included in the plan. The court was of the view that this was a clear indication that the post-commencement creditors did not have a voting right in terms of section 152, because section 152 does not make mention of post-commencement creditors.
- Section 135 provides for post-commencement finance, but the section does not refer to “creditors” but only to “lenders”. The court was also of the view that the “preference” created by s135(4) provides PCF providers with “enhanced security” to the post-commencement creditors.
- The binding nature of the business plan which is created in section152(4) and the moratorium placed on further claims after the approval of the plan in terms of s150(2)(b)(i), confirmed the court’s view that it would be nonsensical to afford a post-commencement financier with a “preferent claim against the company in terms of section 135, if that claim could suspend or extinguished under business rescue plan.”
The court’s findings and reasoning create more questions than answers on the rights of post-commencement providers in the business rescue process. Unfortunately, the court makes some sweeping statements on a complex issue that impacts the rights of post-commencement creditors. These creditors are considered by the court as a bunch of asset strippers, whose only real goal is the liquidation of the company. This view is however problematic, as post-commencement finance is of the utmost importance to a successful business rescue process and the success of business rescue process.
Furthermore, Dr Levenstein makes a valid distinction in “South African Business Rescue Procedure” between post-commencement financiers who provide finance on condition that the business rescue plan be adopted and those who provide unconditional finance before the adoption of the plan. He is of the view that the latter group of financiers should be allowed to vote on the plan and not the former group of financiers.
Furthermore, it appears that the court misconstrues the purpose of PCF. While it is considered to be the lifeblood of business rescue, the court considered them to be well-protected creditors, even though the “protection” is limited to (a tedious) preference should the business rescue proceedings end up in liquidation proceedings.
Lastly, the court merely states that Mashwayi is a post-commencement creditor, but it is not clear from the judgment whether Mashwayi obtained its claim by taking cession of pre-commencement creditors’ claims. If Mashwayi obtained (even some of its claims) by way of cession from the pre-commencement creditors it should also be considered as the pre-commencement creditor, in particular for purposes of voting in terms of section 152.
This matter needs to be heard by the Supreme Court of Appeal to give clear directions to business rescue practitioners and post-commencement financiers on what exactly the rights are during the business rescue process. The post-commencement finance is the backbone of the business rescue process, but the current judgement will make it very difficult to convince possible financiers to put up money if they have no say in the business rescue proceeding with only the scant consolation that they enjoy limited preference should the business rescue proceedings be replaced with liquidation.
By Hugo van Heerden
Director at Hayes Inc.
Read the full judgment here: https://www.saflii.org/za/cases/ZAGPJHC/2023/1097.html.