SCA confirms that post-commencement creditors are allowed to vote on business rescue plans

Issue before the SCA

The primary issue before the SCA, was whether, on a proper Interpretation of the relevant provisions of Chapter 6 of the Companies Act 71 of 2008 (the Act), post-commencement creditors may vote on a business rescue plan. The High Court's judgment, that only pre-commencement creditors are entitled to such voting rights, was contentious with the views of legal and academic writers being divided on the issue.

SCA's findings

The SCA held that similar statutes in foreign jurisdictions were not helpful in interpreting the Act, as those foreign statutes are informed by particular policy considerations and socio-economic factors which do not necessarily apply in South Africa.  The SCA emphasized that a grammatical, contextual and purposive unitary approach to interpretation is required.

The SCA noted the context and purpose of the relevant provisions of Chapter 6 are found in section 5, which provides that the Act must be Interpreted and applied in a manner that gives effect to the purposes of the Act as set out in section 7.  Section 7 of the Act in turn provides that one of the purposes of the Act is it is to provide for the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders. With this in mind, the language used in the relevant provisions of the Act are relevant, and the SCA found it apposite to start the analysis with the concept of 'creditor' and to determine whether the provisions of Chapter 6 impose a limitation on the entitlement of certain creditors to vote on a business rescue plan.

The SCA found that the absence of a specific definition of 'creditor' is an indication that the Legislature did not contemplate a specific meaning other than the ordinary grammatical meaning of the word; that a creditor is a person or entity to whom an unpaid debt is due.  As regards to post-commencement financiers, the SCA noted that section 135(2)(a), in relevant part, provides that 'financing may be secured to the lender by utilising any asset of the company to the extent that it is not otherwise encumbered', and that a 'lender' is but a sub-category of 'creditor'.

The SCA considered the relevant provisions of Chapter 6 of the Act, and amongst those sections were sections 151(1) and 152, which deals with a meeting to consider a business rescue plan and how voting on a business rescue plan should be conducted.   The SCA found that the Act placed no limitation on the word 'creditor' and the Legislature has not seen fit to exclude post-commencement creditors.  In fact, the SCA found that, to import a limitation of the word 'creditor' to mean only pre-commencement creditors, would strain the meaning of the text and lack merit.

Ultimately the SCA held that absent the Act drawing any distinction between pre-commencement creditors and post-commencement creditors, they are, as stakeholders, deserving of equal protection under s 7(k) of the Act. As such, post-commencement creditors are equally entitled to vote on the adoption of a business rescue plan. 

Conclusion

IWIRC Southern African Network NPC, as amicus curiae, and represented by Advocate Lizelle Acker, used the analogy of passengers climbing on and off a bus that is heading towards its destination – some passengers may get off at different stops while new passengers get on.  If the bus breaks down it will not affect those passengers who got off at their respective bus stops, but it will most certainly affect the passengers that remain on the bus (whether they got on the bus at the departure point or at another bus stop). 

Creditors in a business rescue are, in this respect, not too dissimilar to the passengers of a bus.  If a post-commencement creditor remains on the bus with other pre-commencement creditors by the time the business rescue plan is put to a vote, then all the creditors that remain on that "bus" at that stage should vote on the future of the company.  And, the SCA agrees!