The precarious position of the voting rights of post commencement creditors

The rescue of a company in business rescue ultimately depends on the implementation of a viable business rescue plan which has received the support of 75% of the creditors of the company. A recent business rescue case of Wescoal Mining (Pty) Ltd Another v Mkhombo NO¹ and Other has potentially wide-ranging implications for creditors after business rescue has commenced. 

At the heart of the case was the approval of a business rescue plan for Arnot Opco Proprietary Limited, aimed at selling the company to Ndalamo Coal Proprietary Limited. However, the approval process was marred by disputes over the validity of certain creditor votes, particularly those of a post-commencement creditor, who had acquired the claims of other creditors after the commencement of business rescue.

To briefly summarise the case, the business rescue plan appeared to have garnered the necessary creditor approval at a meeting held on 28 July 2023, however the business rescue practitioner, concerned that the tally of the votes was improperly counted, requested for the votes to be forensically re-counted. The subsequent re-evaluation revealed that the votes counted at the July meeting did not meet the statutory threshold of 75% as one post-commencement creditor's vote was included in the tally. The court reasoned that post-commencement creditors are not creditors as contemplated in Chapter 6 of the Companies Act and are therefore not entitled to vote on a business rescue plan. Below are some of the bases the court relied on:

• firstly section 150(2)(a)(ii) of the Companies Act which requires that a business rescue plan contain "a complete list of the creditors of the company when the business rescue proceedings began". The court held that the express exclusion of post-commencement creditors in that section only makes sense if those creditors have no voteable interest in the plan;
• secondly the judge reasoned that the definition of affected persons should be interpreted to refer to those people who are "affected" by the business rescue itself and if post-commencement creditors were allowed to vote, there would be little to stop speculators or asset strippers preying on business rescue proceedings, blocking the adoption of appropriate business rescue plans, and forcing liquidations where they could be avoided; and
• finally, the court noted that section 135 of the Companies Act dealing with post commencement finance refers to "lenders" and not "creditors" indicating that post-commencement financiers are not to be treated as the type of "creditor" to which business rescue would apply. The court found that that post-commencement finance creditors are rewarded with enhanced security rather than the right to vote on business rescue plans.

The judgement has some implications this includes on the business rescue process and the treatment of post-commencement creditors:

1. Acquisition of Pre-Business Rescue Claims
Any person who acquired the claim of a pre-business rescue creditor, after the company went into business rescue is not a creditor entitled to vote on the business rescue plan. The effect of the court's decision to exclude individuals or entities acquiring the claims of pre-business rescue creditors means that potential funders of distressed companies will have no voting rights which attach to claims acquired by them. 

It is common for interested third parties to acquire claims in distressed companies to gain a seat at the table and assist in the restructuring or rescue of the company after the commencement of business rescue proceedings.  Disenfranchising those creditors because their claims have been acquired after business rescue will most likely hamper the successful rescue of the company, by discouraging investment and participation in the rescue process.

2. Limited Scope of Pre-Business Rescue Claims

The narrow interpretation of creditors in business rescue as only those that exist up to the commencement of business rescue proceedings may overlook the evolving nature of creditors involvement and financial obligations during business rescue. Creditors may (and are often encouraged to) continue to extend credit or provide goods and services during the business rescue process, thereby accruing additional claims that should be treated the same as pre-business rescue claims. To not do so would inadvertently prejudice some creditors over others, noting that not all creditors who provide goods or services after the commencement of business rescue will be considered post-commencement lenders under section 135.

3. Exclusion of Post-Commencement Creditors

The court's stance on excluding post-commencement creditors from voting rights in business rescue proceedings overlooks their critical role in supporting the company's operations during restructuring. Post-commencement creditors often play a vital role in injecting liquidity and sustaining operations, thereby contributing to the company's prospects for recovery. Denying them voting rights undermines their stakeholder status and may disincentivise future financing, exacerbating the company's financial distress.

Further, the amount of post commencement finance is usually a fraction of the total pre-business rescue debt of the company and therefore a post-commencement creditor alone, would never be able to have the statutory percentage to approve a plan. Therefore, to deny those post-commencement creditors a vote would disincentivise post-commencement creditors who despite their ranking may be disproportionally prejudiced to other creditors.

The success of a business rescue process or plan is often dependent on the availability of post-commencement finance and therefore post-commencement creditors play a critical role in keeping the company afloat while rescue is being planned. 

The fact that post-commencement creditors may receive a priority ranking or even receive security should not in itself be sufficient to distinguish them so materially by removing their ability to vote on the business rescue plan. It is typical for post-commencement creditors to insist that they will receive a vote or that their post-commencement funding is taken into account in the business rescue plan. This judgment abruptly puts an end to that practice with potential severe implications for post-commencement creditors and other creditors who continue to support distressed companies. 

[1] Wescoal Mining (Pty) Ltd Another v Mkhombo NO and Other (2023-079991) [2023] ZAGPJHC 1097