In the recent case of Mashwayi Projects (Pty) Ltd and Others v Wescoal (Pty) Ltd and Others, an important debate on the interpretation of section 152(2) of the Companies Act and the right of post-commencement creditors to vote on a business rescue plan was decided. The debate stemmed from a High Court judgement which held that only pre-commencement creditors were entitled to vote on a business rescue plan.
Factual Background:
In order to understand the importance of this debate, a brief factual background of the matter is imperative. On 23 August 2023, Wescoal Mining, a JSE-listed coal mining company (now subsequently known as Salungano) instituted business rescue proceedings against Arnot Opco, a joint venture formed between Wescoal and Arnot (“Arnot”). Additional creditors of Arnot include Mashwayi Projects, a construction materials wholesaler, and Ndalamo Coal, a 100% black owned mid-tier coal producer focused on mining investment opportunities in the South African mining sector.
On 10 October 2022, the High Court placed Arnot under compulsory business rescue and Mr Phahlani Mkhombo was appointed as the Business Rescue Practitioner. The business rescue plan was published on 29 June 2024 and the meeting in terms of section 151, to consider the plan and vote thereon, was convened on 28 July 2023. In terms of the proposed business rescue plan, four proposed options for the rescue of the Arnot were placed before creditors, namely -
- to expend capital on refurbishing facilities and running Arnot’s business;
- for the sale of Arnot as a going concern, the free residue of which would be used to settle creditors’ claims (if such proposal was voted on, creditors would have to vote on four alternative purchase offers, one of which was proposed by Ndalamo);
- to reject the business rescue plan; or
- to abstain from voting.
In terms of the Companies Act, specifically section 152(2)(a), a proposed business rescue plan will be approved on a preliminary basis if it is supported by the holders of more than 75% of the creditors’ voting interests that voted, and the votes in support of the proposed plan include at least 50% of the independent creditors’ voting interests, if any, that voted.
The creditors in this matter voted for the applicable proposal electronically through email and WhatsApp. After the counting of the votes cast at the meeting, the practitioner’s representative declared that 75.4% of the voting interest present, 50% + 1% of whom were independent creditors, had voted in favour of Option B. After tabling the four offers, 88% of the parties present voted in favour of Ndalamo’s offer.
A forensic accountant was appointed by the business rescue practitioner after the meeting to verify the tallying of the votes. In terms of the report produced, the forensic accountant noted errors which had occurred during the tallying of the votes.
These errors included the double counting of certain votes, the failure to consider emails revoking votes, certain creditors voted as a group and later cast a separate vote, and certain proxies were received late and not taken into consideration. After these errors were taken into consideration by the forensic accountant, it was held that the necessary 75% threshold had not been met for the adoption of the business rescue plan. The forensic report produced reflected that only 72.2% of creditors voting interests voted in favour of Option B. That figure was later amended to 70.5%.
Based on these miscalculations, the business practitioner notified creditors, on 4 August 2023, that the threshold of 75% had not been achieved. Therefore, Ndalamo’s offer had not been properly accepted. The business rescue practitioner invited creditors to inform him whether they objected to the proposed publication of a revised plan on the basis that the plan had not been validly adopted under s 152(2) of the Companies Act. Wescoal and Salungano subsequently objected on the basis that the statutory threshold had been met and that the plan had been validly adopted.
High Court Ruling:
Wescoal and Salungano, along with Ndalamo, then proceeded to launch urgent court proceedings seeking declaratory orders that the plan was adopted. Mashwayi Projects, Arnot and the business rescue practitioner on the other hand brought counter-applications seeking declaratory relief that the plan was not validly adopted. With two opposing sides, the High Court was tasked in deciding whether Mashwayi Project’s vote as post-commencement creditor should have been considered. It was common cause that had Mashwayi Project’s vote been excluded, the relevant 75% threshold would have been met and the plan validly adopted.
The High Court interpreted the relevant provisions of Chapter 6 of the Companies Act to conclude that the voting interests under section 152 of the Act only applied to those who were creditors of the entity under business rescue at the time the business rescue process commenced, i.e. that post commencement creditors did not have a voting interest. Therefore, in terms of the High Court Judgement, the business rescue plan was validity adopted.
The High Court’s reasoning for its conclusion in the main application aligned with Wesoal, Salungano and Ndalamo’s submissions, inter alia, as follows –
- The absence of an express reference to post-commencement creditors and their voting interest in the relevant provisions of the Act meant that they were excluded and had no voting interest.
- Relying on the interpretation of the word “creditor” in terms of insolvency law, which interpretation only includes creditors as at the date when “concursus creditorium” is achieved, they contended that only pre-commencement creditors were entitled to a voting interest.
- A balancing of stakeholders’ rights supports their interpretation as it would be untenable for post-commencement creditors, whose claims were not compromised by a business rescue plan, to potentially outvote and limit the claims of pre-commencement creditors. It was submitted that this would amount to an arbitrary deprivation of property under S 25 of the Constitution.
Supreme Court of Appeal:
Unhappy with the decision, Mashwayi Project’s, the business rescue practitioner and Arnot appealed (the Appellants) to the Supreme Court of Appeal, submitting that post-commencement creditors were entitled to vote on a business rescue plan. In addition, they contended that the high court’s reasoning was at odds with the relevant provisions of Chapter 6 of the Companies Act and that it did not align with its text, which contained no provisions excluding or limiting post-commencement creditors’ rights to a voting interest. Such interpretation by the High Court, according to the Appellants, disregarded commercial realities and would have an unbusinesslike result which would inevitably discourage post-commencement financing critical to the rescue of companies in financial distress. Therefore, to treat post-commencement creditors differently, would implicate the equality provisions of the Constitution and erode their property rights.
Wescoal, Salungano and Ndalamo, however, contended the opposite. In their arguments, they held that the word ‘creditor’ should be interpreted with reference to insolvency legislation. The absence of an express reference to post-commencement creditors and their voting interest in the relevant provisions of the Companies Act meant that they were excluded and had no voting interest. They further stated that a balancing of stakeholders’ rights supported their interpretation as it would be untenable for post-commencement creditors, whose claims were not compromised by a business rescue plan, to potentially outvote and limit the claims of pre-commencement creditors. To do so, would amount to an arbitrary deprivation of property under section 25 of the Constitution.
The Supreme Court of Appeal held that although post-commencement finance creditors enjoyed a preference in ranking under section 135(2), as read with s 135(3) of the Companies Act, there is no indication in the text that post-commencement creditors’ rights are limited to such preference or that the preference adequately safeguards their position. The absence of a specific reference to post-commencement creditors in section 145 and section 150 of the Companies Act does not evidence any intention on the part of the Legislature to exclude them or to limit their rights. Voting interest, as defined in section 145 of the Companies Act expressly grants each creditor various rights. There is no limitation placed on which creditors are afforded those rights.
It was based on the above reasoning that the Supreme Court of Appeal ruled that Wescoal, Salungano and Ndalamo arguments around the interpretation of the Companies Act lacked merit in that it ignored what the Companies Act expressly provided for in respect of creditors and their rights. Therefore, the business rescue was effectively not adopted/ approved in line with section 152 of the Companies Act. The SCA’s judgment is welcomed as it has not only removed inconsistency regarding the interpretation, in practice, by different business rescue practitioners of the meaning of the word “creditors” in section 152 of the Companies Act, it has ensured that the parties that can be considered the lifeline of business rescue proceedings, i.e. PCF creditors, are acknowledged as such and bestowed with associated voting interest. This is a positive step, and we expect that this will result in PCF becoming more accessible.
