In the Mashwayi case, Arnot Opco (Pty) Ltd (“Arnot”) entered business rescue at the instance of one of its creditors Wescoal Mining (Pty) Ltd (“Wescoal Mining”). A meeting of creditors was held to adopt a business rescue plan which afforded pre- and post- commencement creditors the right to vote on this plan. The dispute centred around whether the vote of Mashwayi Projects (Pty) Ltd (“Mashwayi Projects”) a post-commencement creditor in the business rescue proceedings should have been excluded.
Section 152(2)(a) of the Companies Act 71 of 2008 requires that a business rescue plan must be supported by the holders of at least 75% of the creditors’ voting interest that voted. It was held that if Mashwayi Projects had been excluded from voting, a 75% threshold would have been met, and the business rescue plan would have been validly adopted.
Wescoal Mining approached the High Court to determine whether Mashwayi Projects’ vote as a post-commencement creditor should not have been counted. The High Court ruling however held that a post-commencement creditor’s vote should not have been taken into account.
Mashwayi Projects took the matter on appeal and argued that the court a quo’s decision to exclude post-commencement creditors’ votes overlooked commercial realities, which as a consequence discouraged post-commencement financing which was critical to the rescuing of companies in financial distress. Wescoal Mining on the other hand argued that the term creditor should be interpreted with regard to insolvency legislation, where there is an absence of an express reference to post-commencement creditors, and that post-commencement creditors should accordingly not have the right to vote on business rescue plans.
As the Companies Act does not make specific provision for the term “creditor” the SCA focused on addressing the long-standing uncertainty of whether the term creditor under business rescue proceedings included post-commencement creditors.
The Court had to interpret whether the express absence of the term post-commencement creditor in various sections of the Companies Act meant that “creditor” was only applicable to pre-commencement creditors. The intention of the legislature was considered, and it was determined that “creditor” is not limited to pre-commencement creditors as the legislature would have made a specific distinction between these two types of creditors.
The SCA therefore set aside the High Court’s order and held that post-commencement creditors have a right to vote on business rescue plans and that in the Mashwayi Projects case, the 75% voting threshold was not met and the plan was therefore rejected.
This judgment provides clarity to all participants in business rescue regarding the voting rights of post-commencement creditors. Importantly, the SCA reiterated that the purpose of business rescue is to save entities which are failing and to avoid liquidation and that post-commencement creditors play a pivotal role in achieving the objectives of business rescue and that they have an equal right to vote regarding a financially distressed company’s business rescue plan.
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