Who gets a say? SCA's final word on creditor voting rights in business rescue

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A dispute pertaining to the adoption of the business rescue plan of Arnot Investco (in business rescue) arose after the results of the voting on the plan came into question. The court was faced with determining two issues – one legal, and one factual.

The legal issue to be determined was whether, on a proper interpretation of the relevant provisions of Chapter 6 of the Companies Act, post-commencement creditors may vote on a business rescue plan. The factual question was whether the business rescue plan presented to the creditors was properly adopted in accordance with section 152 of the Companies Act.

The legal question

This article focuses only on the legal question. Controversially, the court a quo held that only pre-commencement creditors were entitled to exercise voting rights in respect of a business rescue plan. The High Court interpreted the relevant provisions of Chapter 6 of the Companies Act and concluded that voting interests under section 152 are assigned only to creditors who were creditors as at the commencement of the business rescue proceedings.

In upholding the appeal against the judgment of the High Court, the SCA inter alia considered the correct interpretation of the term ‘creditor’, and whether the absence of an express reference to post-commencement creditors in various sections of the Companies Act means that those sections apply only to pre-commencement creditors.

The appellants contended that the interpretation adopted by the High Court disregarded commercial realities and had an unbusinesslike result. The appellants contended further that the High Court’s interpretation would inevitably discourage post-commencement financing, which is often a critical component in the rescue of financially distressed companies.

Conversely, the respondents contended inter alia that the word ‘creditor’ should be interpreted with reference to insolvency legislation, and that post-commencement creditors hold no voting rights as Chapter 6 of the Companies Act does not contain an express reference to post-commencement creditors and their voting rights.

Defining 'creditor'

The SCA analysed the concept of a ‘creditor’ with reference to various provisions in Chapter 6 and the contentions of the parties, and inter alia stated that:

• The term ‘creditor’ is not defined in the Companies Act and the absence of a specific definition indicates that the Legislature did not envisage that a specific meaning would be attributed to the term, other than the ordinary grammatical meaning (ie. that a creditor is a person or entity to whom an unpaid debt is due).

  The SCA recognised that even in the context of liquidation proceedings, the term ‘creditor’ is afforded its normal grammatical meaning. The term ‘lender’ as used in section 135, is merely a sub-category of creditor, and as such, should similarly be interpreted.

• Unless the Companies Act classified creditors and afforded them different or unequal rights, there is no basis to import, via interpretation, different or unequal rights. By way of a practical example, the Court highlighted the Legislature’s intention in differentiating between pre- and post-commencement claims of employees in terms of sections 144(2) and 144(3)(f).

  The Court went on to state that the general rights of post-commencement creditors are not regulated or limited in a similar way by the Companies Act, and had the Legislature intended to differentiate between pre- and post-commencement creditors in a similar way, it would have done so.

• The contention that ‘creditor’ should be defined with reference to the insolvency legislation is misconceived. The Court recognised that the contention is based on the fact that only creditors with claims as at the institution of the concursus creditorum are entitled to exercise voting rights.

  However, the Court pointed out that business rescue and liquidation are distinct and separately regulated processes and found that using the meaning ascribed to terms in one piece of legislation as determinative in other legislation is not permitted. The Court also pointed out that the concept of a concursus creditorum does not find application in business rescue, and that the distinction between pre- and post-commencement creditors is less pronounced and need not be made in business rescue.

• The SCA further considered the context and purpose of Chapter 6 which is contained in sections 5 and 7 of the Companies Act.

  The Court had specific reference to section 7(a), which provides that the purpose of the Companies Act is to ‘promote compliance with the Bill of Rights as provided for in the Constitution’ as well as section 7(k), which provides that the purpose of the Companies Act 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’.

  The SCA stated that the word ‘stakeholders’ is not confined to a particular category and refers to persons who have an interest in the company.

No distinction

In summary, the SCA found that:

• The Legislature elected not to draw any distinction between pre- and post-commencement creditors or to deprive the latter from the right to vote.
• The omission of a specific reference to post-commencement creditors means that the Legislature purposefully elected not to draw the distinction between pre- and post-commencement creditors. Imposing a limitation on the term would require a reading-in, which would not be justified.

Ultimately, the SCA held that, absent a distinction between pre- and post-commencement creditors in the Companies Act, post-commencement creditors are ‘stakeholders’, deserving of equal protection under s 7(k) of the Companies Act. Accordingly, post-commencement creditors are equally entitled to vote on the adoption of a business rescue plan.