In this article the author considers whether the creditors of a
company, which is placed under business rescue, can lose the
ranking status bestowed on them in terms of sections 95 to 103 of
the Insolvency Act 24 of 1936 (the Insolvency Act).
In terms of sections 95 to 103 of the Insolvency Act, there are
three distinct types of creditors, namely in descending order of
ranking, secured creditors who hold security for their claim over a
specific asset or assets of the company; preferent creditors whose
claims are not secured but that nevertheless rank above the claims
of concurrent creditors; and lastly, concurrent creditors who do
not hold any form of advantage over other creditors and are paid
out of the balance of the free residue of the estate.
The abovementioned debate, in the writer's opinion, would seem
to stem from section 154(2) of the Companies Act 71 of 2008
(hereinafter referred to as the Act) which provides:
"If a business rescue plan has been approved and implemented
in accordance with this Chapter, a creditor is not entitled to
enforce any debt owed by the company immediately before the
beginning of the business rescue process, except to the extent
provided for in the business rescue plan."
In terms of this section, once a business rescue plan has been
approved and implemented, the plan is binding on every creditor and
every holder of the company's securities, regardless of the
creditor's ranking, and in accordance with section 152(4) of
the Act regardless of whether the creditor was present at the
meeting where approval of the business rescue plan was put to a
vote, no matter whether they voted in approval of the proposed plan
and irrespective of whether they have proven a claim or not. In
addition every action that is taken in relation to the company from
that point onwards is to be made in accordance with the business
rescue plan.
A business rescue plan is in terms of section 150 of the Act,
prepared by the business rescue practitioner after he has consulted
with the creditors, affected persons and management of the company.
Section 152(2) of the Act then sets out the votes which are
required in order to approve the proposed plan. It states:
"In a vote called in terms of subsection (1) (e), the proposed
business rescue plan will be approved on a preliminary basis if
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(b) the votes in support of the proposed plan included at least 50% of the independent creditors' voting interests, if any, that were voted."
There is a distinction drawn between "creditors" and
"independent creditors", where an independent creditor is
defined as "a creditor of the company, including an employee
of the company who is a creditor in terms of section 144 (2) and is
not related to the company, a director, or the practitioner,
subject to subsection (2)".
This is where the debate arises. It could be argued that since the
approval of all the creditors, particularly that of the secured and
preferent creditors, is not required to approve and implement the
business rescue plan, a situation could arise where a secured
creditor, who failed to vote or who voted against the approval of
the implemented business rescue plan, despite his security could be
placed in a situation where he is unable to realise his security
and furthermore has no control over the use of the asset which is
the subject matter of his security during the period in which the
company is placed under business rescue. The issue which could
arise is the effect which this may have on the secured creditor in
two instances:
- if the plan requires all the creditors to compromise their claims, to a percentage lower than the recovery which the secured creditor could reasonably have expected in a liquidation; or
- if business rescue should fail and the company is thereafter placed in liquidation.
I shall use an example to illustrate the latter situation: The
company placed under business rescue is a flower shop. One of the
company's secured creditors holds security in the form of a
motor vehicle which is used for the delivery of flowers. The
secured creditor attends the meeting and votes against the approval
and implementation of the proposed business rescue plan. Despite
this, the plan is approved in accordance with section 152(2) and is
thus implemented. A term in the plan is that the motor vehicle,
which is the subject of the secured creditors' security, will
be used for double the amount of deliveries for which it has been
used in the past in order to save costs on purchasing a further
vehicle and paying another driver. The plan does not provide for
the sale of the motor vehicle and in terms of section 154(2), the
secured creditor may not realise the security. Despite the
implementation of the plan, the company is not salvageable and is
thus placed into liquidation. As a result of the motor vehicle
being used excessively during the implementation of the plan, it
has depreciated in value to a very large degree and thus the
secured creditor's security has now been depleted
substantially.
By the same token, the preferent creditors being SARS and employees
in an insolvency scenario, could potentially be outvoted by other
creditors and find their claims compromised under the business
rescue plan to a recovery lower than they would have received had
the company been liquidated.
The argument that thus arises is that while the objectives of the
business rescue plan were bona fides and were to salvage
the company so that it would be in position to fully repay all of
its creditors, this does not always come to fruition and thus a
secured creditor may end up in a much worse position than it would
have been if the company had simply been liquidated in the first
place. In that instance, the creditor would have been in a position
to realise the security for a much larger sum of money. Thus, while
the business rescue plan may have been approved and implemented and
this may be very beneficial to concurrent creditors, its benefits
may be lost on certain secured and preferent creditors.
On the whole it may be said that the voting provisions in the Act
tend to favour the majority of creditors in value rather than on
the basis of ranking under the Insolvency Act.
Despite the situation described above, the writer is of the opinion
that the Act makes adequate provision for the input and
participation of all creditors prior to the acceptance and
implementation of a business rescue plan. Section 145 of the Act is
an important section to take note of in this regard. It entitles
the creditor inter alia, to be given notice of "each
court proceeding, decision, meeting or other relevant event
concerning the business rescue proceedings, to participate in any
court proceedings arising during the business rescue proceedings,
to formally participate in a company's business rescue
proceedings to the extent allowed in the Act and to informally
participate in those proceedings by making proposals for a business
rescue plan to the practitioner". In addition sub-section 3
allows creditors to "form a creditors' committee, and
through that committee (the creditors) are entitled to be consulted
by the practitioner during the development of the business rescue
plan". Section 147 then sets out how notice of the first
meeting of creditors must be given.
In relation to a business rescue plan providing for an asset which
is the subject-matter of security to be sold, in addition to the
sections set out above which specifically provide for the
creditors' participation in the formation and approval of the
plan, section 150(2)(b) sets out that in Part B of the proposed
plan "the order of preference in which the proceeds of
property will be applied to pay creditors if the business rescue
plan is adopted" must be set out in the plan. Thus, the
secured creditor would have an opportunity to ensure that its
rights are being recognised, and if in its opinion they are not,
then to utilise the rights given to it in sections 145(2) and
152(1) of the Act to rectify this.
In light of these sections, if the business rescue practitioner
acted in accordance with the Act, the secured creditor should have
received ample notice of the meeting and ample opportunity to make
proposals in relation to the proposed plan.
Therefore, it is the writer's opinion that while the example
situation as set out above may occur in practice, in most instances
if the secured creditor found himself in such a situation, it would
be as a result of its negligence in either not attending the
meeting wherein the proposed plan was voted for, or in that it
failed to adequately utilise the various rights which the Act
provides it with to ensure that a situation as set out above does
not occur.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.