Creditors of a company in business rescue do not have an unfettered vote to reject a proposed business rescue plan because their vote may be set aside by a court if it is inappropriate.
The Supreme Court of Appeal in Firstrand Bank Ltd v KJ Foods CC considered the meaning of ‘inappropriate’ relating to business rescue plans in the Companies Act 2008. Business rescue plans are adopted if supported by the holders of more than 75% of the creditors’ voting interests who attended the meeting. Of the 75% who vote in favour of adopting the plan, at least 50% must be independent creditors’ voting interests. Practically, a creditor holding more than 25% of the total voting rights has negative control over the business rescue proceedings and can prevent such proceedings from being implemented.
A creditor’s ability to reject a business rescue plan is subject to a provisio. Section 153 of the Companies Act allows a business rescue practitioner to apply to court to set aside the result of the vote by the holders of voting interests on the grounds that it is inappropriate.
Firstrand Bank held a voting interest of 29.81% which meant that Firstrand’s vote against the business rescue plan would lead to the final plan being rejected, despite all other creditors voting in favour of the plan. The business rescue practitioner approached the court to set aside Firstrand’s negative vote as being inappropriate.
In interpreting the meaning of ‘inappropriate’, the court held that the interpretation should take place within the wider context of the purpose of business rescue and be in sync with the object of business rescue to enable the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all stakeholders. In deciding whether a vote is inappropriate, the court has to make a value judgment considering all the facts and circumstances.
Creditors’ vote in rejecting a business rescue plan is not the final word.
The court ultimately held that Firstrand’s rejection of the final business rescue plan was inappropriate. It arrived at the decision by considering facts and circumstances, which included the interests of the employees who would continue working for the rescued company, which would not be the case if the company was liquidated. Firstrand would, in terms of the plan, have its claim settled in full by KJ Foods in a series of payments over a period of time while all the other creditors would also benefit, including the concurrent creditors who would receive 100 cents in the rand in business rescue. If the company was liquidated, the concurrent creditors would only have received 51 cents in the rand.
The judgment is important insofar as it warns creditors that their vote in rejecting the business rescue plan is not the final word. While a creditor can surely vote in its own interests, it must do so while being cognisant of the interests of the other creditors and stakeholders. If the court sets aside the result of the vote, the plan is adopted by operation of law.