The pivotal judgment of the Supreme Court of Appeal in Mashwayi Projects (Pty) Ltd and Others v Wescoal Mining (Pty) Ltd and Others delves into the nuances of the Companies Act, 2008 and finds that post-commencement creditors have the right to vote on the adoption of a business rescue plan. The decision overturns a previous high court ruling. The judgment significantly impacts the business rescue landscape.

The Parties
The case involved several parties, including: Arnot Opco (Pty) Ltd, the company in business rescue which owns and operates the Arnot coal mine in Middelburg, Mpumalanga (Arnot), Pahlani Lincoln Mkhombo NO (Arnot’s business rescue practitioner), Mashwayi Projects (Pty) Ltd (a post commencement creditor and cessionary of claims from various of Arnot’s creditors), Wescoal Mining (Pty) Ltd (a creditor of Arnot) and its parent company Salungano Group Ltd, Ndalamo Coal (Pty) Ltd (whose offer was accepted at the creditors’ meeting and an intervening party in the proceedings), and two friends of the court in the appeal proceedings: IWIRC Southern Africa Network NPC, and the Industrial Development Corporation of South Africa.

Key Issues
The appeal raised two main issues: a legal issue and a factual issue. The legal issue was whether post-commencement creditors are entitled to vote on a business rescue plan under the Act. The factual issue was whether Arnot’s business rescue plan was properly adopted.

  • On the Legal Issue: Voting Rights of Post-Commencement Creditors:

The court had to interpret the relevant provisions of Chapter 6 of the Companies Act. The court noted that the word “creditor” is not defined in the Act, either generally or specifically in the context of business rescue. The absence of a specific definition indicated that the legislature did not contemplate a specific meaning other than the ordinary meaning of the word, which is a person or entity to whom an unpaid debt is due. The court emphasised that unless the Act classified creditors and gave them different or unequal rights, there is no basis to import such distinctions via interpretation.

The court undertook a detailed analysis of Chapter 6 and concluded that the Act does not limit the entitlement of post-commencement creditors to vote on a business rescue plan. The absence of explicit mention of these creditors in certain sections of the Act did not imply their exclusion or a limitation of their rights:

“Absent the Act drawing any distinction between pre-commencement creditors and post-commencement creditors, they are, as stakeholders, deserving of equal protection under s 7(k) of the Act. As such they are equally entitled to vote on the adoption of a business rescue plan.”

In coming to its determination, the court reiterated several key differences between business rescue and liquidation, to highlight that the mechanisms and objectives of business rescue and liquidation are fundamentally different. Each requires a different approach to creditor involvement and voting rights. The court rejected the respondents’ submissions that the word “creditor” should be interpreted with reference to insolvency legislation.

  • On the Factual Issue: Adoption of the Business Rescue Plan:

The factual issue centred on whether the business rescue plan was properly adopted at the creditors’ meeting. The plan proposed four options, and the Wescoal parties voted in favour of Option B, which involved the sale of Arnot’s business as a going concern and the application of the free residue to creditors’ claims. It was common cause that had Mashwayi’s vote been included, the relevant 75% threshold for the adoption of the plan would not have been met.

The high court had erred in making declaratory orders that the plan was validly adopted. Given the exclusion of the vote of only one post-commencement creditor, Mashwayi, it was not clear what the ultimate voting percentages would have been if all post-commencement creditors’ votes were treated equally, and had the irregularities had not occurred. The matter should have been remitted to the creditors to vote afresh upon the changed landscape. The court declared that the business plan had been rejected. A new vote will be required.

Conclusion
The judgment clarifies that post-commencement creditors are entitled to vote on a business rescue plan. The court’s interpretation aligns with the ordinary meaning of the word “creditor” and ensures that the rights and interests of all stakeholders are balanced, as required by the Companies Act.

This judgment is a significant and welcomed development in South African company law and corrects the impractical outcome of the earlier high court decision.  It underscores the vital role of post-commencement financing which is essential for the successful business rescue of distressed entities and, without which, achieving the objectives of business rescue would be challenging, if not impossible.

Mashwayi Projects (Pty) Ltd and Others v Wescoal Mining (Pty) Ltd and Others