Following the judgment in Mashwayi Projects (Pty) Ltd v Wescoal Mining (Pty) Ltd (previously discussed here), the position is now clear that post-commencement creditors are entitled to vote on a business rescue plan.

The Supreme Court of Appeal’s decision underscored the distinct objectives of business rescue and liquidation proceedings. The differentiation is pivotal to the court’s interpretation of the term ‘creditor’ in the Companies Act of 2008. The court’s nuanced understanding firmly rejected the idea that ‘creditor’ should be defined through the lens of insolvency law. The court emphasised that the purposes, mechanisms, and procedures of insolvency and business rescue are inherently different, and the legislature has chosen to regulate them separately, necessitating a unique business rescue approach to creditor involvement and voting rights.

Here are four key distinctions to consider:

 IssueBusiness RescueLiquidation
 1.Purpose of Business Rescue vs LiquidationThe primary purpose of business rescue, as outlined in Chapter 6 of the Companies Act, is to facilitate the rehabilitation of financially distressed companies. Business rescue aims to provide a temporary moratorium on the rights of claimants against the company or in respect of property in its possession, allowing the company to restructure its affairs, business, property, debt, and other liabilities. The ultimate goal is to maximize the likelihood of the company continuing on a solvent basis or, if that is not possible, to achieve a better return for the company’s creditors or shareholders than would result from immediate liquidation.

In contrast, liquidation proceedings focus on the orderly winding up of an insolvent company’s affairs. The objective is to collect and realize the company’s assets, pay off its debts, and distribute any remaining assets to its shareholders. Liquidation is a process of dismantling the company, where the rights of creditors become fixed and immutable, and the company’s assets are distributed according to a predetermined order of priority, in terms of Chapter XIV of the Companies Act, 1973 which is still in force.
 2.Objective and OutcomeThe primary objective is to save the company and avoid liquidation. The process is designed to restructure the company’s affairs to enable it to continue operating and meet its obligations.The objective is to wind up the company’s affairs and distribute its assets. The process is focused on the dissolution of the company and the appropriate distribution of its assets among creditors and shareholders.
 3.Mechanisms and ProceduresInvolves a temporary moratorium on claims, the appointment of a business rescue practitioner, and the development and implementation of a business rescue plan. The process is collaborative, involving the company’s management, creditors, and other stakeholders.Involves the appointment of a liquidator who takes control of the company’s assets, realizes them, and distributes the proceeds. The process is arm’s length, with creditors’ rights becoming fixed at the commencement of liquidation.
 4.Role of CreditorsCreditors play an active role in the process, including voting on the business rescue plan. The plan must be approved by a specified majority of creditors’ voting interests.Creditors’ rights are determined at the commencement of liquidation, and their claims are addressed according to a statutory order of priority. Creditors do not have the same level of involvement in the decision-making process as in business rescue.

Conclusion

By emphasising the distinct purposes of business rescue and liquidation proceedings, the Supreme Court of Appeal underscored the importance of interpreting the term ‘creditor’ within the specific context of business rescue. The court’s distinction between the two processes reinforces the need for a tailored approach to creditor rights and involvement in business rescue proceedings and affirmed that post-commencement creditors are entitled to voting rights.

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