Creditors who vote against the adoption of a business rescue plan out of self-interest, without considering the rights of other affected parties, may risk having their votes deemed inappropriate by a court.
A creditor of a company undergoing business rescue proceedings is entitled to vote on the proposed business rescue plan. However, for some creditors, voting for the approval of the business rescue plan would not achieve their objectives.
If you decide to vote against the plan in the hope of a better business rescue plan being proposed, or the company being liquidated instead, could your vote be deemed inappropriate and the resultant rejection of the business rescue plan be at risk of being set aside?
The Companies Act
In terms of section 153(1)(a) of the Companies Act 1, if a business rescue plan is rejected, the business rescue practitioner is entitled to advise, at the meeting called for consideration of the plan, that the company will apply to court to set aside the result of the vote by the holders of voting interests or shareholders, on the grounds that it was inappropriate. (Alternatively, the business rescue practitioner may ask the holders of voting interests to vote for approval to prepare and publish a revised plan.)
If the business rescue practitioner takes neither of these steps, any 'affected person' in terms of section 153(1)(b)(i)(bb) who is present at the meeting may apply to a court to set aside the result of the vote by the holders of voting interests or shareholders, on the grounds that it was inappropriate. 'Affected person' is defined in section 128 of the Companies Act and includes shareholders, creditors of the company, registered trade unions representing the company's employees and individual employees or their representatives who are not represented by a registered trade union.
If an application is made to set aside the result of a vote on the grounds that it was inappropriate, in terms of section 153(7) of the Companies Act, a court may grant the order if it is satisfied that it is reasonable and just to do so, having regard to:
- the interests represented by the person/s who voted against the proposed business rescue plan;
- provision, if any, made in the proposed business rescue plan with respect to the interests of that person/s; and
- a fair and reasonable estimate of the return to that person or those persons, if the company were to be liquidated.
Determining whether voting against the business rescue plan is appropriate
In the case of Ferrostaal GmbH and Another v Transnet SOC Ltd t/a Transnet National Ports Authority and Another (the Ferrostaal case)2 the Supreme Court of Appeal had to deal with whether votes were inappropriate and accordingly whether they should be set aside after a business rescue plan was rejected.
The approach taken by the court was formulated in the case of FirstRand Bank Ltd v KJ Foods CC (the FirstRand Bank case)3. The court needs to determine whether it is reasonable and just to set aside the relevant vote against the business rescue plan by taking into account the factors set out above in terms of section 153(7) of the Companies Act and all circumstances relevant to the case, including the purpose of business rescue. The interpretation of the term 'inappropriate' needs to take place within the wider context of the objects of business rescue, including the provision of the efficient rescue and recovery of financially-distressed companies, in a way which balances the rights and interests of all the relevant stakeholders, including all creditors and employees. In determining whether a vote against the adoption of a business rescue plan is inappropriate or not, a court needs to consider all the facts and circumstances and make a value judgment.
Inappropriateness in the circumstances
In the Ferrostaal case, the appeal was instituted by Ferrostaal GmbH and Atlantis Marine Projects Proprietary Limited, the shareholders of the company in business rescue, Ferromarine Africa (Pty) Ltd (FMA).
FMA did not have any employees, business or assets, aside from its lease agreement with Transnet SOC Ltd t/a Transnet National Ports Authority (Transnet), which it sublet. Transnet voted against the business rescue plan as it was commercially unviable and failed to adequately protect the interests of Transnet, the major creditor of FMA. Transnet also reasoned that the implementation of the business rescue plan could not achieve the legislated objective of facilitating the efficient rescue and recovery of financially-distressed companies in a way that balances the rights and interests of all stakeholders. Also, it reasoned that the liquidation of FMA would be advantageous to Transnet. The court did not set aside Transnet's votes rejecting the business rescue plan. The court found that the arrangement set out in the business rescue plan encroached on the ability of Transnet to exercise its contractual rights with FMA in future and was heavily skewed against Transnet. There were no other affected persons whose interests needed to be protected. Accordingly, Transnet's opposition to the business rescue plan could not be considered as unreasonable and its vote against the adoption of the business rescue plan was not inappropriate.
In contrast, in the FirstRand Bank case, the company in business rescue, KJ Foods CC (KJF), had over 200 employees, who would be able to continue working for KJF if the business rescue plan was adopted. If KJF was liquidated, they would lose their employment. If the proposed business rescue plan was approved, FirstRand Bank's claim would be settled in full by way of payments made over a period of time. Other creditors of KJF would also benefit if the business rescue plan was approved. Another aspect that the court considered was that, if the business rescue plan was approved, concurrent creditors of KJF would receive 100 cents in the rand instead of the 51 cents in the rand they would receive upon liquidation of KJF. Taking into consideration all the facts and circumstances, the court held that FirstRand Bank's vote to reject the business rescue plan was due to self-interest and was inappropriate.
Creditors have to take into account the impact on others when determining whether to vote against the adoption of a business rescue plan, not only how the decision will affect them or their companies directly. It is vital to look at the bigger picture before casting a vote, or risk it being deemed inappropriate, if self-interest is the motivation and other stakeholders involved are not being considered.