Will proposed amendments to the Companies Act make raising post commencement funding harder?

Recent proposals to amend sections 134 and 135 of the Companies Act includes changes which may have the effect of unfairly benefiting landlords and other lessors of property (who are proposed to be considered as post commencement finance (PCF) providers) to the detriment of other PCF providers, namely lenders. The unintended consequence that the proposed amendments may have is that it will be even harder for business rescue practitioners to raise PCF. Given the position of PCF providers and their rights in the business rescue proceedings; the legislature needs to carefully reconsider these proposed amendments and clarify the many questions that they raise, in order to ensure that a successful business rescue process is not made more difficult to achieve.

The proposed amendments are as follows:

    Section 135 of the principal Act is hereby amended -

    (a)  by the insertion after subsection (1) of the following subsection:

      "(1A) To the extent that any amounts due company to any owner of the property, including a landlord in respect of any property of such owner or landlord which is the subject of a contract with a company that is placed in business rescue is not paid to such owner or landlord during business rescue by the company from the date that the company is placed in business rescue proceedings, provided that such amounts do not exceed the aggregate of all disbursements and outgoings, including rates and taxes, electricity and water, paid by such owner or landlord to third parties during the period referred to in this section, the money must be regarded as post-commencement financing that must be paid to such owner in the order set out in subsection (3 )(b).";

    (b) by the substitution in subsection (3) for the words preceding paragraph (a) of the following words:

      "After payment of the practitioner's remuneration and expenses referred to in section 143, post-commencement finance, rental payment and other claims arising out of the costs of the business rescue proceedings, all claims contemplated -"; and

    (c) by the substitution in subsection (3)(a) for the words preceding subparagraph (i) of the following words: 

      "in subsection (1) and subsection (1A) will be treated equally, but will have preference over-".

    Section 145 of the principal Act is hereby amended -

    (a) by the deletion in subsection (4) of the word "and" at the end of paragraph (a) and by the substitution in that subsection for the full-stop of the expression "; and" at the end of paragraph (b); and

    (b) by the addition in subsection (4) of the following paragraph:

      "(c) an owner of property referred to in section 135(2) has a voting interest equal to the amount referred to in that section.".

Following from this, property owners are likely to have pre-commencement claims (those that arose prior to the start of the business rescue proceedings) and post-commencement claims (those that arose after business rescue proceedings started). The debate as to whether the amounts which are due post commencement of the rescue should be considered as PCF often arises in circumstances where the business rescue practitioner suspends the obligation to pay rent or equipment lease amounts but remains in occupation of the property or in possession of the leased goods. PCF is finance provided to the company once business rescue proceedings have commenced. The Companies Act (section 135) sets out the ranking of claims against a company in rescue. PCF providers have a preferent ranking and are preferred "in the order in which they were incurred over all unsecured claims". In other words, PCF is paid before concurrent claims.

Further to that is the question of what rights a provider of PCF has are in the business rescue proceedings in general and, in particular, to vote on the proposed business rescue plan. Given the potentially harsh (and arguably prejudicial) position a property owner could find itself in, in the event of a business rescue, the legislature appears to have tried through the proposed amendment, to provide these creditors with a more secure position in business rescue proceedings, by elevating their claims to that of PCF. However, the legislature has gone one step further, by providing that these owners of property have "a voting interest". Voting Interest is defined as "an interest as recognised, appraised and valued in terms of section 145(4) to (6)".

A debate which has long raged is whether PCF providers are entitled to vote at the various meetings required to be held in terms of Chapter 6 (and most particularly, the vote to approve the business rescue plan). A popular view amongst lenders is that PCF providers are entitled to vote. Their main argument is that the provisions of section 145(4) refer only to the word "creditor". Furthermore, section 152(2), refers to the word "creditors".  It follows that these sections refer to all creditors of the company (regardless of whether they are pre or post commencement creditors) - which must then by plain meaning include PCF providers, who are creditors of the company in rescue. The opposing view is that it was not the intention of the legislature to allow PCF providers vote for a number of reasons including, that:

  • the business rescue plan does not require the details of PCF providers to be included in the plan;
  • calculating the voting interest would be a moving target; and
  • PCF is already super preferent so it does not also carry voting rights and that if PCF providers voted, it could be subject to abuse. The view is that PCF can be provided to the company with a view to dictating the outcome of the vote, particularly if enough PCF is provided such that the voting interest shifts in the PCF provider's favour.

The proposed amendment set out in the Bill therefore raises an interesting debate, one which the "pro PCF vote" camp may not be happy with. That is, if PCF providers vote as they argue, given the wording of section 145(4), why was it necessary for the legislature to propose an amendment which specifically records that "an owner of property referred to in section 135(2) [which has now been defined as PCF] has a voting interest equal to the amount referred to in that section". Furthermore, does the fact that the legislature saw fit to include this amendment mean that other providers of PCF are not entitled to vote, i.e. because those funders who have provided PCF in the ordinary course (working capital for example) are not "an owner of property referred to in section 135(2)".

The effect of the proposed amendment is that property owners (who are now considered PCF providers) may be given more rights than other PCF providers. The intention behind this may be that those property owners did not choose to find themselves in that position (as a PCF provider), whereas, a provider of PCF (probably at a price calculated to take into account the risk inherent in lending into a company in financial distress), elected to do so. This situation might result in lenders having a reluctance to provide PCF, in circumstances where the amendment appears to restrict the rights in business rescue proceedings which they have advocated for, whilst at the same time, property owners are given more rights, despite their claims also being PCF.

The legislature needs to carefully reconsider these amendments and clarify the many questions that these proposed amendments create, with particular reference to the position of PCF providers and their rights in the business rescue proceedings.

Webber Wentzel > News > Will proposed amendments to the Companies Act make raising post commencement funding harder?
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