COUNTING YOUR VOTES – THE VOTING RIGHTS AFFORDED TO CREDITORS UNDER BUSINESS RESCUE by Don Mahon

A vote is like a rifle; its usefulness depends upon the character of the user” – Theodore Roosevelt

Once a company has been placed under business rescue, a business rescue practitioner must publish a business rescue plan and convene a meeting in terms of section 151 to which all affected parties must be invited and the creditors of the company will be given an opportunity to consider and vote on the business rescue plan.

At the meeting convened in terms of section 151 of the Companies Act, the business rescue practitioner must invite discussions and entertain and conduct a vote on any motions to amend the proposed plan and he must call for a vote for preliminary approval of the proposed plan by the creditors.

The first point to be made is that, whilst affected parties (who are not necessarily creditors) must be given notice of the convening of the meeting in terms of section 151, they are not entitled to vote on the preliminary approval of the business rescue plan, unless they are creditors.

In addition, section 151(2) states as follows:

In a vote called in terms of sub-section (1)(e), the proposed business rescue plan will be approved on a preliminary basis if-

(a)       it was supported by the holders of more than 75% of the creditors voting interest that were voted; and

(b)       The votes in support of the proposed plan included at least 50% of the independent creditors’ voting interest, if any, that were voted.

However, the importance of the extent of the voting rights recognised by the business rescue practitioner in terms of the meeting convened in terms of section 151 is often a matter of some contention.

This is particularly so in circumstances where the company was placed under business rescue by resolution of the directors and not at the instance of the creditors.

Therefore, consideration must be given to the extent to which particular creditors are afforded voting rights in accordance with their claims and based on the nature of their claim as the creditors who hold the majority of the voting rights are in the strongest position.

Take, for example, the situation where the company under business rescue has stood surety for the debts of another in favour of a creditor.  It may be that various companies in the same groups have signed cross-sureties in favour of the creditor for the same debt of the principal debtor.

Obviously, the nature of these liabilities is contingent.  Therefore the first question is whether the claim based on a suretyship is entitled to be recognised at the meeting at all inasmuch as a creditor who enjoys such a claim is a contingent creditor. It is submitted that such claims, being contingent liabilities, are not entitled to be recognised.

If, however, it is assumed that such a creditor is entitled to have his claim recognised and to be afforded voting rights at the meeting, does that mean that the creditor would be entitled to have his voting rights recognised to the full extent of this contingent liability? Would he be entitled to exercise such voting rights to the same extent in every company which has signed surety and which may be under business rescue?

Take the following example, the bank provides a loan to company A in an amount of R100 million.  As security for the loan, the bank registers a first mortgage bond over property owned by company A and procures suretyships in its favour by companies B and C who form part of the same group.

Subsequent thereto, companies A, B and C are all placed under business rescue by resolution of their various directors.

There can be no difficulty in recognising that the bank is a creditor of company A in the full amount of its claim and that such claim is secured to the extent of the value of the property over which the mortgage bond has been registered.

But what of the bank’s claim in companies B and C?  Companies B and C both have contingent liabilities in respect of which the bank is a creditor.  However, would that entitle the bank to have full recognition of a claim of R100 million in both companies B and C as well as a full claim of R100 million in company A?

Unfortunately, the provisions of the Act are somewhat unclear.

Assuming that a contingent creditor is entitled to be recognised at all (which is a matter of some contention), section 145(4) of the Act states that:

In respect of any decision contemplated in this chapter that requires the support of the holders of creditors’ voting interests –

(a)       a secured or unsecured creditor has a voting interest equal to the value of the amount owed to that creditor by the company; and 

(b)       a concurrent creditor who would be subordinated in a liquidation has a voting interest, as independently and expertly appraised and valued at the request of the practitioner, equal to the amount, if any, that the creditor could reasonably expect to receive in such a liquidation of the company.

In the example provided, the bank would clearly be a secured creditor in the business rescue of company A and would therefore be entitled to exercise voting rights to the full extent of its claim of R100 million.

The question of the contingent liabilities enjoyed by the bank against companies B and C are somewhat more difficult.  If one assumes for the purposes of the example provided that the contingent claim of the bank in respect of the suretyship would entitle them to lodge a claim as a concurrent creditor if company B or C were in liquidation, it is fundamentally important (and not easy) to determine whether the bank’s claim is that of an “unsecured creditor” as mentioned in section 145(4)(a) or whether the bank would be “a concurrent creditor who would be subordinated in a liquidation” as referred to in section 145(4)(b).

It is unclear what is meant by the use of the words “who would be subordinated in a liquidation”.

Under South African Insolvency Law creditors are categorised as being either secured or unsecured.  Unsecured creditors are then either preferent or concurrent.  Creditors are categorises as preferent for specific amounts owing prior to insolvency (see sections 96 to 102 of the Insolvency Act).  Creditors that receive no preferential treatment are all regarded as being concurrent (section 103 of the Insolvency Act).

Furthermore, under South African Insolvency Law one does not refer to concurrent creditors’ claims being “subordinated in liquidation”. However, as mentioned in Henochsberg on The Companies Act in the commentary under section 145, in reality, what transpires as a result of the order of preference in terms of which claims are paid, is an effectual subordination of concurrent claims in liquidation.

Therefore, it seems that one can accept that all concurrent claims which are not preferent are “subordinated in liquidation: in the sense that they are subordinate to both the preferent concurrent claims and the secured claims.

If the submission is accepted, it must be made clear that although section 145(4)(a) seems to suggest that unsecured creditors are entitled to vote to the full extent of their claim, this is not the case unless they are preferent unsecured creditors.

In the case of all other concurrent creditors, the provision of sub-section (4)(b) would apply.

Therefore, in the example provided, the suretyship in favour of the bank by company B and company C would give rise to a concurrent claim by the bank as against those companies.  In those circumstances, section 145(4)(b) would dictate that the bank would not be entitled to exercise voting rights in respect of the full value of their claims but would only be entitled to exercise voting rights in accordance with what they would be likely to receive under liquidation.

The business rescue practitioner would therefore have to procure the services of an independent expert to give an indication of what the bank would be likely to receive if the company were liquidated and the company would only be able to exercise voting rights at the meeting convened in terms of section 151 to the extent of the estimated value under those circumstances.

In conclusion, therefore, it would seem that every concurrent creditor who does not enjoy preference in terms of the Insolvency Act would require a determination by the business rescue practitioner (invoking the services of an independent expert) of the extent of his voting rights which is commensurate with what that creditor is likely to receive under liquidation.  The statement in section 145(4)(a) that “(a)            … unsecured creditor has a voting interest equal to the value of the amount owed to that creditor by the company” is misleading.  In actual fact, that would only be the case if the creditor were a creditor who enjoys a right of preference.  Normal concurrent creditors would not enjoy voting rights to the full extent of their claim but only to the value of what they would be likely to receive in the event of a liquidation of the company.

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