EMPLOYEES CLAIMS AND THE TREATMENT OF CONCURRENT CREDITORS IN A BUSINESS RESCUE – By Don Mahon, Lisa-Marie Bowes and Kyle Telfer

The Employer generally gets the employees he deserves.” – J. Paul Getty

 

The introduction of the Business Rescue regime into South African Company Law has been a boon for litigators, whilst stakeholders and business rescue practitioners navigate their way through a minefield of difficult legislative provisions in an effort to give effect to the purpose of the regime.

In this article, we intend dealing with two aspects, namely:

  • a proper interpretation of section 135 of the Companies Act 71 of 2008 (“the Act”) dealing with the preferent rights of employees; and
  • whether creditors are obliged to accept a payment of less than what is owed to them, on the basis that their claims may be classified as concurrent.

 

A Proper Interpretation of Section 135 of the Act

 

Section 135 of the Act provides as follows:

(1)    To the extent that any remuneration, reimbursement for expenses or other amount of money relating to employment becomes due and payable by a company to an employee during the company’s business rescue proceedings, but is not paid to the employee –

  • the money is regarded to be post-commencement financing; and
  • will be paid in the order of preference set out in subsection (3)(a).

(3)     After payment of the practitioner’s remuneration and expenses referred to in section 143, and any other claims arising out of the costs of the business rescue proceedings, all claims contemplated –

(a) in subsection (1) will be treated equally, but will have preference over –

(i) all claims contemplated in subsection (2), irrespective of whether or not they are secured; and

(ii) all unsecured claims against the company…

(4)     If business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of this section will remain in force, except to the extent of any claims arising out of the costs of liquidation.

[Our emphasis]

The question arises as to what meaning must be attributed to the words “becomes due and payable”. Although the section, at first blush, does not induce a sense of ambiguity, upon closer analysis it appears that two possible interpretations could be extracted from the wording used, as is set out more fully below.

It has been held that a debt is “due” when it is immediately claimable, that is, when it has matured and that, as its correlative, it is immediately payable.

See    White v Municipal Council Of Potchefstroom 1906 TS 47; And HMBMP Properties (Pty) Ltd V King 1981 (1) SA 906 (N) At 909d

It has also been held that the word “payable” means “that which may be paid or may have to be paid” and that “payable by him” means “for which he is liable in respect of such future loss”.

See    Marine & Trade Insurance Co Limited V Katz No 1979 (4) SA 961 (A) at 975-976

It can therefore be observed that if a debt is “due” then it must also be “payable”, but that a debt may be “payable” without yet being “due”.

A preliminary examination of section 135 of the Act discloses, in our view, two possible meanings, namely:

  • a debt which becomes due and which becomes payable during the company’s business rescue proceedings; or
  • a debt which may be payable prior to the commencement of business rescue proceedings but which transforms into a debt which is both due and payable during the business rescue proceedings.

In order to overcome the interpretational difficulty posed by section 135, one must apply the principles enunciated by Wallis JA in the judgment of Natal Municipal Joint Pension Fund v Endumeni 2012 (4) SA 593 (SCA).

We are thus enjoined to attribute meaning to the words used, having regard to the context provided by reading the particular provision in the light of the statute as a whole, giving due consideration to the language used in the light of the ordinary rules of grammar and syntax, the context in which the provision appears, the apparent purpose to which it is directed, and to weigh each possible interpretation against each of these factors. A sensible meaning is to be preferred to one that leads to insensible or un-businesslike results or one that would undermine the purpose of the Act.

The purpose of the Act can be ascertained from section 7 thereof, the most apposite subsection being section 7(k), which directs the purpose of the Act to “… the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders …”.

Section 144(2) of the Act provides that:

To the extent that any remuneration, reimbursement for expenses or other amount of money relating to employment became due and payable by a company to an employee at any time before the beginning of the company’s business rescue proceedings, and has not been paid to that employee immediately before the beginning of those proceedings, the employee is a preferred unsecured creditor of the company for the purposes of this Chapter.

It can immediately be observed that section 144(2) refers to amounts of money which became “due and payable” prior to the commencement of business rescue proceedings where a mere reference to a debt which had become “due” would suffice to bear the same meaning. One can therefore not presume that the Act necessarily seeks to distinguish between debts which are due and payable on the one hand, and debts which are payable but not due on the other hand.

If the provisions of section 135 were to be interpreted on the basis that they refer only to debts which became payable during business rescue and not before, this would lead to insensible or unbusinesslike results or a result that would undermine the purpose of the Act.

We say this because, implying such an interpretation, the Act would give preferent status:

  • to employees to whom payment had become due prior to the commencement of business rescue proceedings; and
  • to employees in respect of whom employment-related claims arose and became due during business rescue proceedings.

Protection would, however, on such an interpretation, not be afforded to employees in respect of whom employment-related claims arose prior to business rescue but which only became due subsequent to the commencement of business rescue. We fail to see any legitimate basis for seeking to exclude this category (and only this category) of employees from the protection afforded by the Act through preferent status.

It would be more reasonable and businesslike, in our view, to attribute a meaning to section 135 which is directed at the preservation of employees’ claims which do not fall within the purview of section 144(2). One would, on such an interpretation, regard a debt as having become due and payable once it is both due and payable. Therefore, if the moment at which both criteria are met (that is, the debt being both due and payable) occurs during the company’s business rescue proceedings, then the claim will be preferent in terms of section 135(3)(a)(i). In our view, an employee who has not been paid must either fall within the provisions of section 135(1) or section 144(2).

 

­Can Concurrent Creditors Lose the Right to Enforce Their Debt or a Part Thereof

 

We have witnessed an increasing practice on the part of Business Rescue Practitioners to make provision in the proposed business rescue plan for payment to creditors which they have classified as concurrent, of a concurrent dividend which is less than the full amount of their claim. This is similar, in principle, to how concurrent creditors are treated in liquidation proceedings.

Where all of the creditors concerned agree to such a proposal, no difficulty arises. However, can a creditor be forced to accept such a proposal, if he has unsuccessfully voted against the adoption of the proposed business rescue plan?

In our view, this approach is contrary to the provisions of section 154(1) of the Act which provides as follows:

A business rescue plan may provide that, if it is implemented in accordance with its terms and conditions, a creditor who has acceded to the discharge of a whole or part of a debt owing to that creditor will lose the right to enforce the relevant debt or part of it.

In DH Brothers Industries v Gribnitz No 2014 (1) SA 103 (KZP) At Para [67], Gorven J held that a business rescue plan may only provide that a creditor “who has acceded to the discharge of a whole or part of a debt” may be deprived of the right to enforce its claim. Since section 152(4) makes an adopted plan binding on non-consenting creditors and section 154(2) allows enforcement of pre-business rescue debts only to the extent allowed for in a plan, any provision in a plan which goes beyond a voluntary discharge of a whole or part of a debt is not competent.

We are mindful of the provisions of section 128(1)(b)(iii) of the Act, which contemplates a plan which results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company under circumstances where it is not possible for the company to continue to exist on a solvent basis.

At first blush this would seem to suggest that a business rescue plan may lawfully contemplate the discharge of a portion of debts owed to concurrent creditors for so long as the dividend which is paid to such creditors would constitute a better return than that which would prevail in the event of an immediate liquidation.

However, the Supreme Court of Appeal, in Oakdene Square Properties v Farm Bothasfontein (Kyalami) 2013 (4) Sa 539 (SCA) at para [33], has held that an alternative, informal kind of winding up of the company outside the liquidation provisions of the 1973 Companies Act was not the intention of the legislature when creating business rescue as an institution and that a winding-up of the company in order to avoid the consequences of liquidation is not what is contemplated by the Act.

A similar view was taken in the decision of Gormley v West City Precinct Properties (Pty) Ltd And Another, Anglo Irish Bank Corporation Ltd V West City Precinct Properties (Pty) Ltd And Another (19075/11, 15584/11) [2012] ZAWCHC 33 (18 April 2012) At Para [12].

In light of these decisions, one cannot help but wonder what was intended by the latter provisions of section 128(1)(b)(iii) of the Act and, as far as we are aware, the Supreme Court of Appeal is yet to provide meaningful guidance in this regard in light of what is stated Oakdene.

 

Adv Don Mahon

Attorney Lisa-Marie Bowes

Attorney Kyle Tristan Telfer

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DO SHAREHOLDERS HAVE A REMEDY WHERE THEY HAVE NOT BEEN CONSULTED IN REGARD TO THE CONTENTS OF A BUSINESS RESCUE PLAN PUBLISHED IN RESPECT OF A COMPANY? – By Don Mahon

DO SHAREHOLDERS HAVE A REMEDY WHERE THEY HAVE NOT BEEN CONSULTED IN REGARD TO THE CONTENTS OF A BUSINESS RESCUE PLAN PUBLISHED IN RESPECT OF A COMPANY?

– By Don Mahon

“Most shareholders have little if any control over the companies in which they own stock, even if they own a million shares.” – Robert Kiyosaki

Section 128(1)(b) of the Companies Act 71 of 2008 (“the Act”) defines an “affected person” as:

  • a shareholder or creditor of the company;
  • any registered trade union representing employees of the company; and
  • if any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives.

Shareholders in a company under business rescue have a direct and substantial interest in the manner in which the business rescue practitioners intend to rescue the company and, more particularly, the manner in which they intend to part with any of the assets of the company.

Section 146 of the Act provides that, during a company’s business rescue proceedings, each holder of any issued security of the company is entitled to:

  • notice of each court proceeding, decision, meeting or other relevant event concerning the business rescue proceedings;
  • participate in any court proceedings arising during the business rescue proceedings;
  • formally participate in a company’s business rescue proceedings to the extent provided for in chapter 6 of the Act.

In terms of section 150(1) of the Act, the practitioner is required to consult with affected persons (including shareholders) before preparing a business rescue plan for consideration and possible adoption at a meeting in terms of section 151 of the Act.

In terms of section 150(2) of the Act the business rescue plan must contain all the information reasonably required to facilitate affected persons in deciding whether or not to accept or reject the plan.

The aforesaid provisions of the Act enjoin the business rescue practitioner to provide the shareholders of the company in business rescue with sufficient information (including documentation) so as to enable them to meaningfully participate in the company’s business rescue proceedings, to carry out meaningful and effective consultation with the business rescue practitioners as contemplated in section 150(1) and to enable the shareholders to accept or reject the plan, as contemplated in section 150(2) of the Act.

Of course, section 151 and 152 do not contemplate participation by shareholders in the meeting convened for the purposes of approving the business rescue plan. How then, are the shareholders able to “accept or reject the plan”, as contemplated in section 150(2)?

Due to the fact that the provisions of sections 151 and 152 of the Act do not entitle a shareholder to vote on a proposed business rescue plan, to make representations at a meeting contemplated in section 152 of the Act, or even to participate in such a meeting, the shareholders appear, on a plain reading of these sections, to be rendered powerless to prevent the complete and utter decimation of the value of their shareholding in circumstances where the business rescue practitioners have acted with absolute disregard for the interests of such shareholders.

However, the detrimental effects of these sections upon shareholders are ameliorated by the provisions of section 150(1) and 150(2).

It is submitted that the business rescue practitioners accordingly have a duty to consult with the shareholders prior on the contents of the proposed plan prior to the publication thereof and is enjoined to take into consideration there decision to accept or reject the proposed plan.

In doing so, the practitioner is obviously not entitled to pay mere lip service to the provisions of the act but must deal with the shareholders’ submissions in regard to the plan arbitrio boni viri although he is not necessarily bound to the shareholders views in this regard.

There will, in the circumstances, be a remedy which lies with a shareholder who was not consulted in regard to the contents of a proposed business rescue plan prior to the publication thereof and may, depending on the circumstances, be entitled to interdict the meeting scheduled for the purposes of approving the plan and could be entitled to an order having the publication of the plan set aside.