A business rescue plan (a plan) should ideally benefit all affected persons in the best way possible, and a vote in support of its adoption or rejection should not be premised purely on self-interest while disregarding the collective benefit of all affected persons.
A recent High Court judgment highlighted this fact, setting aside the major creditors' votes on the grounds of inappropriateness, and investigating the creditors' conduct during the business rescue process.
In
Reiscor Two (Pty) Ltd v Anheuser-Busch Inbev Africa (Pty) Ltd and Others[1], the court dealt with an application by the business rescue practitioners (the BRPs) of Reiscor Two (Pty) Ltd trading as Bootleggers (Reiscor) for an order setting aside the votes of four of Reiscor's major creditors under section 153(1)(a)(ii) and 153(7) of the Companies Act[2]. The court also heard a counter application for Reiscor's liquidation from one of its major creditors.
The central features of the dispute were that:
- On 11 October 2021, the BRPs concluded a sale agreement with Jay Jay Meat Suppliers CC to sell Reiscor's fixed assets, inventory, liquor license, and property for ZAR7 million (the Sale of the Business).
- On 29 October 2021, the business rescue plan was published and circulated to the affected parties. It was further confirmed that a meeting would be held on 12 November 2021 to discuss and vote on the business rescue plan.
- On 10 November 2021, the major creditor requested permission and co-operation from the BRPs to consent to a 5 to 7-day due diligence by a management accountant during November 2021. The creditor also requested full access to the applicant's documents and records, as well as the postponement of the meeting from 12 November 2021 to early December 2021.
- On 10 November 2021, the BRPs denied the request to postpone the meeting in terms of section 151 of the Companies Act. The BRPs indicated that they were prepared to discuss potential amendments to the business rescue plan that would be presented to the creditors for adoption as per section 152(1)(d) of the Companies Act. Certain proposed amendments were formulated to cater for investigations into Reiscor's affairs by affected persons who filed complaints with the BRPs.
- On 12 November 2021, the BRPS held a meeting of creditors in terms of sections 151 and 152 of the Companies Act, to discuss and ask questions about the plan. The major creditors simply confirmed their opposition to it and did not engage, ask questions or propose any amendments. The major creditors expressed a view that: (a) an independent auditor was required to investigate Reiscor; and (b) they lacked information on which to base an opinion to vote in favour of the plan.
- The proposed business rescue plan
- did not compromise creditors' claims
- (ii) barred creditors for a period of 7 months from setting aside the Sale of the Business after its effective date;
- (iii) envisioned that after the period of 7 months, the creditors could apply to liquidate Reiscor and utilise all the mechanisms flowing from such course of action, including the holding of any necessary enquiries; and
- (iv) encompassing the Sale of the Business and other steps to be taken by the BRPs would achieve a better dividend for all creditors than a liquidation.
The major creditors, holding 65,36% of the vote, voted against adopting the business rescue plan, and the plan was rejected. The BRPs informed the meeting that Reiscor will seek to set aside the result of the major creditors' votes because these votes were inappropriate.
Appropriateness
The court followed the approach in
First Rand[3]where the Supreme Court of Appeal held that a conclusion as to appropriateness is a value judgement which requires a single enquiry taking account of all circumstances (the material facts). The question before the court in this matter was simply (as observed in the
Ferrostaal cas[4]:
whether it was reasonable and just to set aside creditors' votes on the grounds that the votes were inappropriate.
The court found that the major creditors had failed, on various occasions (including the meeting to consider the adoption of the proposed plan), to address their concerns, despite being invited to do so. They simply confirmed that they objected to the adoption of the plan. The major creditors also had the option of postponing the creditors' meeting in terms of section 152(1)(d)(ii) of the Companies Act but they chose not to do so. The court questioned why this powerful tool was not used by the major creditors. The court noted that one of the inferences that could be drawn is that the major creditors had an agenda to send Reiscor into liquidation so that enquiries could be held at the expense of the creditors. In their answering affidavits, the major creditors raised concerns that were not raised at the creditors' meeting.[5]
The Court found that the test for determining whether a vote was inappropriate "is to be viewed objectively and thus, factors which became known after the date of the meeting or only considered after the date of the meeting should, if relevant, weigh in on the evaluation of whether the decision to reject the plan was appropriate. All circumstances relevant to the case are to be considered".][6] On this basis, the court found that the timing of the significant creditors' complaints had no bearing on whether the decision was appropriate or not, but rather on the
bona fides of the objection and costs.
The major creditors had
inter alia raised that there was a further need for investigation into the affairs of Reiscor. However, the court found that this ground of opposition had no merit as creditors have no right to access and analyse the financial information of a company in business rescue, and the BRPs were correct in refusing to grant the major creditors' request of 10 November 2021. The BRP was not obstructive and proposed that further investigations would be conducted following the adoption of the proposed plan. The court reasoned that a need for investigation of the company affairs into possible mismanagement, unlawfulness or voidable dispositions cannot validly scupper an otherwise sound plan, given the significant time constraints imposed by the Companies Act on a business rescue practitioner in formulating and publishing a plan.
The applicability of section 34 of the Insolvency Act (the Insolvency Act)
The court also reviewed whether section 34 of the Insolvency Act applies to the disposal of a business by a company that is a trader under an approved plan. This consideration was necessitated by the provision of the above-mentioned plan, which barred creditors from taking any steps to set aside the Sale of the Business for 7 months. The Court concluded that section 34 of the Insolvency Act does not represent an obstacle to the plan's approval because:
- the creditors contracted outside the scope of section 34. In this regard, the court reasoned that section 34 is not mandatory and envisions that a trader may not follow the notification rules therein (but would have to face the consequences of such a course of action); or
- based on the applicable legislation, section 34 does not apply to a company in business rescue. Holding that it does, would have bizarre consequences and defeat the purpose of Chapter 6 of the Companies Act. Section 134 of the Companies Act specifically empowers the practitioner to dispose of the company's property in specified circumstances. It would be illogical to suggest that section 34 of the Insolvency Act continues to operate and apply to a company in business rescue because the very persons called upon to vote in terms of the business rescue plan are the persons who would ordinarily receive or require notice in terms of section 34 of the Insolvency Act.
Commercial Morality
The major creditors further argued that:"the court, even if it were minded to set aside the vote and thus, in effect, secure the business rescue plan's approval, ought not to do so because the business rescue plan or its implementation would be contrary to public policy because the company post business rescue would still be commercially insolvent, lack any assets and should not be permitted to participate in commerce".
The court found this argument to be both factually and legally flawed. This argument was based on the incorrect factual premise that the plan's purpose is to allow Reiscor to recommence trading after the business rescue. This was not the case, as the plan's objective was to "extract a superior outcome via business rescue rather than via liquidation".[7] Legally, the argument was flawed as the plan before the court is precisely what the legislative framework for business rescue requires. The court found the argument on commercial morality to be of no substance.
Considering the above and that the plan only had the effect of benefiting creditors (as opposed to a liquidation of Reiscor at this stage), the court found that it is reasonable and just that the votes rejecting the plan be set aside on the grounds that they were inappropriate.
This judgment is welcomed as it adds to the expanding body of legal precedent on the application of section 153(7) of the Companies Act.
