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Amendments to Approved Business Rescue Plans and Making Provision for Dispute Resolution Mechanisms in the Business Rescue Plan

27 May 2013

Routledge Modise

In this article I examine the provisions of Chapter 6 of the Companies Act 71 of 2008 (the Act) relating to amendments of a business rescue plan, in particular amendments after it has already been approved. It is common, if not inevitable, that events do not materialise exactly as they were planned – which leaves business rescue practitioners with the conundrum of how to plan for a business rescue plan that goes awry.  It is easy enough for a business rescue plan to be amended before it is presented to creditors for a vote at a section 152 meeting. The Act provides numerous avenues for affected parties to make representations to amend a draft plan. These are summarised below.

Section 145 of the Act allows for participation by creditors and empowers creditors to vote for a proposed business rescue plan, including voting to amend such plan. Section 149 of the Act makes provision for creditors to consult with the Business Rescue Practitioner in relation to any matters relating to the business rescue proceedings. Section 152(1)(d) of the Act specifically empowers the creditors to submit motions to amend the  proposed rescue plan.

It must be noted, however, that all of the abovementioned rights are only available to creditors and to the business rescue practitioner, prior to the approval of a business rescue plan. The Act does not extend similar rights to creditors or the business rescue practitioner after the point where a business rescue plan has been adopted. The Act in particular does not make provision for amendments to an adopted business rescue plan. 

It will be appreciated that a business rescue plan essentially constitutes self-legislation. The answer to the conundrum is therefore that the Practitioner ought to insert into the proposed business rescue plan the relevant and necessary provisions which will allow for amendment of the plan after same has been adopted, in the event that this is required. In particular if one aspect of the business rescue plan cannot be fulfilled after the plan has been approved, the Practitioner, acting in conjunction with the creditors, needs to be able to revise the plan. Similarly, if a substantial component of the plan goes wrong, provision must be made in the original business rescue plan empowering the Practitioner and the creditors to revisit the plan.

The basis of such provisions being incorporated into the original business rescue plan is not for the Practitioner to seek the approval of the creditors for his departure from the approved plan in the normal course of business. The Practitioner must, as a matter of course, have discretion to depart from such plan, should such departure fall within in the normal course of business. Such discretion however is not be permitted by the Act and will also need to be expressly granted to the Practitioner in terms of the plan. The relevant amendment provisions will only come into effect in the event where there is a fundamental and substantial change to the business rescue plan and where such changes would require the consultation and voting upon by creditors.

As an example, the financier to the company in business rescue proceedings could, after the adoption of the business rescue plan, seek to vary the amount, the form or the manner in which the investment or financing will be put into the business. The business rescue plan must accordingly make provision for creditors to vote on this new proposed form or amount of investment which will be put into the business, which vote will effectively result in the amendment of the business rescue plan.

In this context, it is apposite to deal with a problem that commonly arises in business rescue proceedings, namely, that the Act does not provide mechanisms to deal with disputed claims.

Section 147 of the Act makes provision for the first meeting of creditors in terms of which the Practitioner among other things "may receive proof of claims by creditors".

The use of the word "may" in this section indicates that it is not necessary for creditors to prove claims at the first meeting of creditors. This in itself opens the door for abuse as creditors are not obliged to prove their claims formally as is required in the case where a company is placed into liquidation. Furthermore, neither this provision nor any other provision of chapter 6 of the Act deals with or specifically allows either a creditor, any other affected party or even the practitioner to challenge a claim lodged by one of the creditors.

The business rescue plan must accordingly make provision for mechanisms, which mechanisms should include dispute resolution mechanisms whereby the validity of claims may be challenged by affected parties, including the business rescue practitioner. These provisions could be couched in such a manner so as to enable the challenging of creditors' claims in a similar manner as parties are entitled to do in instances where a company has been liquidated. As a starting point the business rescue practitioner could have regard to the provisions of the Insolvency Act which allow for the challenging of proved creditors' claims.

In terms of the laws of insolvency, it is usually the Master who would preside over disputes in relation to proved claims in an estate. The question in the case of a business rescue is who must be empowered to preside over such disputes. These are further issues that would need to be canvassed in the dispute resolution mechanism provisions contained in the business rescue plan. The business rescue practitioner could also make provision under such dispute resolution mechanism provisions empowering himself to report to the relevant presiding forum (as agreed upon) regarding the validity of any claim which has been challenged. This would be similar to the powers granted to a liquidator in terms of Section 45(3) of the Insolvency Act which entitles him to file a report to the Master expressing his views on the validity of any proved claims which have been challenged. In a similar fashion, the business rescue practitioner should make provision in his business rescue plan, contractually empowering himself to file a report to CIPC or the Court with his views on the legitimacy of any proved claims that are challenged.

Aside from resolving disputes of creditors pertaining to claims, the practitioner must also be empowered to take action against any defaulting party or a party who has breached a substantial component of the business rescue plan. By way of example, a potential financer could, after the adoption of the business rescue plan, seek to withdraw his undertaking to invest and/or provide financing to the business. In these instances the Practitioner must be empowered to take action to effectively enforce the undertaking by the financier. The business rescue plan therefore must make provision for the necessary dispute resolution mechanisms which would regulate such action and which would come into effect in such instances. In this regard and as a starting point the Practitioner could have regard to the standard dispute resolution mechanisms and provisions that are commonly put in place in commercial contracts.

Inclusion of the abovementioned provisions into a business rescue plan may serve as a contractual safeguard and empowerment tool enabling the business rescue practitioner to take the necessary steps to ensure the effective implementation of the business rescue plan and to prevent any abuse of the business rescue process.

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