Reflections by a court on whether a creditor's vote is appropriate or inappropriate
One of the first cases involving the operation of section 153(1)(a)(ii) of the Companies Act 71 of 2008 is the matter of Copper Sunset Trading 220 (Pty) Ltd t/a Build It Lephalale (In Business Rescue) and Spar Group Limited (First Respondent) and Normandien Farms (Pty) Ltd (Second Respondent). This matter was decided under case 365/2014 in the High Court of South Africa (Gauteng Division, Pretoria) functioning as Limpopo Division, Polokwane.
The Honourable Makgoba J made an order on 30 April 2014 in terms of which the results of the votes by the first and second respondents in rejecting the revised business rescue plan were set aside on the ground that they were inappropriate.
The second part of the judge's order is that the revised business rescue plan was declared to be properly adopted on the condition that the applicant and/or the business rescue practitioner obtained post commencement finance of R2 million within 30 days from the date of the order.
The timeline of the business rescue proceedings is important:
- 26 November 2013 - section 129 resolution
- 11 December 2013 - business rescue practitioner appointed
- 19 December 2013 - first creditors' meeting held
- 23 January 2014 - publication of the proposed first business rescue plan
- 4 February 2014 - first business rescue plan rejected at second creditors' meeting
- 18 February 2014 - publication of the revised business rescue plan
- 4 March 2014 - meeting of creditors at which the revised business rescue plan was introduced
Copper Sunset Trading 220 (Pty) Ltd (Copper Sunset) traded as a "Build It" retailer in the hardware, building materials and related products industry. Copper Sunset had been trading in Lephalale, Limpopo Province since 2006. It employed 52 people, having two directors who were the only shareholders.
The Build It brand is owned by the Spar Group (first respondent).
Copper Sunset is a member of the Build It-Guild of South Africa and as such enjoys the use of the brand and the benefits of the combined buying power arising from the membership of the Guild.
Spar was owed approximately R6.7 million and as such Spar was the largest creditor of Copper Sunset. The second respondent is a creditor of Copper Sunset in the amount of R412 756.
Spar and Normandien Farms both voted to reject the revised plan on 7 March 2014.
The challenge for the learned judge was to determine whether Copper Sunset, represented by the business rescue practitioner, had made out a proper case that the votes of Spar and Normandien Farms were inappropriate within the meaning of section 153(1)(a)(ii).
The answer to this can only be obtained by the reading of section 153(1)(a)(ii) together with section 153(7). Section 153(1)(a)(ii) allows an application to court to set aside the result of the vote by the holders of voting interests or shareholders on the grounds that the vote was inappropriate.
Most importantly, section 153(7) says that in an application of this nature a court may order that the vote on a business rescue plan is set aside, if the court is satisfied that it is reasonable and just to do so having regard to:
- The interests represented by the persons who voted against the plan.
- The provision, if any, made in the proposed plan with respect to the interests of the persons who voted against the plan.
- A fair and reasonable estimate of the return to that person if the company were to be liquidated.
It must be appreciated that this method is one of the three methods available to have a rejected proposed business rescue plan approved. The other two methods are first to seek approval for the practitioner to prepare and publish a revised plan, and the third method is by purchasing the voting interests of one or more persons who opposed the adoption of the business rescue plan. The judge was faced with the difficulty of interpreting the word "inappropriate". There has been no decision in the business rescue context. The author, Henochsberg, on the Companies Act (Volume 1 – page 529) is, with respect, correct when he says it is difficult to think of circumstances where the creditors’ vote for the rejection of the business rescue plan would be inappropriate. The fact of the matter is simple; creditors are entitled to exercise their votes freely depending on their exposure and their policies in relation to such exposure.
The judge then determined the matter by considering the factors set out in section 153(7) of Act 71 of 2008. The court, if this section is applied properly, has to come to the conclusion (to set aside the vote as inappropriate) that it is reasonable and just to do so, having regard to the interests of the persons who voted against the plan, the provision in the plan with respect to the interests of the persons who voted against the plan, and a fair and reasonable estimate of the return to that person if the company were to be liquidated.
It is the writer's view that the judge misdirected himself completely by stating in paragraph 37 that:
" The attitude of the First Respondent in gunning for liquidation is self-serving and, with respect, unreasonable regard being had to the fact that it is the only creditor to probably gain at most R0.45 dividend".
It is the view of the writer that the fundamental issue is that a court can set aside the vote if the major creditor (creditor voting against the plan) lacked bona fides and was acting contrary to public interest and the dictates of commercial morality.
The writer thinks that section 155(3)(7) is confusing and badly worded, but it is the only section to which the court did and could have referred. The judge made no finding about the bona fides of the vote but stated that "it is worth it to embark upon the business rescue plan than resort to a more devastating process of liquidation of the company".
It is the writer's respectful opinion that the court is not empowered to say what should or shouldn’t happen. If the vote determines that the business rescue plan is rejected and as a result of this the company goes into liquidation then so be it.
It is suggested that a practical and business-like interpretation of section 153(7) is that the interests of persons who voted against the business rescue plan must be protected, taking into account the provisions, if any, made in the business rescue plan for those creditors (section 153(7)(b)). In addition, a factor that must be considered is a fair and reasonable estimate of the return to that person if the company were to be liquidated.
In this case the learned judge said that because Spar would get R0.45 dividend on liquidation it would be inappropriate for Spar to vote for liquidation. With respect, this is not logical and the logical approach should have been to dismiss the application by Copper Sunset.
The vitally important issue is that a creditor can vote in accordance with its own interests. The creditor does not have to vote in accordance with what is set out in section 7(k) of Act 71 of 2008, which is the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders. In fact, the reverse applies, namely that creditors must have a free choice to vote whichever way they want to. The writer believes that an unfortunate side effect of this judgment is that if more applications are decided on the court's reasoning, it could amount to a situation of the vote of major creditors being neutralised.
A further criticism of the judgment is that the court does not have the power to grant the relief that the plan is properly adopted. The court's dictum, in this case, amounts to an extension of its powers, because the court says that the vote is inappropriate and therefore the plan has to be adopted. The court should have said that in its view the vote is inappropriate and as such it must be put to the vote again. Obviously it is likely that Spar would again have voted against the plan. However, the function of a business rescue practitioner is to interact between the affected parties and, in the writer's view, the business rescue practitioner could have taken financial and business steps to negotiate sensibly with the affected parties in order to try and achieve a balance in which event it would have been likely that a plan with amended terms could have been voted in.
Unfortunately, this did not happen in this case. The result is that a plan has been declared to be properly adopted and this plan will most certainly never be supported by Spar and the likelihood of a successful business rescue happening in Copper Sunset is negligible.