What is the meaning of "voting interests" in terms of section 153(1)(b)(ii)?
Section 153 (1)(b)(ii) of the Companies Act 71 of 2008 (the Act) is intended to afford a remedy to affected persons who support a business rescue plan that has been
The section can be broken down into five key elements:
- any affected person/s
- may make a "binding offer to purchase"
- the "voting interests" of persons who opposed the adoption of the plan
- at a value independently determined
- to be a fair and reasonable estimate of the return to that person should the company be liquidated.
The general approach in practice has been to assume that the purchase of voting interests (a somewhat vague term) in terms of this section carries with it an automatic purchase of the dissenting creditor's claims against the company. This article examines whether that assumption is justified.
There are two main schools of thought in the judiciary as to how to interpret this opaquely drafted section, which are diametrically opposed to each other. In the Kariba Furniture Manufacturers case, Judge Kathree-Setiloane held that "voting interests" are equated to the dissenting creditor's claim against the company, and accordingly the offeror acquires the dissenting creditor's claim against the company, and with it the right to vote.
In the later Dowmont Snacks case, Judge Gorven disagreed and held that "voting interests" are not equated to the dissenting creditor's claim and the offeror cannot in this manner acquire the claim as an automatic attachment to the voting interest. However, he did not give reasons for his view.
The question then arises as to whether the Act can reasonably be interpreted to mean that "voting interests" are equated to the creditor's claim. This is not an issue on which Gorven J dwells but, because of its importance, is worthy of further discussion. I deal with the issue first on a literal approach to statutory interpretation, and then on a purposive approach.
Section 128(1)(j) defines a "voting interest" as an interest as recognised, appraised and valued in terms of sections 145(4) to 145(6). The jurisdictional fact, which must be present in order for the definition in section 145(4) to apply, is that there must be in issue a decision that requires the support of the holders of creditors' voting interests, that is, where a vote is required. If a vote is indeed required, then a creditor, whether secured or unsecured, has a voting interest "equal to the value of the amount owed by the creditor to the company", that is, to the monetary value of the creditor's claim.
Simply put, the term "voting interest" simply means "voting right" and nothing more. The measure of the power of a voting interest is determined by the rand value of the claim. But it is the voting interest that attaches to the claim, and not the claim that attaches to the voting interest.
Indeed, the term "voting rights" is defined in section 1 of the Act to mean "with respect to any matter to be decided by a company" (that is, any matter that is put to a vote by the company's shareholders), the rights of any holder of the company's securities to vote on that matter. Clearly, a shareholder's ownership of shares in the company is not equated to its right to vote those shares on a decision of the company.
The reason that the legislature did not use the more linguistically accessible term "voting rights" in Chapter 6 was, I suggest, in order to distinguish the concept of "voting interests" belonging to a creditor from the concept of "voting rights" belonging to holders of securities.
Kathree-Setiloane J adopted the approach that the dissenting creditor should not complain, since it will be receiving the amount that it would have received in any event were the company to be liquidated. The facetious answer is that the company is not being liquidated, so creditors should not be treated as if it is.
A more considered answer would take into the account the rights of a creditor whose claims are effectively being expropriated. It is a trite rule of statutory interpretation that legislation is to be interpreted so as not to interfere with existing rights. The claims of a creditor against the company in business rescue clearly constitute existing rights. Since there is no express statement in the Act that a section 153(1)(b)(ii) purchase constitutes a purchase of the dissenting creditor's claim, the legislature is not likely to have intended that the claim is indeed purchased.
If Kathree-Setiloane J is right, it is possible for an affected person to forcibly purchase not only the voting interest but also a dissenting creditor's claim at the liquidation value of that claim. The potential for abuse is manifest, particularly where the company is hopelessly insolvent and concurrent creditors would receive no dividend in liquidation. Creditors opposed to the plan would be placed under undue pressure to vote in favour of any plan that offers a dividend nominally above zero, even if they have other, perfectly legitimate, reasons to vote against the plan. They would face the prospect of their claims being effectively expropriated. Furthermore, the offeror would benefit from receiving the dividend accruing from the dissenting creditor's claim, which it is now acquired for a negligible price. Indeed, since in nearly all cases the business rescue dividend is higher than the liquidation dividend to concurrent creditors, a section 153(1)(b)(ii) purchaser is likely to make a profit on the transaction.
I do not believe it could have been the intention of the legislature to permit such abuse or to allow the purchaser to profit in this manner.
Kathree-Setiloane J correctly points out that in terms of section 5(1) read with section 7(k) of the Act, the court is enjoined to interpret the business rescue provisions in a manner that promotes the rescue of financially distressed companies while balancing the rights and interests of all stakeholders. Applying a "balancing of rights and interests" test in this instance would, in my view, lead to the inevitable conclusion that the rights and interests of the opposing creditors would be unreasonably discounted were the Kariba Furniture Manufacturers approach to be followed.
It would, in my view, be fair to accept that the legislature intended to prevent dissenting creditors from unreasonably obstructing the adoption of a plan. On my interpretation, a dissenting creditor would not be prejudiced by the section 153(1)(b)(ii) purchase of its claims. On the contrary, it would receive the double benefit of being paid out both for liquidation value of its claims as well as the business rescue dividend for the same claims. There may even be an arbitrage opportunity for disgruntled creditors to oppose the adoption of the plan on a tactical basis, so as to make this additional income.
It can be assumed that the offeror will benefit because it will have achieved its objective of getting the plan through, albeit at a cost. All creditors who voted in favour of adopting the plan will benefit because the plan will be adopted at the adjourned meeting. In short, everybody wins.