The Supreme Court of Appeal (SCA) has eased jitters in the business rescue profession — in a landmark judgment that ensures both pre- and post-commencement creditors have equal protection under the country’s Companies Act.
The high court in Johannesburg in 2023 threw a spanner in the works when it ruled that only pre-commencement creditors could vote on business rescue plans.
The concern in the business rescue industry was that the effect of the high court’s decision was that it would disenfranchise a great number of post-commencement financiers and creditors who are essential to the ongoing business of a company in financial distress.
This fear was allayed by the SCA on Wednesday, in a unanimous finding that set aside the high court’s decision.
“The rights of post-commencement creditors are not regulated or limited in a similar way by the act. Had the legislature intended to differentiate between pre-commencement creditors and post-commencement creditors in a similar way, it would have done so in clear terms,” the SCA ruled.
The controversy on which rights are enjoyed by pre-commencement creditors’ vis-vis their post-commencement counterparts emanates from the decision by the high court that Ndalamo Resources is the preferred bidder for the embattled Arnot OpCo coal mine. This was despite evidence that the votes against the Ndalamo offer by one of Arnot’s creditors, Mashwayi, were not counted.
At the heart of the dispute was whether Arnot’s creditor Mashwayi had voting rights. Mashwayi became a creditor of Arnot OpCo after the business rescue process commenced, making it a post-commencement financier.
Arnot OpCo owns and operates a coal mine in Middelburg that sits on 192-million tonnes of thermal coal, the largest such coal reserve in Africa.
A 2022 report by SizweNtsalubaGobodo (SNG) Grant Thornton found that no sooner had Arnot OpCo received the mining rights from Exxaro Resources than a feeding frenzy took root, with procurement processes flouted.
SNG Grant Thornton’s findings were scathing about the company’s executives, some of whom were found to have unduly benefited from the mine’s shift allowances system.
The probe also found that executives entered into contracts without the requisite board approvals and some service providers commenced work or services without valid contracts.
The SCA judgment will be a blow to Ndalamo, which hoped to add Arnot Opco to its coal portfolio.
Ndalamo already has controlling stakes in the North Block Complex near the Arnot power station, and New Clydesdale Colliery close to Eskom’s Kriel power station.
Ndalamo also has a controlling interest in Ubuntu Colliery, an opencast operation near the Kusile power station, as well as a 50% stake in Arnot South Colliery, which is close to two of Eskom’s Hendrina and Arnot plants.
Eric Levenstein, head of the insolvency and business rescue practice group at Werksmans Attorneys, said the SCA judgment strengthens the legal standing of PCF providers and ensures that their financial contributions are recognised in decision-making when it comes to the approval of business rescue plans.
“The judgment is critically important in the context of business rescue proceedings in SA and confirms that post-commencement finance (PCF) providers have voting rights in business rescue plans and their votes impact on the approval of a business rescue plan and must be taken into account when determining the voting on a business rescue plan,” Levenstein said.
“It also confirms that business rescue practitioners must include all PCF votes in tallying voting results. This decision finally provides clarity on the status of PCF creditors voting on business rescue plans, and provides certainty for those PCF providers who wish to provide PCF funding to companies undergoing a restructuring in terms of chapter 6 of the act.”
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