10 March 2025
| Insolvency and Business Rescue
In Mashwayi Projects (Pty) Ltd and Others v Wescoal (Pty) Ltd and Others (1157/2023) [2025] ZASCA 5 (29 January 2025), the Supreme Court of Appeal (SCA) ruled that post- commencement creditors, as stakeholders, are entitled to equal protection under section 7(k) of the Companies Act (Act) and, as such, have the right to vote on the adoption of a business rescue plan.
Post-commencement creditors play a critical role in business rescue proceedings by providing financing to a distressed company after the initiation of business rescue. The Act grants them the right to secure their loans using the company’s unencumbered assets and prioritises their claims in the order of preference outlined in the Act.
The Court a Quo’s Decision
The court a quo was the first to address whether the Act intended to extend the rights under section 145(4) specifically, the right to vote in a meeting convened under section 152 only to creditors existing at the commencement of the business rescue process, or whether it also applied to those to whom the company incurred obligations during the rescue process. The court a quo (Wilson J) acknowledged that its interpretation had significant implications not only for this case but for all business rescue proceedings under the Act, prompting the SCA to grant leave to appeal.
The SCA found no basis in the wording of section 145 to suggest that the right to participate in the business rescue process including attending creditors’ meetings and voting on the adoption of a rescue plan was limited to pre-commencement creditors. There was no justification for excluding post-commencement creditors from equal participation in determining the company’s fate during rescue proceedings.
The SCA emphasised that, unlike liquidation, business rescue does not create a concursus creditorum where creditors’ rights become fixed and immutable. In rescue proceedings, the distinction between pre and post commencement creditors is less significant, as the company’s status does not change upon the commencement of rescue.
The court a quo had relied on the requirement that the rescue plan detail pre commencement creditors but not post commencement creditors to support its narrow interpretation of voting rights. However, the SCA clarified that this requirement was not intended to determine who could vote.
The SCA’s interpretation aligns with international principles, particularly the World Bank’s recommendations on post-commencement financing in business rescue. These principles, which emphasise the importance of financing for struggling businesses during rescue, were considered in the drafting of South Africa’s corporate rescue laws under Chapter 6 of the Act.
The SCA’s decision
The SCA addressed two primary issues:
- whether post-commencement creditors are entitled to vote on a business rescue plan; and
- if not, whether the court a quo correctly declared the plan duly adopted after discounting the votes of post-commencement creditors, or whether it should have ordered a revote.
Wescoal and Salungano argued that the appeal should fail, as a proper interpretation of the Act excludes post commencement creditors whether post-commencement finance (PCF) creditors or other post-commencement (PC) creditors from voting on a rescue plan under section 152.
The appellants, however, rightfully contended that all post-commencement creditors should have voting rights. Alternatively, the appellants submitted that even if the court a quo’s interpretation was correct, it should not have declared the plan adopted at the 28 July 2023 creditors’ meeting but should have ordered a revote.
All things considered, it was held that the amended business rescue plan was not supported by the holders of more than 75% of creditors voting interests at the creditors meeting, concluding that the amended plan was in fact rejected.
Absent the Act drawing a distinction between pre-commencement creditors and post commencement creditors, the SCA rightfully held that they are, as stakeholders, deserving of equal protection under section 7(k) of the Act and are therefore entitled to vote on the adoption of a business rescue plan.
Concluding Remarks
The SCA’s decision to uphold the appeal underscores the importance of post- commencement financing in enabling distressed companies to restore solvency and continue operations during rescue proceedings.
This ruling aligns with the purpose and objectives of the Act and provides much-needed clarity and relief for post-commencement finance creditors.
The Salungano Group Ltd and Ndalamo Coal (Pty) Ltd have lodged appeals to the Constitutional Court against the judgment and the whole of the order of the SCA.
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