BUSINESS RESCUE

 &

Classes of Creditors

By: Pat Pattinson

THE QUESTION

Should a Business Rescue Practitioner be allowed to create “classes” of creditors simply to secure favourable votes?

The answer should be simple; it only gets complicated through the interpretation of ethical conduct by a Practitioner tasked with balancing the rights of all the affected parties.

Considering the Letter of the Law

Unfortunately, Chapter 6 of the Companies Act that governs business rescue, is silent on a definition of the term “classes”. Even more noticeable is the absence of a definition for the term “Creditors”; other than the mention of “Independent Creditors” in “Application and Definitions to Chapter”, Section 128(1)(g) of the Companies Act.

Section 150 of the Companies Act contains the myriad of information that must be contained in a proposed Business Rescue Plan. In Section 150(1)(iii) it specifically requires that a Practitioner must provide:

• “the probable dividend that would be received by creditors, in their specific classes, if the company were to be placed in liquidation”.

This requirement is however contained in the section relating to the background of the company and not in relation to the proposal in the Business Rescue Plan!

Section 150(1)(b)(v) requires that the proposed Business Rescue Plan must contain:

• “the order of preference in which the proceeds of property will be applied to pay creditors if the Business Rescue Plan is adopted”.

Based on these two clauses, it is my interpretation that the only difference in the respective offers / compromises made to creditors, in a proposed Business Rescue Plan may, in turn, be as a result of one of the following sections of the Companies Act:

Section 134 of the Companies Act “Protection of property interest”

• What this means is that a creditor may be classed as a secured creditor and enjoy preference only in terms of the actual security and further also only in relation to the actual security held, which might not be a full settlement of their claim. This security relates to the quantum, and unless the assets are being sold, such a secured creditors does not automatically enjoy a preference in the period of the repayments.

 Section 135 of the Companies Act “Post-commencement finance”

• The most noticeable aspect of this section is that all remuneration due to staff members during a Business Rescue is automatically considered to be Post Commencement finance and staff members therefore have the same rights as any Post Commencement Financier in the process.

Similar to the other sections of the Act, this section does not allow for the creation of additional classes of creditors, or for any differentiation as far as the quantum of dividend is concerned. It simply provides for the preference of Post Commencement Financiers claims above claims from unsecured creditors and in the order, they were incurred.

It is further still uncertain if Post Commencement Financiers have an actual vote on the proposed Business Rescue Plan as their debt was incurred after the commencement of the Business Rescue and therefore falls outside the definition of creditors as set out in the definition of voting interest as provided in Section 128(1)(j) of the Companies Act when read together with sections 145 and 154(2).

It is clear from the wording in Section 150(1)(b)(v) that the Act only allows for the payment preference of creditors and not the quantum of the dividends to be paid! Why is it then that so many Business Rescue Plans provide for additional “classes of creditors”, all unsecured, but each with their own dividend percentage?

In my opinion, a Business Rescue Plan may not provide for the creation of classes of creditors, especially not if these additional classes of creditors will receive any form of preference simply based on their assigned class.

When I posed these questions to several Practitioners that have adopted the practice of additional classes of creditors into their Business Rescue Plans, they replied that it is simply to secure the votes they need in order to have a proposed Business Rescue Plan adopted.

Surely this cannot be considered ethical or in the spirit of the law, even if it is not prevented by the letter of the law!

 

 

"The views and opinions expressed in this article belong solely to the author and are not in connection with or associated with his business, organization, committee, association or other group or individual. The contents of this article are for informational purposes only and are not intended to be legally binding or constitute advice in any manner whatsoever and is provided without prejudice."

BUSINESS RESCUE & Classes of Creditors