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Landmark Court Ruling Grants Voting Rights to Post-Commencement Creditors in Business Rescue

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In a landmark ruling that reshapes the landscape of business rescue proceedings in South Africa, the Supreme Court of Appeal (SCA) has confirmed that post-commencement creditors are entitled to voting rights when it comes to the adoption of a business rescue plan.

This significant judgment, delivered on 29 January 2025 in the case of Mashwayi Projects (Pty) Ltd and Others v Wescoal (Pty) Ltd and Others, settles years of legal uncertainty about whether post-commencement creditors are considered “creditors” under Chapter 6 of the Companies Act, 71 of 2008.

The Case That Changed It All

The dispute arose from the business rescue process of Arnot Investco (Pty) Ltd, where the legitimacy of a rescue plan vote was questioned. The key legal issue was whether creditors who provided financing after the commencement of business rescue (post-commencement creditors) had the right to vote on the plan.

While the High Court initially ruled that only pre-commencement creditors held such voting rights, the SCA overturned this decision, affirming that all creditors, regardless of when their claims arose, are entitled to participate in the voting process.

Key Takeaways from the SCA Judgment

  • Broad Definition of ‘Creditor’: The court clarified that the term “creditor” is not narrowly defined in the Companies Act. Therefore, it should carry its ordinary meaning—anyone to whom a debt is owed, regardless of when the debt was incurred.
  • Equal Rights for All Creditors: The judgment emphasized that unless the law specifically distinguishes between creditor types, no such division should be implied. The Companies Act does not limit voting rights to pre-commencement creditors, meaning post-commencement creditors deserve equal treatment.
  • Business Rescue vs. Liquidation: The SCA rejected the argument that creditor rights in business rescue should mirror those in liquidation proceedings. Business rescue focuses on the recovery of distressed companies, making post-commencement financing vital for success.

Why This Ruling Matters for Business in South Africa

This decision is a game-changer for companies undergoing financial distress, as well as for investors and lenders considering providing post-commencement funding. Here’s why:

  • Encourages Post-Commencement Financing: The ruling removes uncertainty for lenders, making them more willing to support struggling businesses since they now have a say in critical decisions.
  • Promotes Fairness: It ensures that all creditors, regardless of when they provided credit, are treated equitably.
  • Legal Clarity: Businesses, legal practitioners, and rescue practitioners now have a clear legal precedent to follow, reducing the risk of future disputes.

What’s Next for Companies and Creditors?

If you’re a business in financial distress, this ruling strengthens your ability to secure financing during rescue proceedings. For creditors, it means greater influence over business rescue plans that could affect the recovery of your debt.

Legal experts recommend that companies and creditors review their business rescue strategies in light of this ruling to ensure they’re fully aligned with the new legal framework.

How do you think this ruling will impact business rescue cases in South Africa?

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