10 May 2017 by and Dispute Resolution Alert

The court’s power to set aside the dissenting vote of a creditor in business rescue proceedings

If satisfied that it is reasonable and just to do so, a court may set aside a dissenting vote on a business rescue plan. In Collard v Jatara Connect (Pty) Ltd & Others [2017] ZAWCHC 45, the court did exactly that.

Explaining his decision, Judge Dlodlo stated that there should be no reason to prefer a winding up application over a business rescue plan that will pay the employees of the company in full and result in a better return for creditors. This judgment has subsequently been confirmed by the Supreme Court of Appeal (SCA) in First Rand Bank Ltd v KJ Foods CC (in business rescue) (734/2015) [2015] ZASCA 50 on 26 April 2017.

In the Collard case, it was common cause that the business of the company in distress, Jatara Connect (Pty) Ltd (Jatara) was incapable of financial rescue. The fact that a company is incapable of rescue does not preclude it from business rescue because a legitimate, alternate objective of business rescue is to ensure a better dividend for creditors in instances where the company cannot be rescued. In this instance, Jatara had commenced arbitration proceedings against its major client, Edcon Limited (Edcon). If Jatara are successful in the arbitration, they would receive a substantial award for damages resulting from an alleged breach of contract by Edcon. This sum would be sufficient to ensure that each of Jatara’s 140 staff would be paid in full and sufficient to provide a more favourable dividend to Jatara’s remaining creditors. It is noteworthy that upon winding up, Edcon would not receive a dividend, whereas in terms of the business rescue plan, Edcon would likely receive a sizeable dividend.

Collard, a director and creditor of Jatara, brought an application to wind up Jatara. In response, the employees brought an application for an order placing Jatara into business rescue. The order was granted and the essence of the business rescue plan was to allow for the continuation of the arbitration proceedings.

Edcon, as a proven creditor holding 49.8% of the company’s debt and consequently a substantial voting interest, voted against the business rescue plan while all other creditors, including SARS, voted in favour of the plan. The plan was therefore rejected. The employees of Jatara then brought an application to set aside Edcon’s vote in terms of s153(7) of the Companies Act, No 71 of 2008 (Act). This section provides that a court may order that a vote on a business rescue plan be set aside if it is satisfied that it is reasonable and just to do so taking various factors into account. Judge Dlodlo was therefore called upon to decide whether or not Edcon’s dissenting vote should be set aside.

The Judge cited with approval the judgment of Koen & Another v Wedgewood Village Golf & Country Estate (Pty) Ltd & Others 2012 (2) SA 378 (WCC) in which the court acknowledged the significant collateral damage, economic and social, brought about by the liquidation of companies, specifically, the destruction of wealth and of livelihoods. The court stated that it is in the public interest that the incidence of such adverse socio-economic consequences should be avoided where reasonably possible. 

Upon examination of the business rescue plan, the Judge noted that, pursuant to success in the arbitration proceedings, all of the concurrent creditors of the company, including Edcon, would receive a better dividend under the business rescue and, significantly, that the employees would be paid in full. The only inference the Judge could thus draw from Edcon’s dissenting vote was that it did so with the sole intention of frustrating the arbitration proceedings against it. 

Edcon’s vote was found to be mala fide, and therefore it could not be considered appropriate. The judge found that Edcon’s vote was inappropriate and that it was reasonable and just to set it aside, which it duly did. In the result, the business rescue plan was adopted at the intervention of the employees of Jatara with the assistance of the court. 

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