31 August 2021 by and Dispute Resolution Alert

Grey area? Some clarity on joinder of creditors to court proceedings after publication but before adoption of a business rescue plan

In the recent case of Blue Nightingale Trading 709 (Pty) Ltd v Nkwe Platinum South Africa (Pty) Ltd (in business rescue) and Others, the Gauteng Division of the High Court (the Court) provided some clarity on whether the creditors of a company under business rescue must be joined to legal proceedings for the setting aside of the business rescue proceedings, in circumstances where the business rescue plan has been published but not yet adopted.

Briefly, the facts of the matter are that Blue Nightingale Trading 709 (Pty)  Ltd (Blue Nightingale Trading) brought an application for an order setting aside the business rescue proceedings of Nkwe Platinum South Africa (Pty) Ltd (Nkwe Platinum). Nkwe Platinum’s proposed business rescue plan had been published. However, in terms of an interim court order, its creditors were prevented from voting on the plan until the Court had decided on the outcome of Blue Nightingale Trading’s application for the setting aside of the business rescue proceedings (the main application). In addition to the main application and the interim order, Blue Nightingale Trading then brought a further interlocutory application for an order joining all of Nkwe Platinum’s creditors to the main application.

On the issue of joinder in circumstances where a business rescue plan has already been adopted, our courts have made it clear in various judgments of the Supreme Court of Appeal that it is necessary to join all the creditors whose rights under the plan may be prejudiced by the outcome of legal proceedings which will affect the status quo established by the plan. However, in the Blue Nightingale Trading matter the circumstances were different in that no business rescue plan had been adopted yet.

In respect of the issue of joinder to legal proceedings, our common law essentially provides that a party must be joined to any process of litigation if they have a direct and substantial interest in the subject matter of the litigation and stand to be prejudiced by its outcome.

The Court accordingly had to decide whether the creditors had a direct and substantial interest in the legal proceedings for the setting aside of Nkwe Platinum’s business rescue, in circumstances where its business rescue plan had been published but not yet adopted.

This distinction between pre and post the adoption of the plan for the purposes of the joinder test is significant, as the Court explained that the position of creditors under an adopted business rescue plan is materially different from the position of creditors who have not yet voted on and adopted a plan. Once a business rescue plan has been adopted, the creditors’ claims are affected as their pre-existing rights in respect of the debt owed to them become novated. In other words, the adoption of the plan results in the creditors’ claims against the company under rescue being compromised, and thereby replaces their pre-existing rights in respect of their claims with entirely new rights. The terms of the business rescue plan, once adopted, are therefore determinative of the creditors’ substantive legal rights. Their financial interests are accordingly directly implicated in any legal proceedings seeking to set aside the plan, as the outcome could have a prejudicial effect on their rights as set out in the plan.

By contrast, where a business rescue plan has not yet been adopted, the creditors’ rights have not yet been redefined and replaced by the terms of the plan. Therefore, any legal proceedings seeking to set aside the business rescue process prior to the adoption of the business rescue plan will have no effect on the creditors’ pre-existing substantive rights. In practical terms, should the business rescue process be set aside prior to the adoption of the business rescue plan, the creditors will simply maintain their rights to claim the full amount of debt owed to them by the company. Such creditors accordingly do not stand to be prejudiced by the setting aside of the business rescue proceedings, as it would not result in having any effect on their existing legal rights.

After considering the common law test for joinder, with reference to the position of creditors pre and post the adoption of the business rescue plan, the Court concluded that the creditors of a company under business rescue are not required to be joined to legal proceedings for the setting aside of the busines rescue proceedings in the absence of an adopted business rescue plan. In these circumstances, the creditors would, in law, not have a direct and substantial interest in the subject matter of the litigation as their rights would remain unaffected by the outcome of the proceedings.

In support of its conclusion, the Court further clarified that merely because there is no requirement to join the creditors to the legal proceedings does not mean that they are not able to participate should they so wish. The Court confirmed that sections 145(1)(a) and (b) of the Companies Act 71 of 2008 provide that the creditors are entitled to notice of, and participation in, each court proceeding that arises during business rescue proceedings (irrespective of whether or not a business rescue plan has been adopted). These provisions accordingly safeguard creditors who want to intervene in the proceedings by supporting either the continuation or termination of the business rescue proceedings. Accordingly, merely because joinder may not be necessary does not mean that creditors’ rights to participate in the court proceedings are prejudiced. They remain fully empowered and entitled to intervene.

The Court accordingly dismissed Blue Nightingale Trading’s application for joinder.

From the perspective of a party wishing to bring court proceedings against a company in business rescue where a business rescue plan has been published but not yet adopted, this judgment has provided some clarity and confirmed that it is not necessary to join the company’s creditors to the court proceedings, although the creditors retain their right to receive notification of the court proceedings.

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