Some clarity on what constitutes a “class” of creditors in a section 155 compromise

The Gauteng Division of the High Court recently delivered a judgment in the matter of The Commissioner for the South African Revenue Service and Logikal Consulting (Pty) Ltd and Others, Case No. 96768/2016, in which the court had to interpret, among other things, what comprises a “class” of creditors as contemplated in s155(2) of the Companies Act, No 71 of 2008.

6 Jun 2018 3 min read Dispute Resolution Alert Article

In this case, SARS applied for a rescission of an order granted in its absence, for the sanctioning of an offer of compromise under s155(7). Section 155(8)(c) provides that a compromise will only become binding on all the creditors (or class of creditors) of the company on a date that the company files a copy of the court order sanctioning the compromise.

The intended compromise was between Logikal and its preferent creditors only, being SARS with a claim of approximately R6 million and five of Logikal’s employees with an aggregate statutory claim for arrear salaries of approximately R27,000. The proposed compromise entailed no compromise at all for the employees’ claims as they were to be paid their claims in full, however, SARS’s claim would be compromised to 20c/rand of its claim.

The compromise was accepted at a meeting convened for that purpose by the other preferent creditors at which SARS was not present and ultimately sanctioned without SARS’s knowledge.

The grounds for SARS’s application were, among other things, that as preferent creditor it did not belong to the same class as the employees with their preferent claims for arrear salaries and therefore their vote in favour of the compromise did not bind SARS, that SARS was not given proper notice of the meeting at which the compromise was voted upon and that SARS should have been but was not notified of the application for sanctioning.

In respect of the interpretation of what constituted a class of creditors in terms of s155(2), SARS’s submission was that creditors whose rights are so dissimilar that it would be impossible for them to consult together with a view of common interest cannot form a class. The court held that merely because creditors are “preferent” does not mean that they fall under the same class as there are different rankings within preferent creditors. The court referred to s98A of the Insolvency Act, No 24 of 1936 which affords employees’ preferent claims for salaries a higher ranking than SARS’ preferent claim for unpaid tax. The court further held that since the employees’ claims were not being compromised at all while the majority of SARS’s claim was being compromised, it is difficult to see how all six parties could meaningfully consult together with a view to a common interest. Put differently, the distinction drawn between the two sets of claims meant that they were too different to form a class.

The court accordingly granted an order rescinding and setting aside the sanctioning order and declared that that the order was not binding on SARS.

The principles dealt with in this judgment are important and should be taken note of in ensuring that the statutory mechanism afforded by s155 is not abused by companies to water down creditors in SARS’s position. Creditors should also beware of the class that they are placed in, especially where a compromise will have the effect of watering down a creditor’s claim that is disproportionate to other claims in the same class. 

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