Is a simple majority sufficient to amend a business rescue plan or to adjourn a meeting?

At a Section 151 meeting, a BRP must:

(i)    Introduce the proposed BR Plan for consideration by the creditors and, if applicable, by the shareholders;

(ii)   Inform the meeting whether the BRP continues to believe that there is a reasonable prospect of the company being rescued;

(iii)  Provide an opportunity for the employees’ representatives to address the meeting;

(iv)  Invite discussion, and entertain and conduct a vote, on any motions to:

- Amend the proposed plan, in any manner moved and seconded by creditors, and satisfactory to the practitioner; or

- Direct the BRP to adjourn the meeting in order to revise the BR Plan for further consideration.

(v)   Call for a vote for preliminary approval of the proposed BR Plan, as amended if applicable.

Whereas the Companies Act specifically states that a proposed BR Plan will be approved on a preliminary basis if: (i) it was supported by the holders of more than 75% of the creditors’ voting interest that were voted; and (ii) the votes of the proposed plan includes at least 50% of the independent creditors’ voting interests that were voted, there is no direct indication in the Companies Act as to what majority is required to amend the BR Plan or to adjourn the meeting where the BR Plan was put to a vote.

The aforesaid lacuna has created legal uncertainty, which will in all likelihood result in future disputes, since parties tend to interpret legislation in a manner that is the most advantageous towards them.

Potential interpretations

We are of the view that parties could potentially argue that the following different majorities are required in order to amend the BR Plan or to adjourn the meeting:

(i)    75% of the creditors’ voting interest that were voted; and (ii) at least 50% of the independent creditors’ voting interests that were voted;

(ii)   A simple majority of the independent creditors’ voting interests; and

(iii)  A simple majority of the creditors’ voting interest.

75% of the creditors’ voting interests and 50% of the independent creditors’ voting interest

A number of South African academics argue that 75% of all creditors’ voting interests and 50% of the independent creditors’ voting interest are required in order to pass a motion to amend a BR Plan or to adjourn the meeting. However, there are a number of interpretational difficulties with this interpretation. The most evident difficulties are:

• Section 152(1)(d)(i) of the Companies Act specifically refers to “holders of creditors’ voting interests”. This is similar to the wording used in the first stage of the two-stage approach in section 152(2) of the Companies Act (i.e. 75% of the creditors’ voting interests that were voted). However, unlike section 152(2) of the Companies Act, there is no mention of the second stage of the two-stage approach, namely, the 50% independent creditors’ voting interest that were voted.
• Section 152(2) of the Companies Act specifies that the subsection applies to votes called in terms of section 152(1)(e) of the Companies Act. In light of the aforementioned, it will be difficult to argue that section 152(2) of the Companies Act must be used to determine the majority required in order to pass motions in terms of section 152(1)(d) of the Companies Act.
• In terms of this interpretation, in order to amend a proposed BR Plan or to force a BRP to publish a revised BR Plan (in terms of section 153(1)(b)(i)(aa) of the Companies Act), you will require the same majority that is required in order to ultimately approve the BR Plan. This will make it unnecessarily difficult for creditors to get a proposed BR Plan amended.

A simple majority of the independent creditors’ voting interests

Another potential interpretation is that a simple majority of the independent creditors’ voting interest is required in order to amend the BR Plan or to adjourn the meeting.

However, since section 147(3) of the Companies Act specifically states that a simple majority of the independent creditors’ voting interests will only be required to pass motions at meetings of creditors other than section 151 meetings (where the BR Plan is put to a vote), and since motions in terms of section 152(1)(d) of the Companies Act will be considered at section 151 meetings, it is clear that the legislature didn’t intend the independent creditors’ voting interest to be taken into consideration.

A simple majority of the holders of creditors’ voting interest

A further interpretation is that a simple majority of all the holders of creditors’ voting interest will be sufficient to pass motions in terms of section 152(1)(d) of the Companies Act. This is the approach that is followed by BRPs.

In practice, this will mean that the same creditors who could vote in terms of the first stage of the two-stage approach on the adoption of the BR Plan, would be able to vote to pass the motions to amend the plan or to adjourn the meeting. The only difference is that now, instead of requiring a 75% majority (as per section 152(2) of the Companies Act), a simple majority will be sufficient to pass these motions.

We are of the view that this approach is the correct approach, as long as the following requirements are also met:

(i)    The motion must be proposed by one of the holders of creditors’ voting interest (it doesn’t matter what percentage of the creditors’ voting interest the creditor holds);

(ii)   The motion must be seconded by another holder of creditors’ voting interest (it also doesn’t matter what percentage of the creditors’ voting interest the creditor holds); and

(iii)  The BRP must be satisfied with the proposed amendment.

Lastly, since the proposal to amend the BR Plan must be satisfactory to the BRP, it could potentially be argued in the future that the BRP has a veto right and that if he/she is not satisfied with the proposed amendment/adjournment, he/she could set aside the vote.

Conclusion

The fact that the Companies Act is drafted in a manner where there is no clarity regarding the majority required in order to amend a BR Plan or to adjourn a meeting where the BR Plan is put to a vote, creates legal uncertainty. This will undoubtedly result in disputes, especially where competing bids for distressed assets are often, and even more so in the current economic climate, the topic of discussion at meetings of creditors. This legal uncertainty will hopefully be dealt with by the South African courts in due course.