We have found that creditors are often uncertain about what their rights are during business rescue proceedings. Not being familiar with the process, they often seem to freeze, expecting the worst, when they are informed that one of their customers has filed for business rescue. It is of utmost importance for a creditor to understand the business rescue process and to recognise that to freeze and to observe what unfolds from a distance is the incorrect approach.
Creditors must take cognisance of what chapter 6 of the Companies Act (“the Act”) provides for in respect of creditors rights during business rescue proceedings. Ensuring that they know what their rights are can enable them to participate in the proceedings in an effective and constructive manner.
Section 145 of the Act provides for various rights which creditors are entitled to. It states that creditors are entitled to: 1) notice of commencement of the proceedings, 2) participate in any legal proceedings arising during business rescue proceedings, 3) formally participate in the business rescue proceedings, 4) informally participate in the business rescue proceedings, by making proposals to the business rescue practitioner to consider and incorporate in the plan.
Additionally, creditors have the right to amend, approve or reject a proposed business rescue plan. Should the business rescue plan be rejected at a meeting of creditors in terms of section 151 of the Act, creditors may propose that the business rescue practitioner amend the plan, or alternatively one creditor may present an offer to acquire a dissenting creditors’ interest, as contemplated in section 153 of the Act.
It is important to understand that there are different classes of creditors. During business rescue proceedings you get secured creditors, unsecured creditors and post commencement finance creditors.
Secured creditors are those holding some sort of security for their debt for example a bond or an instalment sale agreement. Unsecured creditors firstly comprise out of preferent creditors being employees in respect of any arrears owed to them before commencement of the proceedings, secondly all the other creditors that do not hold any form of security, such as trade creditors who sold goods on credit in terms of a credit agreement. Interestingly, during business rescue proceedings the South African Revenue Services (“SARS”) is not considered to be a preferent creditor.
Lastly post commencement finance creditors, if agreed to in the business rescue plan, are creditors who loaned money or those who have provided their services or supplied goods after the commencement date of the business rescue proceedings. These creditors are entitled to payment before any other creditor. In a recent case the Supreme Court of Appeal ruled that a post commencement finance creditor is also entitled to vote on the business rescue plan, which was not the case a few months ago.
It is important to know that when creditors must decide on a business rescue plan that each creditor has a voting interest equal to the value of their claim. Therefore, should a creditor have a large claim compared to other creditors they will have a significant say during the proceedings. On the contrary, a small claim will most likely mean that the creditor will have little say, however still be entitled to all the rights as mentioned above.
This is only a brief overview of certain rights a creditor has during business rescue and there is much more to consider depending on the circumstances. It must be noted that business rescue legislation and proceedings have been designed to be a dynamic and quick process. It is therefore important for creditors to understand the process and to keep well informed throughout the process, to ensure effective and constructive participation in an attempt to safeguard their rights.
The specialist business rescue staff at Rauch Gertenbach have vast experience in business rescue and -restructuring matters and are well equipped to advise creditors during the business rescue process.
For more information, contact Danie Acker, Basson Piek or Enrico Acker at office@rgprok.com or 044 601 9900. www.rgprok.co.za
