The recently published Draft Companies Amendment Bill, 2021 proposes the following changes to the business rescue legislative framework.
- utility costs which are due and payable by the company in business rescue to its landlord, during business rescue proceedings, should be regarded as post-commencement financing (commonly referred to as a “PCF claim”);
- a landlord’s PCF claim for unpaid utility costs should enjoy preferential ranking before PCF lenders but should rank after employee costs incurred during business rescue; and
- the landlord’s PCF claim should have a voting interest equal to the amount of such claim.
The stated rationale for the proposed amendments is to address the unfairness on landlords who, due to the moratorium on enforcement action, are prevented from recouping the unpaid utility costs which they have already paid on behalf of the company in business rescue. However, although the legislature’s intention remains admirable, these amendments have the potential to be problematic in practice.
A general overview on the proposed amendments
The amendment which grants landlords with PCF claims for unpaid utility costs a voting interest, in relation to matters which require creditor approval during business rescue proceedings, is far more problematic, as the Companies Act does not afford PCF lenders the same voting interest. This amendment may disincentivize potential lenders from advancing PCF, and thereby, counterintuitively, jeopardize the success of a business rescue by cutting off the proverbial lifeline to its success.
The granting of a voting interest to an identified category of PCF creditor, being landlords with PCF claims for unpaid utility costs, to the exclusion of all other PCF creditors, may arguably lead to the inference that the legislature’s intention is that no other PCF creditors may vote on matters requiring creditor approval during business rescue. Based on this inference, potential lenders may be deterred from advancing PCF as they would have no influence on the restructuring of the company and the repayment of their PCF loan.
On the flip side, the proposed amendments may be welcomed by property owners as a “better than nothing” gift to the already struggling rental industry. The amendments may also, to a certain extent, assist a business rescue practitioner during negotiations with the landlord regarding the company’s continuing occupation of the rental premises during business rescue proceedings. This is so because, at the very least, a landlord’s claim for utility costs will rank ahead of PCF lenders and unsecured creditors – thereby increasing the likelihood of recovery of the utility costs. Arguably, this will still fall short of property owners’ expectation that the full rental (inclusive of utility costs) would be deemed as a PCF claim.
Having briefly summarized the proposed amendments, and the potential issues which may arise, we now turn to a discussion of the practical consequences of the proposed amendments.
Current vs. Proposed
The current position under Section 135 of the Companies Act
Currently, landlords’ clams for unpaid utility costs are regarded as unsecured claims, and they are not afforded a preferential treatment in the ranking of creditors’ claims.
In South African Property Owners Association v Minister of Trade & Industry and others  JOL 39915 (GP) the court held that PCF under section 135 of the Companies Act relates to financing obtained in order to assist the company in business rescue out of its financial distress; it does not include contractual obligations which existed prior to the commencement of the company’s business rescue, and which are used to assist in managing the company during the business rescue process. As utility costs are incidental to and consequent on an existing lease agreement, they are considered to be pre-existing obligations which are used to manage the distressed company during business rescue and not PCF obtained in order to assist it in getting out of its financial distress.
Any claims for unpaid utility costs are therefore currently treated as unsecured claims, unless an adopted business rescue plan specifically provides otherwise.
Position under the proposed amended section 135 of the Companies Act
Practically, the proposed amendments provide that landlords’ PCF claims for unpaid utility costs should be paid:
- after the business rescue practitioners’ claims for remuneration and expenses, the costs arising out of the costs of business rescue proceedings, and employees’ PCF claims;
- but before PCF Lenders and any secured, unsecured (or concurrent) creditors’ claims.
The current position under section 145(4) of the Companies Act
Currently, Section 145(4)(a) to (b) essentially provides that where decisions in relation to a business rescue requires approval by a vote of the creditors of the company in business rescue:
- secured and unsecured creditors are afforded a voting interest equal to the value of their claims against the company in business rescue; and
- concurrent creditors, who would otherwise be subordinated in a liquidation, have a voting interest equal to the amount, if any, that they could reasonably expect to receive in a liquidation scenario.
Section 145(5) accordingly does not currently make any express reference to PCF creditors in the context of voting interests. However, the general view from a lender’s perspective is that this does not mean that PCF creditors are currently divested of voting interests, as section 145(4) simply refers to “creditor” or “creditors” without defining who does or does not qualify as a creditor. In other words, the current wording arguably supports an interpretation that the legislature’s intention is that all creditors, including PCF creditors, should be vested with a voting interest.
There is however a counterargument that the legislature did not intend for PCF lenders to have a voting interest in relation to matters that require creditor approval during business rescue, and especially not in relation to the approval of a business rescue plan. The basis for this counterargument, amongst others, is that providing PCF lenders with a voting interest could result in an abuse of the business rescue process. This would be in circumstances where a lender provides sufficient PCF to entitle it to a voting interest that could be determinative in any creditor decision-making process, and therefore of matters relating to the outcome of the business rescue.
Notwithstanding the various arguments regarding whether or not PCF creditors are afforded a voting interest under the current section 145(4) of the Companies Act, in practice it has been a matter which has been dealt with on a case-by-case basis in each particular business rescue.
Position under the proposed amended section 145(4) of the Companies Act
Should the proposed amendments to section 145(4) be passed into law, it would mean that the erstwhile generic wording of the section, which did not provide for any outright discrimination against PCF creditors by preventing them from having a voting interest, would be done away with.
The consequences of this, from a statutory interpretative perspective, would be that the only PCF creditors afforded with an express voting interest are landlords with PCF claims for unpaid utility costs, to the exclusion of all other PCF creditors.
The provision of PCF is more often than not essential for a distressed company to be rescued, especially in the current economic climate. In the absence of PCF, a distressed company is often certainly fated for liquidation. The business rescue statutory framework should accordingly be designed in a way that most incentivizes lenders to provide PCF, and avoid any amendments that may suppress lenders appetite to extend PCF to a distressed company. The proposed amendment to section 145(4) may result in the latter outcome as lenders may perceive the risks associated with investing in an already financially distressed company to be more than they are willing to accept, considering that they will be precluded from having any say in the process and outcome of the restructuring of the distressed company.
Tobie Jordaan is a Director at Cliffe Dekker Hofmeyr and is the Head of the Business Rescue Restructuring & Insolvency Sector