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Setting aside the rebellious vote of a creditor in business rescue proceedings

July 17, 2017

Once a company commenced with business rescue, the creditors must vote on the adoption of the proposed business rescue plan.

In order for a plan to be adopted, the Act requires 75% of the creditors in attendance at the meeting, to vote as such. The vote is calculated on the value of each creditor’s voting interest.

What happens when a creditor vote against the plan and it is believed to be inappropriate?

The act provides that affected parties may approach the court to set the vote aside on the grounds that it’s inappropriate. If the court is satisfied that it is reasonable and just to do so, it may be set aside.

In Collard v Jatare Connect (Pty) Ltd & Others [2017] ZAWCHC 45, the court did exactly that. The court found that there should be no reason to prefer a liquidation application over a business rescue plan which will ensure a better dividend to its creditors and employees. The judgment is confirmed by the Supreme Court of Appeal in First Rand Bank Ltd v KJ Foods CC.

In the Collard-case it was common cause that Jatara, the company in business rescue, was incapable of financial rescue. However Jatara commences with arbitration proceedings against its major client, Edcon Ltd. If successful, its employees and creditors would receive better dividends that they would in liquidation.

The core of the business rescue plan was to allow for the continuation of the arbitration proceedings against Edcon.

Edcon, also a creditor, voted against the plan whilst all other creditors voted in favour of the plan, therefore it was rejected.

The employees of Jatara applied to the court to set aside Edcon’s vote.

The Judge noted; if Jatara is successful in the arbitration proceedings, the creditors, including Edcon, and employees would receive a better dividend under business rescue. The only inference the Judge could make from Edcon’s dissenting vote was that it did so with the sole intention of frustrating the arbitration proceedings against it.

The court found Edcon’s vote to be mala fide and inappropriate. The vote was set aside, resulting in the plan to be adopted.