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The inappropriate vote in business rescue proceedings

May 7, 2021

In terms of section 152 of the Companies Act a proposed Business Rescue Plan must be approved by more than 75% of its creditors.
Should a plan be rejected due to a creditor who is unreasonable, the practitioner may apply to court to set aside the vote on the grounds that it was inappropriate. This same remedy is also available to any affected person.

In Collard v Jatara Connect (Pty) Ltd & Others, the court did exactly that. The Court held that there should be no reason to prefer a liquidation of a company over a business rescue that will pay the employees in full and result in a better return for its creditors. This judgment has been confirmed by the Supreme Court of Appeal.
In the Collard case, it was common cause that the business of the company in distress, Jatara Connect, was incapable of financial rescue. However, a legitimate, alternate objective in business rescue, rather liquidation, is to ensure a better dividend to creditors in instances where the company cannot be rescued. The employees of Jatara brought an application for an order placing Jatara into business rescue which order was granted. A proven creditor holding 49.8% of Jatara’s debt, voted against the plan while all other creditors, voted in favour of the plan. The employees of Jatara brought an application to set aside the Creditor’s vote. If satisfied that it is reasonable and just to do so, a Court may set aside a vote on a business rescue plan.

The Court found, after examination of the business rescue plan, that all the concurrent creditors of the company, would receive a better dividend under the business rescue and, significantly, that the employees would be paid in full.

The Creditor’s vote was found to be mala fide and could not be considered appropriate. The Creditor’s vote was therefore inappropriate and set aside. The business rescue plan was adopted at the intervention of the employees of Jatara with the assistance of the court.

Disclaimer: The contents and information provided above are generalised and must not be acted upon as legal advice