Is it inappropriate for a creditor to vote against the adoption of a business rescue plan on the basis that it provides cold comfort? And can the appellate court interfere with a high court’s refusal to set aside a vote rejecting the plan? 

These issues occupied the Supreme Court of Appeal (the SCA) in the matter of Ferrostaal GmbH and another v Transnet Soc Ltd t/a Transnet National Ports Authority and another [2021] 4 All SA 330 (SCA) (Ferrostaal), where Molemela JA gave a unanimous judgment on 25 May 2021.

This was an appeal against a decision of the Western Cape High Court by Bozalek J in which he refused to set aside Transnet National Ports Authority’s (Transnet) vote against the adoption of a business rescue plan on the basis that it did not make provision for Transnet’s interests. 

The matter concerned the terms of a proposed business rescue plan (the plan) published in July 2019 in respect of Ferromarine Africa (Pty) Ltd (FMA), which was placed in business rescue. The plan provided inter alia as follows: (i) the continuation of a 15 year lease that FMA, as lessee, had concluded in December 2006 with Transnet; (ii) it granted FMA an 'option' to renew the lease but on terms still to be negotiated and agreed upon prior to the date of termination; (iii) that the repayment of the arrear rentals in respect of the main lease [between Transnet and FMA] be deferred until the commencement of the extended period; and (iv) that the repayment be rescheduled on terms to be agreed between Transnet and FMA. 

Unsurprisingly, Transnet, as a major creditor, voted against the adoption of the plan on the basis that inter alia the plan (i) was based on number of uncertainties and contingencies, (ii) was not commercially viable and (iii) failed to sufficiently protect Transnet’s interests as FMA major creditor. 

The appellants, Ferrostaal GmbH and Atlantis Marine Projects (Pty) Ltd (both shareholders of FMA) applied to the Western Cape High for an order setting aside Transnet's vote on the basis that it was inappropriate as envisaged in s153(1)(b)(i)(bb) the Companies Act 71 of 2008 (“the Companies Act”). The High Court dismissed the application. The appellants appealed to the SCA. They argued inter alia that the rejection of the plan was not in the best interests of Transnet, having regard to the low return that would be yielded in the case of liquidation (which would in effect be the consequence of allowing Transnet's vote to stand). Transnet maintained its contentions and concerns about the plan set out above.

The SCA held that:

• in terms of s153(7) of the Companies Act a court may, on an application in terms of ss(1)(b)(i)(bb), set aside a vote if it were satisfied that it was reasonable and just to do so, having regard to the interests of the persons who voted against the plan, the provisions made in the plan in respect of the interests of such persons and a fair and reasonable estimate of the return to such persons if the company were liquidated;
• a court should consider all relevant circumstances and the purpose of business rescue, when determining whether it would be just and equitable to set aside a rejection vote. On this score, the court considered inter alia the following: (i) the arrear rental would not be paid unless and until the extension of the lease had been agreed upon between Transnet and FMA. No explanation was provided by FMA for not starting to pay the arrear rentals during the remaining period of the lease; (ii) the renewal of the lease amounted merely to an unenforceable agreement to negotiate in the future; (iii) even if the lease were to be extended, the repayment terms still needed to be agreed upon; (iv)Transnet was thus put in a weakened position regarding the negotiation of the terms of the extended lease; 
• Transnet had valid concerns about (i) the implementation of the plan being dependent on the occurrence of future uncertain events and (ii) the commercial viability of FMA. Transnet was accordingly justified in contending that the plan would not achieve the legislated objective set out in s7(k) of the Companies Act - of facilitating the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all stakeholders;
• for the appellants to succeed in their appeal, the court had to be satisfied that the high court was wrong in the exercise of its value judgment. A court determining whether a vote against the adoption of a business rescue plan was inappropriate, exercises a discretion. An appellate court's power to interfere is curtailed by broader policy considerations. The High Court's discretion was properly exercised, with result that the SCA was not free to interfere with the decision. The appeal was thus dismissed. 

In the premises, on application of Ferrostaal, it would appear that it is not inappropriate for a creditor to reject a business rescue plan on the basis that it provides cold comfort and insufficient protection to the creditor in contravention of s7(k) of the Companies Act. Not even the appellate court can interfere with a high court’s refusal to set aside a vote against the plan, where the high court’s discretion was properly exercised. The appellate court can only intervene where the high court was wrong in the exercise of its value judgment. 

It is therefore critical for business rescue practitioners to reflect and think very carefully about the terms and proposals they include in business rescue plans. That is because the plan may be lawfully and legitimately rejected by creditors if it contains terms or proposals which are (i) vague, (ii) based on too many uncertainties and contingencies and (iii) provide insufficient protection in violation s7(k) of the Companies Act.