Why dispute resolution mechanisms are a must for creditors

The 2008 Companies Act introduced the concept of business rescue into our company law, where a business rescue practitioner is required to compile a plan which creditors will vote to accept or reject. For the success of the business rescue, the concept of creditor "buy in" is required. The business rescue process is supposed to be a speedy one with very tight timelines for the practitioner to produce the rescue plan upon which the creditors will vote.

30 Jul 2019

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“A creditors’ vote or affected parties’ vote, is directly linked to an accepted claim and whilst it is all fair and well if you have a liquidated claim, what happens if you have a damages claim or a disputed claim which has not yet been assessed - how will you vote on the business rescue plan without a dispute resolution mechanism in place?” cautions attorney PJ Veldhuizen of Gillan and Veldhuizen Inc., who have represented many clients in mediation cases, business rescue matters in particular.

Veldhuizen says that at the first meeting of creditors called, pursuant to a company going into business rescue, creditors should insist that the business rescue practitioner includes an expedited dispute resolution mechanism in respect of disputed claims in the business rescue plan or process.

For a business rescue plan to be implemented it requires 75% of creditors’ votes – a conundrum is created when disputed claims are put forward by creditors, as without an acceptance by the business rescue practitioner, they would enjoy no voting rights on the plan. Although you might be by far the biggest creditor, the effect of not being able to vote your claim or have your claim accepted, is that it might be expunged.

Adds Veldhuizen, “If your claim gets rejected or you don’t get a vote, this may result in your having to bring an application to interdict the plan being voted upon, which will incur unnecessary litigation costs, delays and cost to 'company and distress'.”

The failure to implement a dispute resolution mechanism could result in creditors not being able to exercise their voting rights with the ultimate effect being that their claims may be expunged.