Joinder of creditors in business rescue: direct and substantial interest is still the benchmark
When a person initiates legal proceedings against a company in business rescue, is it necessary to join creditors and other affected persons as parties to the proceedings? Our courts have pronounced that the answer to this question, as is a long-established principle in our common law, depends on whether the creditors and affected persons have a direct and substantial interest in the proceedings.
Most recently, in the case of Blue Nightingale Trading 709 (Pty) Ltd v Nkwe Platinum South Africa (Pty) Ltd (in business rescue) and Others (18 August 2021), the Johannesburg High Court delivered judgment in an urgent interlocutory joinder application and set out the relevant principles relating to joinder of creditors in legal proceedings against a company in business rescue, particularly in the case where a business rescue plan has been published but has not yet been adopted.
The applicant had brought an application (the main application) to set aside the voluntary business rescue proceedings of Nkwe Platinum South Africa (Pty) Ltd (Nkwe). Although a business rescue plan had been published by the business rescue practitioner of Nkwe, it had not yet been voted on by creditors and an interdict had been granted by the High Court preventing the meeting of creditors to vote on the plan being held pending the outcome of the main application.
Subsequently, the applicant had brought an urgent interlocutory application to join all creditors of Nkwe in main application. The applicant argued that the creditors of Nkwe had a direct and substantial interest in the main application as they may have been prejudiced by the outcome of the application.
The court referred to judgments of the Supreme Court of Appeal (SCA) which confirmed that the direct and substantial interest test must be applied to determine whether parties ought to be joined in proceedings.
The court identified that the SCA has made it clear that once a business rescue plan has been adopted, and a party is looking to have such a plan set aside, it is necessary to join all creditors whose rights under that plan may be prejudiced by the outcome of such an application.
The court distinguished the former situation from the circumstances in the present case, where a business rescue plan had been published, but was yet to be adopted. Referring to the recent judgment by the SCA in Timasani (Pty) Ltd (in business rescue) and Another v Afrimat Iron Ore (Pty) Ltd  ZASCA 43 (13 April 2021) and other decisions of the SCA, the court held that there is no general principle requiring the joinder of all creditors in an application under section 130 of the Companies Act 71 of 2008 to set aside a business rescue resolution.
The court explained that the position of creditors under an adopted business rescue plan is different from the position of creditors who have not yet voted on a plan. An adopted plan is binding on all creditors and therefore any proceedings to set aside such a plan will have a direct impact on creditors’ rights. On the other hand, where a plan is yet to be voted on, creditors rights have not yet been altered and the setting aside of business rescue proceedings will not necessarily have a direct impact creditors’ substantial rights.
The court did however state that there may be instances where it is necessary to join creditors even where a plan is not yet adopted, provided that creditors do have a direct and substantial interest in the proceedings. For instance, in a recent case where a business rescue practitioner had brought an ex parte application to place a company in liquidation, the court had held that creditors ought to have been joined in those particular circumstances.
From this case and previous SCA decisions on joinder of creditors in business rescue, some clear principles have emerged, namely:
- The common law test for joinder, whether a party has a direct and substantial interest in the proceedings, continues to be the applicable test.
- Once a business rescue plan has been adopted, and legal proceedings are brought which seek to alter the rights of creditors as contained in the business rescue plan, creditors will have a direct and substantial interest in the proceedings and must therefore be joined.
- On the other hand, if a business rescue plan has not yet been adopted, creditors substantive rights will not necessarily be altered if a party is looking to set aside a company’s business rescue proceedings and therefore it is not necessary per se that creditors be joined merely because a business rescue plan has been published (but not yet adopted).
- There may however be circumstances where the relief sought will have a material effect on creditors’ rights and in such a case, creditors ought to be joined even if a plan has not yet been adopted.