The ranking of the business rescue practitioner’s claim in liquidation proceedings

April 1st, 2019
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Diener NO v Minister of Justice and Correctional Services and Others 2019 (2) BCLR 214 (CC)

It is now trite in South African law that an interpretive procedure includes considering the words used in the legislation in light of all applicable and permissible framework, including the circumstances in which the legislation came into existence. In the Diener matter the Constitutional Court (CC) had to consider the wording of the Companies Act 71 of 2008 (Companies Act) and to rule as to whether the Companies Act creates a super preference claim for business rescue practitioners in failed business rescue proceedings.

Background

JD Bester Labour Brokers CC (JD Bester) is a property holding entity, which owned immovable property and had one major creditor FirstRand Bank Limited (FirstRand). JD Bester suffered a financial breakdown and as a result could not afford to meet its financial obligations. FirstRand obtained default judgment against JD Bester and proceeded to execute same.

Just before the sale in execution, the sole member of JD Bester passed a resolution placing JD Bester under business rescue. A business rescue practitioner (Mr Diener) was appointed as required by the Companies Act. After his appointment, Mr Diener found that JD Bester could not be rescued. He instructed Cawood Attorneys to bring an application in terms of s 141(2)(a) of the Companies Act to alter the business rescue proceedings into liquidation proceedings.

The joint liquidators could not agree on how the fees and expenses of Mr Diener and Cawood Attorneys should be distributed. Mr Diener then approached the High Court for an order giving preference for his fees and expenses, which amounted to a total sum of R 112 918,40.

High Court

The High Court held that s 135(4) of the Companies Act must be read with s 97 of the Insolvency Act 24 of 1936 (the Insolvency Act). On this reading, the court found that remuneration of the business rescue practitioner and the expenses incurred during business rescue proceedings, to the extent that these have not been paid during business rescue proceedings and during liquidation, can be paid only after the costs set out in s 97 have been paid. The action was dismissed.

Supreme Court of Appeal

Mr Diener then approached the Supreme Court of Appeal (SCA) where he argued that the claim for remuneration by a business rescue practitioner was not a concurrent claim, but a special class of claim created by s 135 of the Companies Act. He argued that it enjoys a special and novel preference and that it grants the business rescue practitioner security over all assets, even above securities existing when the business rescue practitioner takes office. He submitted further that the position created by the Companies Act for the remuneration and expenses of the business rescue practitioner places the business rescue practitioner in a more favourable position than the best position that can be occupied by a secured creditor.

The SCA held that it is only s 135(4) of the Companies Act that is concerned with the consequences of a failed business rescue, retaining the preferences created in respect of post-commencement finance on liquidation, subject only to the costs of liquidation. It held that s 135(4), says nothing of the super preference contended for over secured assets. The SCA further held that s 143, is also not concerned with liquidation. It held that this section regulated the business rescue practitioner’s right to remuneration during business rescue proceedings. It concerns the tariff in terms of which business rescue practitioners are remunerated, the additional contingency-based remuneration that the business rescue practitioner may negotiate, and the business rescue practitioner’s claim for unpaid remuneration, which ranks in priority before the claims of all other secured and unsecured creditors. The SCA found that ss 135(4) and 143(5), whether taken individually or in tandem, do not create the super preference contended for by Mr Diener. The appeal was, therefore, dismissed.

Constitutional Court

The matter was then taken to the CC and the court found that the legislature has clearly granted a preference for the claims of a business rescue practitioner over secured creditors in terms of s 143. To examine whether the preference granted by s 143 also extends to unsecured claims, the court had to look at the provisions of the Insolvency Act. The court found that s 97 of the Insolvency Act provides that costs of liquidation are paid out of any balance of the free residue, which shall be applied in defraying the costs of the sequestration of the estate. These costs do not rank in preference above secured creditors. The court further held that s 143 does not allow for the claims of business rescue practitioners to usurp the claims of all creditors, whether secured or not, in liquidation.

The CC further held that unlike s 89(1) of the Insolvency Act, s 135(4) of the Companies Act makes no reference to using secured assets to pay the practitioner. In contrast to ss 135(4), 89(1), in much clearer terms, creates a preference over secured assets for the costs of liquidation. The CC further held that the effect of super preference is that the claim for remuneration of the business rescue practitioner would rank ahead of the costs of liquidation. The business rescue practitioner would also enjoy preference over secured creditors even if a court, on challenge to a director’s resolution to institute business rescue proceedings, set aside that resolution and were to grant an order placing the company in liquidation. The CC held that there is nothing in the Companies Act, or anywhere else, which would suggest that the legislature had intended the rights of secured creditors to be diluted where liquidation of the company supersedes business rescue proceedings through the ranking in preference of the business rescue practitioner’s remuneration and expenses, above the claims of secured creditors. The CC dismissed the appeal.

Conclusion

It is now settled principle in company law that the remuneration of the business rescue practitioner will not take preference over secured claims in the event that the business rescue proceedings fail, and the company is placed under business rescue. The business rescue practitioner will be also required to prove their claim against the insolvent estate like all other creditors in terms of s 44 of the Insolvency Act. To hold security, the business rescue practitioners will be required to secure their claims by way of a guarantee or surety with the shareholders of a financially distressed company.

Njabulo Kubheka BA LLB (UKZN) is a candidate legal practitioner at Venns Attorneys in Pietermaritzburg.

This article was first published in De Rebus in 2019 (April) DR 29.

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