The risky business of a business rescue practitioner

May 1st, 2018
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By Rico van der Merwe and Melandie Buitendag

The concept of business rescue was introduced into South African corporate law through the enactment of ch 6 of the Companies Act 71 of 2008 (the Companies Act) and is similar to judicial management contained in the old Companies Act 61 of 1973. Business rescue proceedings are aimed at the rescue of financially distressed companies. The person tasked to oversee the business rescue process is the business rescue practitioner.

The business rescue practitioner, by virtue of their position, incurs certain expenses in the execution of their duties and is specifically required in terms of s 141(2)(a)(ii) of the Companies Act to apply to court to discontinue the business rescue proceedings and to place such company into liquidation in the event that the business rescue practitioner determines that the company in business rescue cannot be rescued. The peremptory obligation to apply for the liquidation of the company in business rescue, entails that the business rescue practitioner is obliged ex lege to incur expenses in respect of such litigation. For purposes of this article, a distinction must be drawn between the business rescue practitioner’s fees, the business rescue practitioner’s expenses incurred during business rescue and the business rescue practitioner’s expenses incurred in applying to court in terms of s 141(2)(a)(ii) of the Companies Act. In this article, the risks facing business rescue practitioner’s in respect of the latter expense will be highlighted.

In the event that the business rescue practitioner is successful with the application in terms of s 141(2)(a)(ii) of the Companies Act, the expenses incurred by the business rescue practitioner in lodging the application would normally form part of the liquidation costs and the business rescue practitioner  would be able to recover such expenses. In recent decisions by our courts, it has been illustrated that there may be certain instances where a business rescue practitioner is at risk in respect of such expenses and that the business rescue practitioner may in certain circumstances be unable to recover any of the litigation expenses, which the business rescue practitioner is required to incur ex lege.

Applicable statutory provisions

The business rescue practitioner’s fees and expenses incurred during business rescue (not expenses incurred in lodging an application in terms of s 141(2)(a)(ii) of the Companies Act) are expressly dealt with in ss 135 and 143 of the Companies Act. Section 135 in essence provides that the fees and expenses incurred by the business rescue practitioner during business rescue will have preference in the order in which they were incurred over all unsecured claims against the company. The provisions of
s 135(4) confirm that the aforementioned ranking continues to be of force and effect, where business rescue proceedings are discontinued and the company is placed into liquidation. Once the business rescue proceedings are discontinued and the company is placed into liquidation in terms of s 141(2)(a)(ii) of the Companies Act, the Insolvency Act 24 of 1936 (the Insolvency Act) becomes applicable. Section 135 of the Companies Act, however, does not specifically differentiate between the business rescue practitioner’s expenses incurred during business rescue and the business rescue practitioner’s expenses incurred in lodging the peremptory liquidation application in terms of s 141(2)(a)(ii) of the Companies Act.

SCA’s recent interpretation

The Supreme Court of Appeal’s (SCA) recent interpretation of the applicable statutory provisions in the matter of Diener NO v Minister of Justice and Others (South African Restructuring and Insolvency Practitioners Association (SARIPA) and Others as amici curiae) [2018] 1 All SA 317 (SCA), specifically dealt with and found that s 143(5) of the Companies Act has not elevated the business rescue practitioner’s claim for fees and expenses incurred in business rescue to enjoy ‘super-preference’ in liquidation proceedings. This case specifically dealt with the ranking of a business rescue practitioner’s fees and expenses incurred in business rescue in the event of business rescue proceedings being discontinued and where the company is placed in liquidation in terms of s 141(2)(a)(ii) of the Companies Act.

In a nutshell, the SCA confirmed the ranking of claims against the insolvent estate in liquidation proceedings as follows: Secured claims, liquidation costs and only then business rescue practitioner’s fees and expenses incurred in business rescue, in accordance with the Insolvency Act and Companies Act. The SCA did not expressly deal with the question of whether legal fees incurred by the business rescue practitioner in applying to court in terms of s 141(2)(a)(ii) of the Companies Act constitute expenses, which should form part of the costs of liquidation, alternatively should be regarded as post-commencement finance, alternatively constitutes a concurrent claim in the liquidation (at para 15 read with para 63 of the Diener case).

The expenses incurred in lodging the peremptory liquidation application in terms of s 141(2)(a)(ii) of the Companies Act in the Diener case were proven by the attorneys concerned in the liquidation – in terms of s 44 of the Insolvency Act – and dealt with by the liquidators as a concurrent claim, creating the impression that the ranking of such a claim should normally be dealt with as a concurrent claim in terms of which, the business rescue practitioner would –

  • be at risk of not recovering their fees incurred in applying to court in terms of s 141(2)(a)(ii) of the Companies Act, thereby being out of pocket in respect of such expenses; and
  • be at risk of having to pay a contribution in the liquidation.

The fact that the SCA did not expressly deal with the ranking of the business rescue practitioner’s expenses incurred in terms of s 141(2)(a)(ii) of the Companies Act and the fact that such expenses were dealt with in the Diener case as a concurrent claim in the liquidation. This may be interpreted at face value to indicate that regardless of a business rescue practitioner launching a successful or unsuccessful application in terms of s 141(2)(a)(ii) of the Companies Act, the business rescue practitioner’s expenses in lodging the application in terms of the aforementioned section rank as a concurrent claim in liquidation.

In addition to the uncertainty created by the decision in the Diener case as referred to above, the risk of the business rescue practitioner is further increased in the instance where the business rescue practitioner applies in terms of s 141(2)(a)(ii) of the Companies Act, the business rescue practitioner’s application is frustrated and/or protracted for whatsoever reason and the court grants leave to another creditor in terms of s 131 of the Companies Act to apply or proceed with liquidation proceedings against the company, resulting therein that the company is liquidated in different proceedings than those brought by the business rescue practitioner as will be illustrated hereunder.

Case illustration

In the judgment of Van Jaarsveld NO v Q-Civils (Pty) Ltd and Another (FB) (unreported case no 675/2017, 30-3-2017) (Mbhele J) the facts are briefly as follows: Q-Civils resolved to be placed under business rescue in terms of s 129 of the Companies Act. The appointed business rescue practitioner concluded that there was no prospect of rescuing Q-Civils and applied to court in terms of s 141(2)(a)(ii) of the Companies Act. The sole director of Q-Civils resolved to oppose the liquidation application brought by the business rescue practitioner. The business rescue practitioner raised a point in limine in which it was argued that the sole director did not have the authority to resolve that a company in business rescue oppose the liquidation application brought by the business rescue practitioner. Mbhele J found in favour of the business rescue practitioner on the point in limine. Q-Civils thereafter applied for leave to appeal against the decision of Mbhele J and leave was granted to the SCA. The pending appeal created a situation where the liquidation application would not be finalised within the foreseeable future.

Unaware that Q-Civils had been placed under business rescue, another creditor of Q-Civils applied for its liquidation while Q-Civils was under business rescue (see Razzmatazz Trading Investments 19 (Pty) Ltd v Q-Civils (Pty) Ltd and Another (FB) (unreported case no 6115/2016, 7-12-2017) (Jordaan ADJP). Taking into account, inter alia, the fact that the business rescue practitioner’s liquidation application would not be finalised within the foreseeable future, Jordaan ADJP granted leave to the creditor, namely Razzmatazz, in terms of s 131 of the Companies Act to proceed with its liquidation application. Q-Civils was then provisionally and finally liquidated with Razzmatazz as the liquidating creditor and not the business rescue practitioner.

The business rescue practitioner incurred expenses in the litigation by virtue of the fact that the business rescue practitioner was required in terms of the peremptory provisions of s 141(2)(a)(ii) of the Companies Act to lodge the application for liquidation once the business rescue practitioner had concluded that Q-Civils could not be rescued. Taking cognisance of the scope of this matter and the possibility of exorbitant legal fees and expenses in the liquidation, a real risk exists that the business rescue practitioner may not recover their expenses from the free residue. In fact, the obfuscating possibility exists that, if the business rescue practitioner’s expenses incurred in lodging the peremptory liquidation application in terms of s 141(2)(a)(ii) of the Companies Act are not regarded as costs in the liquidation that the business rescue practitioner, as a concurrent creditor, will be liable to pay a contribution in the insolvent estate.

Conclusion

As stated above, in terms of the SCA’s decision in the Diener case, the business rescue practitioner’s fees and expenses in business rescue rank after liquidation costs, but before claims of employees for post commencement wages. Section 97 of the Insolvency Act stipulates that liquidation costs includes the costs of persons who render services in connection with the sequestration proceedings and the administration of the insolvent estate. They are identified as the Sheriff, the Master, a debtor who has voluntarily surrendered their estate, a creditor who has applied for the sequestration of an estate, a curator bonis, a trustee, persons employed by a curator bonis or a trustee to administer an insolvent estate and a presiding officer. We submit that the classification of ‘a creditor who has applied for the sequestration of an estate’ should include, at the very least, the claim of the business rescue practitioner for the expenses incurred by the business rescue practitioner in lodging the application in terms of s 141(2)(a)(ii) of the Companies Act. If this interpretation is to be applied, the expenses so incurred by the business rescue practitioner will form part of the costs of liquidation and will not merely be a concurrent claim in the liquidation (as these expenses were dealt with in the Diener case).

It is vital for the successful implementation and continuance of business rescue proceedings that the courts clarify the current position and provide directions to all stakeholders as to the ranking of a business rescue practitioner’s expenses incurred in lodging the application in terms of s 141(2)(a)(ii) of the Companies Act. We further submit that the courts should in so doing, consider instances such as in the Q-Civils cases where the business rescue practitioner incurred expenses ex lege, but by no fault of their own, was not the liquidating creditor.

It is unfathomable that the legislature could have intended that a business rescue practitioner be compelled ex lege to be exposed to the risk of having to incur the expenses of applying for the liquidation of a company and then not being able (under certain circumstances) to recover such expenses. The inevitable result will most certainly be that no person would be willing to assume the risk associated with being appointed as a business rescue practitioner.

Rico van der Merwe BCom LLB (NWU) is an advocate in Bloemfontein and Melandie Buitendag  LLB (cum laude) LLM (UP) Certificate in Competition Law (cum laude) (UP) is a non-practicing attorney in Bloemfontein.

Mr van der Merwe acted on behalf of the applicant in the Q-Civils matter referred to in the article.

 This article was first published in De Rebus in 2018 (May) DR 22.

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