During Business Rescue proceedings in terms of the Companies Act 71 of 2008 (“the Companies Act”), a business rescue practitioner enjoys first preference in terms of his remuneration and expenses (Section 135(1) to (3)) read with Section 143. However the question that had caused a degree of contention was whether that “super preference” would be carried forward if the business rescue were converted into a liquidation.
Generally the Insolvency Act 24 of 1936 provides for 3 main types of claim statuses in an insolvency which are defined in Insolvency Law and its Operation in Winding -Up (Lexis Nexis Meskin and others) at 9.1.2 :
- Secured Claims
“A secured claim is one in respect of which the creditor holds security, ie, has a preferent right over property of the insolvent estate by virtue of a landlord’s legal hypothec, a pledge, a right of retention or a special mortgage, ie, a mortgage bond hypothecating immovable property or a notarial mortgage bond…”
- Preferred Claims
“ Where he has a right to payment “out of” the property of the estate which is enforceable before other creditors’ rights, a creditor’s claim is preferent. It also may be secured. If it is not secured, it ranks for payment out of the free residue before the claims of non-preferent, ie, concurrent creditors.”
- Concurrent Claims
“A concurrent claim is one which is neither secured nor preferent in terms of the Insolvency Act.”
“135. Post-commencement finance
(1) To the extent that any remuneration, reimbursement for expenses or other amount of money relating to employment becomes due and payable by a company to an employee during the company‟s business rescue proceedings, but is not paid to the employee-
(a) the money is regarded to be post-commencement financing; and
(b) will be paid in the order of preference set out in subsection (3)(a).
(2) During its business rescue proceedings, the company may obtain financing other than as contemplated is subsection (1), and any such financing-
(a) may be secured to the lender by utilising any asset of the company to the extent that it is not otherwise encumbered; and
(b) will be paid in the order of preference set out in subsection (3)(b).
(3) After payment of the practitioner‟s remuneration and expenses referred to in section 143, and other claims arising out of the costs of the business rescue proceedings, all claims contemplated –
(a) in subsection (1) will be treated equally, but will have preference over-
(i) all claims contemplated in subsection (2), irrespective of whether or not they are secured; and
(ii) all unsecured claims against the company; or (b) in subsection (2) will have preference in the order in which they were incurred over all unsecured claims against the company.
Importantly Section 135(4) reads:
“If business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of this section will remain in force, except to the extent of any claims arising out of the costs of liquidation.”
This issue of business rescue practitioner “super preference” was considered by the Constitutional Court in the case of Diener N.O. v Minister of Justice and Correctional Services and Others [2018] ZACC 48.
The brief facts of the matter were that JD Bester Labour Brokers CC (JD Bester), notwithstanding its name, was a property owning entity with a single immovable and one major creditor – First Rand Bank (FRB), who had a mortgage bond over the immovable property. JD Bester fell into arrears on the bond and foreclosure proceedings were instituted by FRB.
On 13 June 2012 two days before a sale in execution of the immovable property, the members of JD Bester voluntarily passed a resolution, placing JD Bester in business rescue. Mr Diener was appointed as the business rescue practitioner and instructed Cawood Attorneys to bring an urgent application to stay the sale in execution. An interim order to this effect was granted.
In August 2012, Diener instructed Cawood Attorneys to bring an application under the Companies Act to convert the business rescue proceedings into liquidation proceedings. On the 27 August 2012 an order was granted for the liquidation of JD Bester.
The first and final liquidation and distribution account that was submitted by the Liquidator to the Master, did not include fees and expenses for the business rescue practitioner.
Diener sought preference for his fees and expenses and submitted these claims to the Liquidators.
The Co-liquidators were split as to the inclusion of Diener’s fees and expenses. The matter was referred to the Master, who agreed with the Liquidator who had argued for the exclusion of Diener’s fees and held that Cawood Attorneys was an unsecured claim.
Diener then applied to the High Court to review the Master’s decision. He also sought that the final liquidation account should provide for the costs of a business rescue practitioner.
The High Court agreed with the reasoning of the Master and held that Section 135(4) of the Companies Act, must be read in conjunction with Section 97 of the Insolvency Act. Upon review of these, the remuneration of the practitioner and the expenses incurred during the 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 Section 97 have been paid.
Section 97 provides for the free residue to be applied to Costs of Sequestration. Section 2 of the Insolvency Act defines “free residue” as :
“ in relation to an insolvent estate, means that portion of the estate which is not subject to any right of preference by reason of any special mortgage, legal hypothec, pledge or right of retention;”
In the Supreme Court of Appeal Deiner raised the provisions of Section 143(5) of the Companies Act which reads:
“ Remuneration of practitioner
….
(5) To the extent that the practitioner’s remuneration and expenses are not fully paid, the practitioner’s claim for those amounts will rank in priority before the claims of all other secured and unsecured creditors.”
This together with Section 135(4), Diener argued, resulted in the “super preference” which ranked even ahead of secured claims.
The Supreme Court of Appeal held that Section 143 is not concerned with liquidation but rather with regulating the business rescue practitioners right to remuneration during business rescue proceedings. Therefore Section 143(5) has not elevated the business rescue practitioner’s claim for fees and expenses incurred in business rescue on order to enjoy ‘super-preference’ in liquidation proceedings.
The Supreme Court of Appeal confirmed the ranking of claims against the insolvent estate in liquidation proceedings as follows: Secured claims, liquidation costs and then only business rescue practitioner’s fees and expenses incurred in business rescue, in accordance with the Insolvency Act and Companies Act. Thus the Supreme Court of Appeal dismissed the appeal.
Diener then appealed to the Constitutional Court.
Ultimately the Constitutional Court dismissed the appeal, rejecting Diener Section 135(4) and 143(5) argument. It held that despite the potential ambiguity of the poorly drafted Companies Act, on plain reading and reading the provision in context with the Insolvency Act, the business rescue proceedings and the other provisions of the Companies Act, it “simply ranks the practitioner’s remuneration and expenses before post-commencement financing and unsecured assets and subjects the practitioner’s payment to liquidation.”
Accordingly business rescue practitioners are not given any form of “super preference” in the event of liquidation by virtue of Section 135(4) and 143(5),rather rank before post-commencement financing and concurrent claims, but after secured claims and costs of liquidation.