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Case update: As a Business Rescue Practitioner, what is the ranking of your claim in Business Rescue Proceedings that have failed?

Business Rescue Proceedings were introduced into our law by the Companies Act, 71 of 2008. South African companies that are financially distressed or that have been trading in insolvent circumstances, can through Business Rescue Proceedings have an opportunity to continue in existence on a solvent basis without being liquidated.

The term Business Rescue is defined in section 128 (1) (b) of the Companies Act to mean

‘. . . proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for —

             (i)   the temporary supervision of the company, and of the management of its affairs, business and property;

             (ii)   a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and

             (iii)   the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.’

A pivotal role in Business Rescue Proceedings is played by the Business Rescue Practitioner (“BRP”) who in terms of section 128 (1) (d) if the Companies Act is defined to mean, “a person appointed, or two or more persons appointed jointly… to oversee a company during business rescue proceedings”. The most important role of the BRP to set out a Business Rescue Plan which sets out the manner in which the BRP envisages how the business will be rescued.

But what happens when Business Rescue Proceedings fail and the company is liquidated, how is a BRP remunerated in this instance. The BRP’s remuneration is generally regularized in section 143 of the Companies Act. However when a Company is Liquidated the BRP will become a creditor of the Company, in the case of Diener No v Minister of Justice and Others (South African Restructuring and Insolvency Practitioners Association as amicus curiae) 2018 1 ALL SA 3017 (SCA) the Court had to look at this very issue.

In casu, the Appellant Diener, was appointed as the BRP to oversee the business rescue of a close corporation, JD Bester Labour Brokers CC (the business). Unfortunately the business could not be rescued and in 2012 attorneys were instructed to covert the Business Rescue Proceedings into Liquidation Proceedings. The attorneys were however appointed by the business to stay a sale in execution by a creditor pursuant to Diener being appointed. The attorneys submitted their account after the BRP was appointed, Diener and a dispute arose as to how the fees of Diener and the attorneys should be dealt with. Diner submitted his account and claimed that the expenses contained therein (including the attorneys account) represented expenses in business rescue as defined in s 143 of the Companies Act, or at the very least, these services and expenses represent unsecured post commencement finance as defined in s 135 of the Companies Act’. The joint BRP, Murray was of the view that “Diener had failed to prove a claim in terms of s 44 of the Insolvency Act 24 of 1936 and that Cawood Attorneys was an unsecured creditor who, ultimately, was required to make a contribution in terms of s 106 of the Insolvency Act.” The Master of the High Court upheld this position and despite an application to the High Court by Diener, the position remained upheld.

The matter then ended up at the Supreme Court of Appeal and the main issue to be decided was whether Diener as he had argued enjoyed a “super-preference” as the BRP over other creditors which is created by section 135(4) and s 143(5) of the Companies Act in favour of Business Rescue Practitioners. Having regard to section 135 of the Companies Act, the Court stated that this section provides to the BRP, “after the conversion of business rescue proceedings into liquidation proceedings, a preference in respect of his or her remuneration to claim against the free residue after the costs of liquidation but before claims of employees for post-commencement wages, of those who have provided other post-commencement finance, whether those claims were secured or not, and of any other unsecured creditors” and that section 135 of the Companies Act does not give the BRP any “super-preference” and the Appeal was dismissed with costs.

Prepared by:  

Noorjehaan Edros | Senior Associate | Dispute Resolution: Litigation

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)