|The Constitutional Court (“CC”) handed down its judgment in an application for leave to appeal against a judgment of the Supreme Court of Appeal (“SCA”), regarding the question as to whether a business rescue practitioner enjoys a “super preference” over all creditors, whether secured or not, during liquidation proceedings, in terms of the Companies Act 71 of 2008 (“Companies Act”).
The applicant in this matter was Mr Ludwig Diener, a business rescue practitioner who launched the application against the Minister of Justice, the Master of the High Court of South Africa, the joint liquidators of the estate at issue, and the estate’s only secured creditor, being FirstRand Bank Limited, amongst others.
JD Bester Labour Brokers CC (“JD Bester”) is a property holding entity, which suffered a serious financial failure. As a result, JD Bester could not afford to meet its financial obligations. Thereafter, FirstRand Bank obtained default judgment against same and proceeded to execute against the immovable property owned by JD Bester. Prior to the sale in execution however, the sole member of JD Bester passed a resolution, placing them under business rescue proceedings. The business rescue practitioner – being Mr Diener, was then appointed, in line with the provisions of the Companies Act. The practitioner subsequently realised, however, that the business could not be rescued.
An application was instituted in terms of section 141(2)(a) of the Companies Act, which converted the business rescue proceedings into liquidation proceedings. This matter was first heard in the High Court, where it was held that Mr Diener could only be paid subsequent to the finalisation of the liquidation. The decision was thereafter appealed in the SCA where it was argued that the claim for remuneration by a business rescue practitioner is not a concurrent claim, rather it is a “special class of claim” created by section 135 of the Companies Act. Mr Diener argued that the claim for remuneration enjoys a “special and novel preference”, which ranks above the claims of creditors, whether secured or not.
The SCA held, however, that while the Companies Act provides for a business rescue practitioner to hold a preferential claim in some respects, the practitioner will not enjoy preference to the extent as argued by Mr Diener. The SCA accordingly dismissed the appeal.
In the CC, Mr. Diener submitted that the claim for remuneration by a business rescue practitioner was a special class of claim, which enjoys preference, as submitted by section 135 of the Companies Act. The CC determined whether such preference had in fact been created by examining the provisions of section 143 of the Companies Act, which also extends to unsecured claims and thus incorporates the provisions of the Insolvency Act 24 of 1936.
|In the matter, the CC was tasked with considering both the plain and purposive readings of the provisions in question, being section 135(4) of the Companies Act as well as section 97of the Insolvency Act 24 of 1936.
The court held that although the application for leave to appeal before the CC raised an “arguable point of law of general public importance, it was not in the interests of justice to grant leave to appeal because there were no reasonable prospects of success that the court could rely upon in order to reverse or alter the decision of the SCA.”
Although the Companies Act ranks the business rescue practitioners’ claim for remuneration and expenses in favour of other claims, including those of unsecured assets as well as subjecting the practitioner’s payment to liquidation, it is unclear whether this extends to liquidation proceedings on an initial “plain reading” of the provisions.
The CC held, after interpreting the legislation, that a preference had clearly been created for the claim of a business rescue practitioner over secured creditors, in terms of s 143 of the Companies Act. Further, the court considered the Insolvency Act 24 of 1936, finding that section 97 provides that the costs of liquidation must be paid out of the free residue and do not rank in preference over the secured creditors. Further, section 143 cannot be used to deprive the claims of other creditors, regardless as to whether the creditors are secured or not. The CC further held that section 89(1) of the Insolvency Act refers to using the secured assets to pay the costs of the business rescue practitioner, whereas section 135(4) of the Companies Act does not.
Accordingly, section 89(1) creates a preference over secured assets for the costs of liquidation. The effect of such a preference being created would have an absurd result, in that a business rescue practitioners claim would rank ahead of the costs of liquidation. The court thus held that there is nothing in the Companies Act that suggests that the legislature intended on weakening the rights of secured creditors – where a company is liquidated rather than entering into business rescue proceedings. The CC thus dismissed the application
|This case established the principle that the remuneration of a business rescue practitioner does not take preference over secured claims, in the event where business rescue proceedings fail, and a company is placed under business rescue.|
The business rescue practitioner will be required to prove his/her claim against the insolvent estate like all other creditors in terms of section 44 of the Insolvency Act. In order to hold security, the business rescue practitioners will be obliged to secure their claims by way of a surety or a guarantee or with the shareholders of a financially distressed company.
Written by Ashleigh Butler and supervised by Jasvir Sewnarain