How busi­ness res­cue is chang­ing ju­rispru­dence

Judg­ment sets out the or­der in which claims of cred­i­tors rank dur­ing such pro­ceed­ings

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - ERIC LEVEN­STEIN

BUSI­NESS res­cue is well un­der way and as with the pro­mul­ga­tion of any new leg­is­la­tion it is in­ter­est­ing to fol­low the ju­rispru­dence that de­vel­ops with such leg­is­la­tion. Since the in­cep­tion of the act nu­mer­ous judg­ments deal­ing with the busi­ness res­cue pro­vi­sions and re­lated mat­ters have been handed down by our high courts in the var­i­ous prov­inces. Judg­ments that have been handed down by our courts have by and large been in­for­ma­tive and in­struc­tive in paving the way for the ef­fi­cient ap­pli­ca­tion of busi­ness res­cue.

On May 1 2011 SA saw the in­tro­duc­tion of the Com­pa­nies Act 71 of 2008, as amended, into law. Busi­ness res­cue, set out in Chap­ter 6 of the act, is one of the more novel fea­tures of the act. Since in­cep­tion it has cap­ti­vated the at­ten­tion of busi­ness res­cue prac­ti­tion­ers, ac­coun­tants, lawyers and aca­demics, and has been widely dis­cussed and de­bated in nu­mer­ous fo­rums.

A judg­ment that will be care­fully con­sid­ered was handed down by Judge Kgomo in the South Gaut­eng High Court on May 10 this year in the case of Mer­chant West Work­ing Cap­i­tal So­lu­tions (Pty) Ltd v Ad­vanced Tech­nolo­gies & En­gi­neer­ing Com­pany (Pty) Ltd & Gains­ford (Un­re­ported, Case No 2013/12406). In this case Mer­chant West Work­ing Cap­i­tal So­lu­tions launched an ap­pli­ca­tion to per­fect its se­cu­rity while the busi­ness res­cue pro­ceed­ings of Ad­vanced Tech­nolo­gies and En­gi­neer­ing Com­pany were on­go­ing.

While the judg­ment high­lights and re­states a num­ber of sem­i­nal prin­ci­ples re­lated to busi­ness res­cue, it sets out in no un­cer­tain terms the or­der in which the claims of cred­i­tors rank dur­ing busi­ness res­cue pro­ceed­ings. The rank­ing of the claims of cred­i­tors has been much de­bated and thus this de­lib­er­a­tion by the court (al­though not strictly rel­e­vant to the is­sue be­fore the court) is a wel­come ad­di­tion to the de­vel­op­ment of the cur­rent ju­rispru­dence on the topic of the rank­ing of claims and in turn the wa­ter­fall of pay­ments in a busi­ness res­cue.

Sec­tion 135 of the act sets out the or­der in which the claims of cred­i­tors rank dur­ing busi­ness res­cue. In terms of sec­tion 135, post-com­mence­ment fi­nanciers are pre­ferred in the or­der of pref­er­ence cre­ated by the act. One of the ma­jor is­sues that is not reg­u­lated by the act re­lates to where cred­i­tors, who are se­cured (as un­der­stood in in­sol­vency law) rank prior to the com­mence­ment of busi­ness res­cue in the or­der of pref­er­ence de­lin­eated by sec­tion 135 of the act.

Judge Kgomo, in the afore­said judg­ment, states in un­equiv­o­cal terms that cred­i­tors rank in the fol­low­ing or­der of pref­er­ence dur­ing busi­ness res­cue pro­ceed­ings:

The fees and ex­penses (in­clud­ing le­gal and other pro­fes­sional fees) of the busi­ness res­cue prac­ti­tioner in­curred dur­ing busi­ness res­cue pro­ceed­ings (sec­tion 135(3));

The fees of em­ploy­ees that be­come due and payable af­ter the com­mence­ment of the busi­ness res­cue op­er­a­tion (sec­tion 135(3)(a));

Se­cured lenders or cred­i­tors for any loan or sup­ply made af­ter the com­mence­ment of busi­ness res­cue (ie se­cured post-com­mence­ment fi­nanciers) (sec­tion 135(3)(a)(i) and sec­tion 135(3)(b));

Un­se­cured lenders or cred­i­tors for any loan or sup­ply made af­ter the com­mence­ment of busi­ness res­cue (ie un­se­cured post-com­mence­ment fi­nanciers) (sec­tion 135(3)(a)(ii));

Se­cured lenders or cred­i­tors for any loan or sup­ply made be­fore the com­mence­ment of busi­ness res­cue;

Claims of em­ploy­ees (for in­stance for re­mu­ner­a­tion) that be­came due and ow­ing prior to the com­mence­ment of busi­ness res­cue; and

Un­se­cured lenders or cred­i­tors for any loan or sup­ply made be­fore the com­mence­ment of busi­ness res­cue (ie con­cur­rent cred­i­tors).

The above makes it clear that the claims of se­cured lenders prior to the com­mence­ment of busi­ness res­cue rank af­ter the claims of both se­cured and un­se­cured post-com­mence­ment fi­nanciers.

Prac­ti­cally, this makes sense. If a lender or cred­i­tor wants to pro­vide post-com­mence­ment fi­nance to a com­pany in busi­ness res­cue it should be clear to such fi­nancier that it will rank be­fore se­cured pre-com­mence­ment cred­i­tors who may in a liq­ui­da­tion be paid in full from their se­cu­rity.

Post-com­mence­ment fi­nanciers can thus seek com­fort in that the court has now set­tled the much de­bated po­si­tion of the rank­ing of cred­i­tors who hold se­cu­rity for their claims prior to the com­mence­ment of busi­ness res­cue.

While the afore­said judg­ment clears one of the ma­jor is­sues that have arisen with the in­ter­pre­ta­tion of the rank­ing of claims in busi­ness res­cue, there are fur­ther is­sues that need to be de­ter­mined by our courts. One such is­sue re­lates to whether or not the rank­ing cre­ated by the busi­ness res­cue pro­vi­sions of the act, which re­mains of force and ef­fect even if the com­pany is sub­se­quently liq­ui­dated, gives rise to a new or­der of pref­er­ence to that de­lin­eated by the In­sol­vency Act 24 of 1936. If the lat­ter is an­swered in the af­fir­ma­tive then a fur­ther ques­tion arises about the treat­ment of se­cured lenders (such as banks) in a sub­se­quent liq­ui­da­tion.

There are at least two com­pet­ing in­ter­ests that come to mind when con­sid­er­ing the afore­said.

On the one hand the pro­tec­tion af­forded to cred­i­tors who are se­cured prior to the com­mence­ment of busi­ness res­cue will be ren­dered nu­ga­tory in a liq­ui­da­tion, in that if their claims are not sat­is­fied out of the se­cu­rity that they hold they will re­ceive pay­ment of their claims only af­ter the var­i­ous cred­i­tors (po­ten­tially post-com­mence­ment fi­nanciers), who rank ahead of them in the or­der of pref­er­ence con­ferred by a busi­ness res­cue.

This would un­der­mine the very rea­son why lenders take se­cu­rity — to pro­tect them (or at least mit­i­gate their ex­po­sure) from an even­tu­al­ity such as liq­ui­da­tion. If the afore­said is the con­se­quence of the busi­ness res­cue or­der of pref­er­ence time will tell whether or not lenders will ap­ply stricter credit terms when lend­ing money. The dif­fi­culty that lenders will have is the fact that the even­tu­al­ity of a busi­ness res­cue, fol­lowed by liq­ui­da­tion, is dif­fi­cult or even im­pos­si­ble to pre-empt when funds are ini­tially ad­vanced.

On the other hand, if the fees and costs of busi­ness res­cue prac­ti­tion­ers, the salaries of em­ploy­ees and the

Post­com­mence­ment fi­nanciers can thus seek com­fort in that the court has now set­tled the much de­bated po­si­tion of the rank­ing of cred­i­tors who hold se­cu­rity for their claims prior to the com­mence­ment of busi­ness res­cue

claims of post-com­mence­ment fi­nanciers are not pre­ferred in busi­ness res­cue (and in a sub­se­quent liq­ui­da­tion), then there will be lit­tle in­cen­tive for prac­ti­tion­ers, em­ploy­ees and new or cur­rent lenders to take ap­point­ments and to sup­port the busi­ness res­cue process, as they will al­ways face the risk that their claims in a liq­ui­da­tion will not be sat­is­fied once se­cured cred­i­tors’ claims are paid.

This is sup­ported by the fact that the act (and the econ­omy) needs prac­ti­tion­ers, em­ploy­ees and lenders to sup­port the busi­ness res­cue process in or­der to give ef­fect to one of the ob­jects of the act, namely the ef­fi­cient res­cue of com­pa­nies.

Over and above the is­sue of the or­der of pref­er­ence in a busi­ness res­cue, cer­tain prin­ci­ples rel­e­vant to such pro­ceed­ings were dealt with by the court, in­clud­ing that:

Sec­tion 133 of the act im­poses a com­plete mora­to­rium on le­gal pro­ceed­ings and en­force­ment ac­tion against a com­pany in busi­ness res­cue, pro­hibit­ing the perfection of se­cu­rity (on ap­pli­ca­tion to court) dur­ing busi­ness res­cue pro­ceed­ings with­out the leave of the court or with­out re­liance on the ex­cep­tions pro­vided by the act;

The pro­ceed­ings be­fore the court for the perfection of se­cu­rity were “le­gal pro­ceed­ings” as en­vis­aged by sec­tion 133 of the act; and

Sec­tion 152(4) of the act has the ef­fect of bind­ing all cred­i­tors (dis­sent­ing or oth­er­wise) to the pro­vi­sions of a busi­ness res­cue plan that has been duly adopted by cred­i­tors and share­hold­ers, (the lat­ter only if nec­es­sary), pre­clud­ing a court from grant­ing re­lief that is in con­flict with the pro­vi­sions of such a busi­ness res­cue plan.

This judg­ment has, at least for now, set­tled the po­si­tion of se­cured cred­i­tors (who were se­cured prior to the com­mence­ment of busi­ness res­cue) dur­ing busi­ness res­cue pro­ceed­ings.

The act, and the or­der of pref­er­ence de­lin­eated by sec­tion 135, how­ever, re­tains many anom­alies that will re­quire de­ter­mi­na­tion by our courts in time.

Un­til such time as we re­ceive such di­rec­tion… into the woods we go.

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