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Reflections on Two Cases

Author :   KJ Braatvedt

Reflections on two cases involving Liquidations and Business Rescue, and fees of Liquidators and Business Rescue Practitioners.

The often quoted Section 7K of Act 71 of 2008 states that:

“7.    Purposes of Act

    The purposes of this act are to ………..

(k)    provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders.”

As the practice of business rescue has developed over the last few years, it has become more and more apparent to me that the process involves the interaction between all relevant stakeholders as well as, most importantly, the interaction between liquidators and business rescue practitioners where the company was initially in liquidation and then went into business rescue and the case where the company was in business rescue and then went into liquidation.

It is my view that there have been many missed opportunities due to the fact that liquidators and business rescue practitioners have not been exchanging information and communicating with each other where a distressed company has been “under the hand” of both a business rescue practitioner and a liquidator.

This article focuses on two decisions where distressed companies have been in liquidation and then in business rescue and in business rescue and then in liquidation.

The first decision is that of Ludwig Wilhelm Diener N.O. v The Minister of Justice (first respondent), the Master of the High Court (second respondent), Cloete Murray N.O. (third respondent), Winifred Frances Harms N.O. (fourth respondent) and Christiaan Frederick De Wet N.O. (fifth respondent).  This matter was heard in the Gauteng Division, Pretoria (High Court of South Africa) under case number 30123/2015, the judgment being handed down by the Honourable Acting Judge Dewrance.

The second decision is that of the Industrial Development Corporation of South Africa (first applicant) and The Development Bank of Southern Africa (Pty) Limited (second applicant).  This decision was handed down by the Honourable Nhlangulela ADJP sitting in the Eastern Cape Local Division, Mthatha.  The case involved an application for business rescue in terms of Section 131 of Laman (Pty) Limited which, at the time of the application for business rescue was, in liquidation.

In the Laman matter there were attempts by the liquidators to obtain powers to sell the business but these were opposed.  The business of Laman had reached a point where, unless the IDC and the DBSA injected further funds into the business there would have been total and complete failure.

The IDC and the DBSA provided funding and the court made an order placing Laman under business rescue.  The liquidators opposed the application for the business rescue of Laman.  The liquidators contended that unless the IDC and DBSA provide more funds for the Laman business to continue, the route to final liquidation must be followed.  The liquidators also said that the costs incurred by the liquidator since the commencement of liquidation must be paid by the IDC and DBSA by way of issuing a guarantee that the business rescue of Laman will not change the preference status of the liquidators’ fees and dibursements.

The Honourable Nhlangulela ADJP said in paragraph 40 of the judgment (page 29) that he does not think that the issue of the liquidators’ fees should be any reason for refusing the relief sought.  The Judge emphasised that the liquidation order has still to be confirmed, meaning that the process of winding-up had not yet started.  The Judge emphasised that Section 143 of Act 71 of 2008 provides for the remuneration for the business rescue practitioner and not the liquidator and that Section 136(4) provides that the liquidator is a creditor of the company and because the section does not refer to any preference, the Judge concluded that liquidators are concurrent creditors under business rescue.

It is my view that this judgment is not incorrect and accurately reflects the law.  However, my view is that in the Laman case, the liquidators went to considerable effort and expense and tried to market the business and in a practical way became hugely involved in the business.  Now the liquidators end up ranking as concurrent creditors for their fees and disbursements.

The business rescue plan, I understand, is in the process of being developed and will ultimately deal with the liquidators’ claim for fees on a concurrent basis.  It is my view that this is extremely unfortunate and could not have reflected the true intention of the drafters of the legislation.  Surely, if a liquidator or a business rescue practitioner gets involved and “adds value”, they should not end up at the wrong end of the queue.

In the Laman matter, the liquidators found themselves as concurrent creditors having done an enormous amount of work and being involved in the matter.

The other side of the coin can be found in the Diener matter.  In this matter, the applicant was the business rescue practitioner of JD Bester Labour Brokers CC, the close corporation in business rescue.  CIPC appointed Diener as business rescue practitioner on 20 June 2012.  After the commencement of business rescue, attorneys were instructed to obtain an order staying the sale in execution.  Subsequently, on 27 August 2012, the business rescue proceedings were terminated in terms of Section 141(2)(a) of Act 71 of 2008.

Diener submitted his account as well as the bills of cost in respect of the attorneys’ charges.  The third respondent, Cloete Murray, one of the liquidators prepared a liquidation and distribution account.  In terms of the contribution account the two claims of the attorneys were reflected and that a contribution is payable by them.  The Honourable Dewrance AJ said in paragraph 19 on page 7 that the purpose of the judgment is primarily directed at what the effect is of the business rescue practitioners’ fees and those of the attorneys during liquidation.  Cloete Murray argued that the costs of the two attorneys, by reason of the provisions of Section 97(2)(c) of the Insolvency Act, never be a charge in the encumbered asset account.

On 12 December 2013, the Master of the High Court ruled on the dispute saying that none of the sections provide that the costs of the business rescue practitioner shall be deemed to be costs of administration in the insolvent estate.  Diener then reviewed the decision of the Master contending that these services and expenses represent expenses in business rescue as defined in Section 143 of Act 71 of 2008 or at the very least represent unsecured post commencement finance.  Diener contended that these costs should be paid in accordance with the provisions of Section 135, Section 143 read with Section 150 of Act 71 of 2008 prior to any claims by other creditors secured or otherwise.  It was argued that those accounts represent claims of a super preferent nature.

The Learned Judge analysed all the issues and came to the conclusion that costs cannot qualify as costs of liquidation and therefore held that the remuneration of Diener and the expenses incurred during business rescue proceedings (the attorneys’ application to interdict the sale in execution), to the extent that it has not been paid during business rescue proceedings and during liquidation can only be paid after the costs set out in Section 97 of Insolvency Act 24 of 1936 have been paid.

I do not have an issue with the correctness of the judgment and, with respect, the interpretation is indeed correct.  The issue must again be restated, namely what did the drafters of chapter 6 intend.

Extensive research in South Africa has been done on instances where business rescue plans have failed and the inevitable conclusion is that if post commencement finance is not available, the business rescue, including the plan and the process is guaranteed to fail.

The concept of post commencement finance is applicable from an urgent and immediate short-term recovery need to the long-term strategy of finance when the reorganisation has taken place and there has been buy-in by the stakeholders.

In both of these decisions I have analysed, the liquidators in the Lamon case have played a meaningful role in the rescue process and in the Diener matter, the business rescue practitioners and the attorneys instructed by them played a meaningful role.  The end result however is that the liquidators (the Lamon matter) remain dissatisfied and without being paid and in the Diener matter, the business rescue practitioners and the attorneys acting for them, have not been paid and remain dissatisfied.

If there is a message, it is obviously to secure payment if you are a business rescue practitioner by way of a guarantee or a surety from the shareholders.  I believe that if there is a second message, it is that business rescue practitioners should talk to liquidators where a liquidation becomes a business rescue because the liquidators have had the benefit of dealing with the distressed company initially.  After all whether business rescue ends up in liquidation or a liquidation ends up in business rescue, is not the real issue.  Of course what the real issue is, is that all those involved in the distressed company should enjoy payment upfront for their services and should not be out of pocket.

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