Business Rescue Practitioners Do Have Skin in the Game, But Watch This Space…

By Anneke Whelan, Partner in the Litigation department

Business Rescue Practitioners are at risk for fees and disbursements incurred in the business rescue proceedings of an entity where the business rescue proceedings are converted to liquidation proceedings. This issue was recently raised in the winding-up of JAD Bester Labour Brokers CC, whereby the Business Rescue Practitioner (“BRP”) unsuccessfully applied for an order setting aside the L & D Account, which did not include charges for his fees and disbursements incurred during the business rescue proceedings.

The BRP argued that the costs of his services constitute post-commencement finance and should have been included in the L & D Account in terms of section 135(4) of the Companies Act. He also contended that his costs represented a “claim of a super preferent nature” as envisaged by section 143(5) of the Companies Act 71 of 2008 (“Companies Act”), and should have been dealt with as such in the L & D Account. The liquidator, on the other hand, argued that the remuneration and the expenses incurred by the BRP do not fall within the ambit of the definition of “administration costs” as envisaged by section 97 of the Insolvency Act 24 of 1936 (“Insolvency Act”). These costs, it was argued, are accordingly not afforded any preferential status; the BRP, like any other creditor of an insolvent estate, is required to submit and prove a claim against the insolvent estate and could not be paid pursuant to a mere demand by the BRP for payment.

The Master found that sections 135(4) and 143(5) of the Companies Act do, in fact, afford the BRP with a preferential claim above the claims of all other creditors, including secured creditors. However, these costs are not elevated to that of administration costs of the insolvent estate and BRP is therefore required to submit and prove his claim against the insolvent estate. In other words, the costs of administration as envisaged by section 97 of the Insolvency Act, must be paid first and only then, the BRP’s costs, provided the business rescue practitioner has proven such a claim and that there are available funds on hand.

With the different layers of costs being added to the equation before creditors are paid, it will certainly be in the BRP’s interest, should the business rescue proceedings be superseded by a winding-up order, to ensure that the post commencement finance obtained during the business rescue proceedings is sufficient, to not only cover his fees and expenses, but also the employee’s benefits due under the Basic Conditions of Employment Act and Labour Relations Act as well as the costs of liquidation. If the post commencement finance is insufficient to cover these various layers of costs and the business rescue fails, he may end up financing the costs of the business rescue proceedings under liquidation.

On 23 August 2017, the matter came before the Supreme Court of Appeal (“SCA”), on an unopposed basis when the BRP appealed against the high court ruling confirming the Master’s view. In acknowledging the importance of the case, the SCA postponed the hearing in order for the Minister of Justice to present an opposing view.

We will provide an update as soon as the SCA judgment is delivered.

For more information on the above, please contact:

Anneke Whelan
Partner in the Litigation department
+27 82 924 0500