May 28,2013 / News / E-Bulletin

On 1 May 2011, South Africa 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 the inception of the Act, numerous judgments dealing with the business rescue provisions as well as related matters have been handed down by our high courts. Judgments have by and large been informative and instructive in paving the way for the efficient application of business rescue.

One such judgment that will be carefully considered was handed down by Judge Kgomo in the South Gauteng High Court on 10 May 2013, in the case of Merchant West Working Capital Solutions (Proprietary) Limited v Advanced Technologies & Engineering Company (Proprietary) Limited & Gainsford (Unreported, Case No 2013/12406).

Whilst 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.

RANKING OF CLAIMS

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 which become due and payable after the commencement of business rescue (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) which 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.

BUSINESS RESCUE PROVISIONS REAFFIRMED

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