Business rescue proceedings superseded by liquidation order: no proof of costs, no claim!

In the recent High Court decision of Ludwig Wilhelm Diener NO v Minister of Justice and Others case number: 30123/2015, the court considered whether the costs for professional services rendered by a business rescue practitioner had to be included as deemed administration costs in the liquidation and distribution account of a liquidated close corporation.

JD Bester Labour Brokers CC (CC) commenced business rescue proceedings. Shortly thereafter the Ludwig Wilhelm Diener, in his capacity as business rescue practitioner, brought an application to court to place the CC in liquidation, which application was granted. The Master of the High Court (Master) appointed joint liquidators to the CC, of which Cloete Murray was one (Liquidator).

The first and final liquidation, distribution and contribution account (Account) that was submitted by the Liquidator to the Master did not include charges for the business rescue practitioner’s remuneration. The business rescue practitioner unsuccessfully applied to the Master to have the Account set aside. The business rescue practitioner took the Master’s decision (to confirm the Account) on review to the High Court.

In the review proceedings, the Liquidator argued that the remuneration and other expenses incurred by the business rescue practitioner do not fall within the ambit of the definition of ‘administration costs’ in s97 of the Insolvency Act, No 21 of 1936 (Insolvency Act), thereby affording such costs a preferential status. The Liquidator argued that the business rescue practitioner could not be paid pursuant to a mere demand for payment, in the absence of submitting a claim against the insolvent estate, as such payment would result in the creditor getting paid in respect of an unproven claim, which goes against the entire structure of the Insolvency Act.

The business rescue practitioner argued that the costs of his services, should have been included as part of his expenses incurred and must be paid to him in terms of s135(4) of the Companies Act, No 71 of 2008 (Companies Act). The business rescue practitioner also argued that his costs represented a “claim of a super preferent nature” (affording him preference over any secured creditor’s claim against an encumbered asset) and should be dealt with as such in the account.

Section 143(5) of the Companies Act affirms the “claim of a super preferent nature” argument of the business rescue practitioner in stating that, to the extent that the business rescue practitioner’s remuneration and expenses are not fully paid, the business rescue practitioner’s claim will rank in priority before the claims of all other secured and unsecured creditors. Section 135(4) of the Companies Act further states that if business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of s135 will remain in force, except to the extent of any claims arising out of the costs of liquidation.

The Master ruled that s143(5) and s135(4) of the Companies Act do in fact afford the business rescue practitioner with a preferential claim above the claims of all other secured and unsecured creditors. However, these sections do not provide that the costs of the business rescue practitioner shall be deemed as administration costs of the insolvent estate. Therefore, the business rescue practitioner is not automatically entitled to these costs and he still had to submit and prove his claim against the insolvent estate.

Accordingly, it is clear from the wording of s135(4) of the Companies Act, read together with s143(5) of the Companies Act, that a preference is created for the business rescue practitioner’s remuneration and expenses as a “claim of a super preferent nature”. However, this claim is subject to any claims arising out of the costs of liquidation in terms of s97 of the Insolvency Act, which claims will first be executed in terms of the liquidation, distribution and contribution account and only thereafter the business rescue practitioner’s costs will be paid, provided the business rescue practitioner has proven such a claim.

This decision is a warning to all business rescue practitioners that - other than their costs incurred during business rescue proceedings which are recognised as “claims of a super preferent nature” - they have to be pro-active in submitting and proving their remuneration and other expenses as a claim against the insolvent estate of a company or close corporation.