Founder Turnaround Talk
It is not a secret that business rescue is a developing field. Even before the current (unique) challenges driving the industry, there were warning signs that a lot of work needed to be done to formalise the industry from a regulatory point of view. This is particularly pertinent when it comes to issues such as post commencement finance (PCF).
Clarity around PCF is more of an issue now than ever before. Government floated the business rescue of South African Airways which left a heavy burden on taxpayers. With the possibility of future business rescues of State-Owned Entities, the question of the efficiency of these rescues is important, taxpayers (as creditors) don’t deserve delays. In the private sector, reports have pointed out that the outlook is just as rocky. CNA’s creditors are uncertain about their future with one creditor still waiting for January payments.
In a world of uncertain economic forecasts where even a faint whisper of uncertainty can derail a rock solid business rescue, the ranking of creditors – while a hotly contested issue – becomes an important one. Cliffe Dekker Hofmeyr published an article discussing these rankings in 2016 citing available cases going through the courts at the time. Are the points made below still relevant in the current paradigm?
The points below come directly from an article published in a Cliffe Dekker Hofmeyr newsletter.
Once bitten twice shy
There is little doubt that even the most thought-out, meticulous and well-structured business rescue plan cannot succeed unless there is some degree of financial support in the form of post commencement finance (PCF) available. This will allow the business to sail through the choppy waters of financial distress.
The South African PCF market is still in its developmental stages and with the fluctuating strength of our economy, financial institutions and other investors are slow to throw money at a business rescue idea, regardless of how plausible it is. The common phrase once bitten, twice shy is often the sentiment of pre-business rescue creditors when PCF is sought.
To add fuel to the fire, the reluctance to provide PCF is further aggravated by the uncertainty in our law regarding how PCF should be dealt with and, once granted, how it affects the ranking of pre-business rescue creditors who hold security for the indebtedness due to it by the company in business rescue. Given that the success of business rescue is intricately linked to the ability to raise PCF, it is surprising that the Companies Act, No 71 of 2008 (Act) does not deal with this in great detail.
Ranking of claims
The ranking of claims in a business rescue was decided in the cases of Merchant West Capital Solutions (Pty) Ltd v Advance Technologies & Engineering Company (Pty) Ltd & Another [2013] ZAGPJHC 109 (10 May 2014) and Redpath Mining South Africa (Pty) Ltd v Marsden N.O. & Others [2013] ZAGPJHC 148 where the court held that the effect of s135 of the Act is that claims rank as follows:
- the business rescue practitioner (BRP) and other professionals, for remuneration and expenses;
- employees for any remuneration which became due and payable after business rescue proceedings began ie PCF;
- secured lenders or other creditors for any loan or supply made after business rescue proceedings began, ie PCF;
- unsecured lenders or other creditors for any loan or supply made after business rescue proceedings began, ie PCF;
- secured lenders or other creditors for any loan or supply made before business rescue proceedings began;
- employees for any remuneration which became due and payable before business rescue proceedings began; and
- unsecured lenders or other creditors for any loan or supply made before business rescue proceedings began.
Unfortunately no analysis is contained in the judgments as to how Kgomo J (who decided both cases) arrived at the decision.
If one were to apply such ranking as is, it would mean that pre-business rescue creditors who hold security would rank below post-commencement financiers regardless of whether the post-commencement financiers hold security or not. This would lead to an absurd result that post-commencement financiers who hold no security would be paid out first from the proceeds of the security held by pre-business rescue creditors.
Kgmomo J’s ranking
Kgomo J’s ranking cannot be justified on the wording employed in s135 and is irreconcilable with the provisions of s134(3) which provides pre-business rescue creditors (who hold security) with the necessary certainty in respect of their security during the business rescue proceedings. While Kgomo J referred to the provisions of s134(4) in the Redpath Mining case, he overlooked the prescriptions as to the treatment of secured creditors therein.
The correct position is that secured creditors are entitled to the treatment set out in s134(3) of the Act, which is to the effect that:
- Unless the proceeds of the assets that form the subject matter of the secured creditors’ security are sufficient to discharge the company’s indebtedness to that creditor in full, the company must obtain the consent of that creditor before disposing of (ie realising) the asset in question; and
- The company must promptly pay the proceeds from the disposal of the assets in question to the creditor up to the amount of the company’s indebtedness to the creditor or provide security for the amount of those proceeds to the reasonable satisfaction of that creditor.
Choppy waters
Accordingly, the correct position is that PCF ranks only in priority to all unsecured creditors and that pre-business rescue creditors’ rights to their security must be respected in terms of s134(3) of the Act and they can therefore not rank below any post-commencement financiers who hold no security.
Although this position protects the rights of pre-business rescue creditors to their security, it increases the level of risk that post-commencement financiers must endure as there is a higher probability of the PCF not being paid back, if secured creditors were to exercise their rights to their security.
After reading the information above, we need to ascertain if these positions are still relevant. If they are, the key question becomes: what needs to change? Following this we need to ask: do we have political will, and the right motivation, to implement these changes? Finally, we need to ask: are there more urgent changes that need to take place in the industry?
