Another blow to business rescue practitioners in respect of payment of their fees?

In November 2022, the Supreme Court of Appeal (SCA) in Mazars Recovery & Restructuring (Pty) Ltd & Others v Montic Dairy (Pty) Ltd (in liquidation) & Others set aside a BRP’s fees paid between the dates that the BRP applied to court to convert the rescue proceedings (on the basis there was no reasonable prospect for the company to be rescued) to liquidation proceedings (i.e on 16 May 2016) and the date of the provisional winding-up Order (in casu 14 June 2016).

In reaching its decision the SCA relied on Pride Milling Company (Pty) Ltd v Bekker N.O. & Another [2021] ZA SCA 127 and the following quotations from that judgment:

“The provisions of Section 341(2) could not be clearer. They, in unequivocal terms, decree that every disposition of its property by a company being wound-up is void. Thus, the default position ordained by this section is that all such dispositions have no force and effect in the eyes of the law, i.e the disposition is regarded as if it had never occurred. The mischief that Section 341(2) seeks to obviate is plain enough. It is to prevent a company being wound-up from dissipating its assets and thereby frustrating the claims of creditors.”

What now for BRPs?

Fortunately, the SCA recorded that BRPs are not without remedy and referred in this regard to the proviso to Section 341(2) as follows:

“… its manifest purpose is to give a court an unfettered discretion to decide whether or not to direct otherwise and thus depart from the default position decreed by the legislature. As already discussed, this discretion is only exercisable in relation to payments made between the date of lodging of the application for winding-up and the grant of a provisional order. In exercising this discretion, a court will, amongst other relevant factors, naturally have regard to the underlying purpose of the provision in the context of winding-up a company unable to pay its debts, the interests of the creditors and those of the beneficiary of this disposition. It bears mentioning that the consequences of visiting dispositions of the kind dealt with in Section 341(2) with voidness, will not always be harsh. This is especially when the potential counter-veiling harshness of allowing the disposition, would not invariably denude the company of its assets in proportion to the value of the disposition to the prejudice of its creditors, is born in mind ….

and further

“However a BRP is not remedyless: first, and most obviously, a BRP may approach a court in terms of the proviso to Section 341(2) to validate a payment. A court hearing such application has a wide discretion. Second, naturally, the BRP enjoys a preference in the ranking of creditors in the winding-up. That preference was considered in Diener – a BRP ranks after the costs of liquidation, but before all other creditors. The BRP thus enjoys a substantial preference.”      [the underlining has been added for emphasis]

Authority for the second remedy referred to by the court is found in the well-known reported decision of Diener N.O v Minister of Justice & Others. Per Diener a BRP’s fees paid out of the free residue in an insolvent estate are preferent in that they are paid after costs of liquidation but before claims of employees for post commencement wages whether those claims were secured or not and before other unsecured creditors. In rescue proceedings, employees for post rescue claims are ranked as preferent but also paid after the rescue practitioners’ fees and disbursements and after secured creditors have been paid.

In summary then the BRPS remedies are as follows:

• they can apply to court for the court to exercise their discretion not to void the payment(s); and

• enjoy a certain preference in the ranking of payment out of the free residue in insolvent estates.

Further rulings

In a separate (concurring) judgment four (of the five) judges also considered certain sections in Chapter 6, i.e Section 135(3), Section 143(1), Section 143(5) and concluded further that:

“the contention made by the BRP that these sections entitle them to payment, amount to a statutory carve-out from the operation of Section 341(2) entitling them to payment”.

In the result the SCA disagreed with this contention and stated that none of these sections specify that a BRP is entitled to payment nor when. In this regard the courts stated that “the wording of the sections plainly do not confer any such right. In short the argument advanced by the appellants that SS143(1), 135(3) and 143(5) continue to apply after the business rescue had terminated is inconsistent with the judgments of this court and the Constitutional Court in Diener N.O v Minister of Justice & Others (Diener).”

Lastly the courts confirmed that payments made to a BRP before the presentation of the application for winding-up are unaffected by Section 341(2) but once the application had been launched the BRPs were in the same position as all other creditors. Unfortunately for Mazars this matter was not argued on the basis of the proviso to Section 341(2).

Thus the courts left open the question as to whether or not in the exercise of their discretion the courts will allow a BRP to be paid his fees between date of issue of the liquidation application and grant of provisional order. This for another day. Until the courts do rule hereon the door has not yet been fully shut on the BRPs for fees paid during this period. However, at this time and in respect of such payments Section 341(2) trumps the provisions of Chapter 6 until and “… unless the courts otherwise orders”.