Business Rescue – Whether a business rescue practitioner enjoys a “ Super Preference” over all creditors. A media summary of Diener NO v Minister of Justice and Correctional Services and Others (CCT03/18) [2018] ZACC 48 (29 November 2018)

On Thursday, 29 November 2018 at 10h00 the Constitutional Court handed down judgment in an application for leave to appeal against a judgment of the Supreme Court of Appeal.  The matter concerned whether, in terms of the Companies Act 71 of 2008 (Companies Act), a business rescue practitioner enjoys a “super preference” over all creditors, whether secured or not, during liquidation proceedings.

The applicant is Mr Ludwig Wilhelm Diener, a business rescue practitioner who brought an application against the Minister of Justice, the Master of the High Court of South Africa, Gauteng Division, Pretoria (Master), the joint liquidators of the estate at issue, and the estate’s only secured creditor FirstRand Bank Limited (FirstRand Bank).  The South African Restructuring and Insolvency Association (SARIPA), the Banking Association of South Africa (BASA), the Independent Business Rescues Association of South Africa (IBRASA), and the Turnaround Management Association Southern Africa MPC (Turnaround Management) made submissions as amici curiae (friends of the Court) in the Supreme Court of Appeal and were therefore joined as respondents in the application made to this Court.

On 13 June 2012, the members of the business JD Bester Labour Brokers CC (JD Bester) passed a resolution voluntarily placing JD Bester in business rescue.  Mr Diener was appointed as the business rescue practitioner for the company.

On 14 June 2012, after the commencement of business rescue proceedings but before Mr Diener’s appointment, JD Bester instructed Cawood Attorneys to launch an urgent application against FirstRand Bank, a secured creditor, to stay the sale in execution of JD Bester’s immovable property, its only asset of any value.  An order to this effect was granted.  Cawood Attorneys later submitted its account for its services to Mr Diener, which Mr Diener went on to claim as one of the expenses incurred in the business rescue proceedings.

During August 2012, Mr Diener instructed Cawood Attorneys to bring an application under the Companies Act 71 of 2008 (Companies Act) to convert the business rescue proceedings into liquidation proceedings.  Mr Diener provided the jointly appointed liquidators with his and Cawood Attorneys’ accounts.  The joint liquidators could not agree on whether the business rescue practitioners’ remuneration and expenses should be given a preference. The issue was referred to the Master, who approved the First and Final Liquidation and Contribution account (final account).

Mr Diener launched an application in the High Court challenging the Master’s decision and also sought that the final account should provide for the costs of a business rescue practitioner in finalising business rescue proceedings.  The High Court agreed with the Master, finding that expenses incurred during business rescue, if not paid during business rescue proceedings or during liquidation, can only be paid after the payment of costs of liquidation.

The matter was then brought to the Supreme Court of Appeal, where Mr Diener contended that in terms of the Companies Act business rescue practitioners’ claims for remuneration enjoy a “special and novel preference” which ranks them above creditors, whether secured or not.  The Supreme Court of Appeal held that while the Companies Act provides for the business rescue practitioner to hold a preferential claim in some respects, they do not have a “super preference” to the extent contended for by Mr Diener.  The Supreme Court of Appeal accordingly dismissed the appeal.

Before the Constitutional Court, Mr Diener argued that the Companies Act creates a “super preference” for the remuneration of a business rescue practitioner.  Mr Diener’s application was supported by IBRASA and Turnaround Management.

In response Mr Cloete Murray N.O., one of the joint liquidators, submitted that JD Bester was never a suitable candidate for business rescue, and that claims by business rescue practitioners are only paid after payment of all claims arising from the costs of the liquidation.  Mr Murray submitted that business rescue practitioners enjoy a statutory preference over unsecured claims, before employee claims arising after commencement of business rescue proceedings and before post-commencement financing charges.  FirstRand Bank argued that business rescue practitioners do not enjoy a “super preference” over secured creditors.  The alternative would incentivise business rescue practitioners to pursue unmeritorious business rescue.  BASA contended that nothing in the Companies Act suggests that the Legislature intended to dilute the rights of secured creditors where such expenses are incurred during business rescue.

In a unanimous judgment penned by Khampepe J, the Constitutional Court finds that while the application for leave to appeal raised an arguable point of law of general public importance, it was not in the interests in justice to grant leave to appeal because there were no reasonable prospects of success that the Court would reverse or materially alter the decision of the lower court.  In its judgment, this Court considered both the plain and purposive readings of the provisions in question.  The Court held that there was no doubt that certain anomalies arose in both the interpretations put forward by the applicant and the respondents.  While the Companies Act clearly ranks business rescue practitioners’ claim for remuneration and expenses before post-commencement financing and unsecured assets and subjects the practitioner’s payment to liquidation; it is not clear whether it extends to liquidation on a plain reading of the provisions.  But ultimately, with regard to the context and purpose of the Companies Act, the Court found there was no way that the interpretation contended for by the applicant would be tenable.  This Court therefore dismissed the appeal and made no order as to costs.

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