As stated in Part 1 of this guide, business rescue brings about the best return for all parties concerned (creditors, directors, shareholders and the company itself) in the instance of the rescue successfully reviving the company. Therefore, should there be a genuine prospect of a successful rescue, creditors should very seriously consider this avenue.
The ranking of creditors in business rescue
The primary objective of business rescue is to rehabilitate the financially distressed company. If this is done successfully, it goes without saying that this in the interests of all creditors and the company alike, with the company being able to settle its debts (in whole or in part by agreement) and subsequently settle its debts when they become due and payable.
However, should the business not be able to be rehabilitated, the second requirement for business rescue as discussed in Part 1 of this guide, is for creditors to achieve a better return than would otherwise result from the immediate liquidation of the company.
In business rescue, the ranking of creditors is more nuanced and flexible (within the framework of section 135 of the Companies Act 71 of 2008 (the Act)). To understand the ranking of creditors in business rescue in this alternative scenario, one must understand the simple pre-commencement and post-commencement lingo used in the business rescue world. “Pre-commencement” speaks to the timeline before company entered business rescue (which will be on a particular date) and “post-commencement” speaks to the timeline after the day on which the company entered business rescue. Therefore, pre-commencement creditors are those creditors who are owed since before the company entered business rescue, and post-commencement creditors are those creditors who are subsequently owed money after the company has entered business rescue. It is possible in certain instances where a creditor can be both. By way of example, consider a historic supplier or service provider who was owed money from the company, prior to the company going into business rescue (pre-commencement) and the business rescue practitioner elects to continue being supplied or serviced by the creditor during the course of the business rescue (post-commencement). This creditor would have both pre- and post-commencement claims. Once the pre and post distinction is understood, the image of the ranking of creditors in business rescue below, becomes clearer:
Costs of the business rescue
The costs of the business rescue include the business rescue practitioner’s remuneration, professional and legal fees incurred during the rescue, and any reasonable costs incurred to conduct the rescue. These costs will always be paid first in business rescue. It is important to note that included in this “super preferred category”, is any remuneration which becomes due and payable to employees, after the company has entered business rescue (i.e. post-commencement).
Post-commencement finance (PCF)
Critical to a successful recue is the ability of the company to be able to secure PCF funding. Should they be successful, any financing provided to the company after entering rescue will rank next in line to be repaid. Should the company receive financing from multiple sources, each respective PCF claim will rank above the next in the order in which they were incurred.
Secured creditors
Secured creditors rank above all unsecured creditors and will be repaid to the extent of the realisation of the underlying asset(s). It is important to note that due to the statutory moratorium in terms of section 133 of the Act, secured creditors cannot enforce their rights to the security whilst the company remains in business rescue without the express permission of the business rescue practitioner or subject to other very limited exceptions.
Unsecured, post-commencement creditors
Before crossing the line into the pre-commencement and unsecured claims, those creditors who have no security, but who incurred their credit prior to the company entering business rescue, will rank next in line.
Unsecured, pre-commencement creditors
Finally, the lowest ranking creditors are the pre-commencement creditors who hold no security in the company. This is sub-divided into preferent creditors, such as employees who were owed remuneration prior to entering business rescue, followed by concurrent creditors who hold no statutory preference. Regardless, these creditors often receive little to nothing in the alternative rescue scenario unless the company in business rescue is asset rich or has very few secured creditors.
Understanding Business Rescue
Business rescue is often misunderstood. If liquidation is the appropriate treatment for a terminally ill company, then business rescue is designed for the chronically ill one. If a company is financially distressed and has a realistic chance to be rehabilitated or at the very least of delivering a better return to creditors than immediate liquidation, creditors should explore this option.
While liquidation brings finality, it also brings rigidity and potentially value destruction. The ranking of creditors under section 135 of the Act, together with the moratorium on enforcement under section 133 of the Act, allows a distressed company the breathing room it needs to either recover or realise its assets in a more orderly and value-maximising manner.
The decision for creditors is therefore not simply a legal one, but a commercial one. More often than not, creditors stand to gain more by supporting a well-conceived rescue process than by forcing a company into premature liquidation.
Business rescue is not a cure-all and it is not appropriate in every case. However, when applied to the right company at the right time, it can transform a bleak outcome into a materially better one for all concerned. Creditors would do well to approach business rescue not with scepticism, but with informed optimism.
