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The Position of Liquidators and the Costs of Liquidation if Business Rescue Proceedings are Superseded by a Liquidation Order

27 May 2013

Routledge Modise

Section 135 of the Companies Act 71 of 2008 deals with the ranking of claims in business rescue. It sometimes happens that business rescue proceedings are superseded by a liquidation order and the question then is how the ranking is affected.

Section 135(4) of Act 71 of 2008 specifies that if business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of section 135 will remain in force, except to the extent of any claims arising out of the costs of liquidation.

This means that if liquidation follows business rescue proceedings, then the costs of liquidation (while the company is in liquidation) are not governed by the preference and ranking preferred in terms of section 135.

In essence, section 135 says that the business rescue practitioner's remuneration and expenses are paid first. After that, the claims of the employees for remuneration and reimbursement for expenses from the date of commencement of business rescue proceedings will be paid. The reason for this is that these claims are categorised as post-commencement finance. This is the funding that is available to a company after the commencement of business rescue proceedings.

Next in line (section 135(3)) are the claims arising out of the costs of business rescue proceedings. After this, payment of the lenders for post commencement finance will be made. This situation applies even if post-commencement financiers have security for their claim. A general point that must not be overlooked is that lenders of post-commencement finance will have preference over the unsecured claims.

There have been cases where distressed companies go into business rescue and thereafter are liquidated. An example of this is the Sanyati Group and a further example is 1Time Airlines. The question I ask is how to interpret section 135(4) of Act 71 of 2008, and more especially, how to interpret the words "except to the extent of any claims arising out of the costs of liquidation".

In a normal grammatical interpretation it means that the ranking specified in section 135(3) will remain in force after the company in business rescue has been liquidated except for the claims arising out of the costs of liquidation.

The task of the liquidator that is appointed becomes very difficult because he must decide how to deal with the host of claims that have arisen during the period of the business rescue and that will arise during the period of the liquidation that superseded the business rescue. The costs of the business rescue are relatively easy because they will have been incurred and will have been recorded by the business rescue practitioner. The liquidator will then have to identify the costs of liquidation. These will have to be paid before any expenses in accordance with the section 135(3) ranking. It will be necessary for the liquidator to determine exactly the meaning of costs of liquidation. The liquidation itself will obviously arise due to the inability of the distressed company to pay its debts and therefore Chapter 14 of Act 61 of 1973 is applicable (by virtue of the operation of item 9 of schedule 5 of the new Companies Act 71 of 2008). Section 403(1)(a) of the Companies Act 61 of 1973 refers to the "costs of winding up". There is no provision in Chapter 14 of Act 61 of 1973 that corresponds to section 97 of the Insolvency Act 24 of 1936. Accordingly, through the operation of section 339 of Act 61 of 1973, the provisions of the Insolvency Act are made applicable.

Section 97 of the Insolvency Act 24 of 1936 provides for the costs of sequestration. There are broadly three categories, namely sheriff's charges for attaching and making an inventory of estate assets, the Master's fee in respect of the sequestration (including the cost of a Presiding Officer at an enquiry) and charges referred to in section 97(2)(c) of the Insolvency Act 24 of 1936. The section 97(2)(c) charges rank equally and are paid proportionately and the important ones are the taxed costs of sequestration, the remuneration of the trustee/liquidator and all other costs of administration and liquidation and the salaries or wages of a person engaged by the trustee/liquidator in connection with the administration of the insolvent estate.

The interesting issue is when a liquidator decides to complete an executory (uncompleted contract). This contract may have been in existence at the time of the business rescue and was being continued by the business rescue practitioner. The liquidator, which he can do, makes the election to continue with the contract and the expenses to complete the contract form part of the costs of liquidation. The reason for this is that the liquidator must render reciprocal performance to the other party and make payment to the other party in full because the continuing of the contract is an act of administration by the liquidator and therefore it must be a cost of administration.

It is likely that the executory contract that liquidators are continuing is probably the life blood of the business and accordingly any available funds will be used to continue that contract.

The inevitable result is that there will be little or nothing left to pay the business rescue expenditure in terms of the section 135 ranking. In view of this, business rescue practitioners may be well advised to make early arrangements for payment of their fees and disbursements and the providers of post commencement finance should be kept fully aware that the costs of liquidation will rank before them if the business rescue is superseded by a liquidation.

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