Picture: ISTOCK
Picture: ISTOCK

Business rescue practitioners should have a claim on unpaid fees during a liquidation, practitioner Ludwig Diener argued in the Constitutional Court on Thursday.

Diener is appealing against a Supreme Court of Appeal judgment on whether business rescue practitioners enjoy a "super preference" over other creditors when a business rescue fails.

Business rescue proceedings were introduced in 2011 to prevent struggling companies from entering liquidation. Two of SA’s oldest construction companies, Basil Read and Esor, are in business rescue at the moment, while the business rescue of Steval Engineering ended in failure last month.

Business rescue allows a company to suspend all claims to creditors and restructure outstanding debt. This process is designed to help struggling entities to refinance themselves.

Proceedings are also supposed to ensure that creditors will get more of the funds owed to them than if the company were liquidated.

Since 2011, secured creditors have been paid first, regardless of whether the business rescue process succeeds or not.

Risks in a business rescue process are thus borne by the business rescue practitioners and unsecured creditors and not by secured creditors.

It was argued in the court that in order to create a fairer balance of risks and rights, business practitioners should be allowed to have a claim on unpaid fees.

Diener has brought an application for leave to appeal against the Supreme Court of Appeal’s judgment on whether a business rescue practitioner enjoyed a "super preference" over all creditors, whether secured or not, during liquidation proceedings.

He said business rescue practitioners’ claims for remuneration enjoyed a "special and novel preference" ranking them above creditors, whether secured or not.

This was because they actually did the work of restructuring companies’ debt and created plans to turn their fortunes around.

The Supreme Court of Appeal (SCA) held that sections 135(4) and 143(5) of the Companies Act, read individually or together, did not create such a "super preference".

Hogan Lovells attorney Alex Eliott, representing the Turnaround Management Association Southern Africa (TMA), a group of business practitioners supporting Diener’s application, said he was optimistic the Constitutional Court would make a judgment that benefited business rescue practitioners.

"Ideally the court will reverse the Supreme Court of Appeal decision, and practitioners will have a claim for unpaid fees.

"Hopefully creditors will also play a role in business rescues in the future. I believe if banks did play a role and had skin in the game, more business rescue cases could be successful," he said.

andersona@businesslive.co.za

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