Diener N.O. v Minister of Justice

Ludwig Wilhelm Diener was appointed as business rescue practitioner (BRP) of J D Bester Labour Brokers CC on 20 June 2012, following a voluntary business rescue resolution by members on 13 June 2012. Prior to his appointment, on 14 June 2012, Cawood Attorneys was instructed to bring an urgent application to stay a sale in execution by FirstRand Bank, a secured creditor. In August 2012, Diener concluded that J D Bester could not be rescued and brought an application to convert the business rescue proceedings into liquidation proceedings. On 27 August 2012, a court order was granted terminating business rescue and placing J D Bester into liquidation. Murray, Harms and De Wet were appointed as joint liquidators. A dispute arose between the joint liquidators regarding how Diener's fees and expenses as BRP, and Cawood Attorneys' fees, should be treated in the liquidation account. Murray took the view that Diener had failed to prove a claim in terms of s 44 of the Insolvency Act and that Cawood Attorneys was an unsecured creditor. The Master upheld Murray's position. Diener applied to the High Court to review and set aside the first and final liquidation, distribution and contribution account. The High Court dismissed the application. Diener appealed to the Supreme Court of Appeal.

• Whether, when business rescue is converted to liquidation, a business rescue practitioner's claim for remuneration and expenses enjoys a 'super-preference' over all creditors, secured or unsecured
• Whether, when business rescue proceedings are converted to liquidation proceedings, the date of liquidation is the date of commencement of business rescue proceedings or the date the liquidation application was filed
• Whether a business rescue practitioner's claim for remuneration and expenses must be proved in terms of s 44 of the Insolvency Act 24 of 1936
• Whether Cawood Attorneys' fees in respect of the urgent application and the liquidation application should be treated as expenses in business rescue or post-commencement finance

The appeal was dismissed with no order as to costs.

1. Sections 135(4) and 143(5) of the Companies Act 71 of 2008 do not create a 'super-preference' for a business rescue practitioner's remuneration and expenses over secured creditors when business rescue proceedings are converted to liquidation. 2. Section 135(4) provides a BRP with a preference to claim against the free residue of an insolvent estate after the costs of liquidation but before claims of employees for post-commencement wages, providers of post-commencement finance (whether secured or not), and other unsecured creditors. 3. The preference does not extend to property held as security by creditors. Section 95 of the Insolvency Act requires that proceeds of secured property be applied to satisfy claims secured by that property in order of preference. 4. The effective date of liquidation when business rescue proceedings are converted to liquidation is the date the liquidation application is filed, not the date business rescue proceedings commenced. 5. A business rescue practitioner is a creditor of the company in respect of his or her remuneration and expenses and is required to prove a claim in terms of s 44 of the Insolvency Act. 6. Business rescue proceedings and liquidation proceedings are distinct, and Chapter 6 of the Companies Act creates a clear distinction between costs of business rescue and costs of liquidation.

The Court observed that Chapter 6 of the Companies Act is intended to create an efficient, regulated and effective mechanism to facilitate rescue of companies in financial distress, in a manner that balances the rights and interests of stakeholders. The Court noted that while the chapter makes provision for business rescue failing in some instances and allows for conversion to liquidation, its overwhelming focus is on business rescue and its mechanics rather than on liquidation. The Court commented that the 'super-preference' argument, if accepted, would lead to anomalies such as potentially ranking the BRP's remuneration ahead of the costs of liquidation in certain circumstances, which could not have been intended. The Court also noted that from provisions dealing with security in Chapter 6, it is apparent that security is treated in the same way as in the law more generally, with no indication that security is to be diluted or undermined during business rescue proceedings. The Court declined to address issues raised regarding Cawood Attorneys' fees, noting that Cawood Attorneys was not a party and Diener had no standing to litigate on its behalf. The Court recognized this matter as having significant implications for business rescue proceedings and BRPs, and as being, in reality, a test case of considerable importance requiring clarification.

This case provides crucial clarification on the rights and preferences of business rescue practitioners when business rescue proceedings are converted to liquidation. It establishes that BRPs do not enjoy a 'super-preference' over secured creditors but rather have a preference against the free residue of the estate after liquidation costs. The judgment confirms that BRPs must prove claims in terms of s 44 of the Insolvency Act and clarifies the effective date of liquidation when business rescue is converted to liquidation. The case has significant implications for business rescue practice, the rights of secured creditors, and the administration of insolvent estates. It provides guidance on the interplay between Chapter 6 of the Companies Act 71 of 2008 and the Insolvency Act 24 of 1936. The case was treated as a test case given its importance, with multiple amici curiae admitted to represent various stakeholder interests including banking, business rescue practitioners, and insolvency practitioners.