Diener N.O. v Minister of Justice and Correctional Services and Others

JD Bester Labour Brokers CC was a property holding entity with one immovable property and one major secured creditor, FirstRand Bank (FRB), which held a mortgage bond over the property. After breaching contractual obligations to FRB, judgment was granted and the property was declared executable with a sale scheduled for 15 June 2012. Two days before the sale, the sole member passed a resolution placing JD Bester in business rescue under section 129(1) of the Companies Act without consulting FRB. Mr Diener was appointed as business rescue practitioner. At the time, JD Bester was not conducting any business, had no employees, and had no assets other than the mortgaged property. The day before the sale, an urgent application was brought to stay the sale in execution, which was granted. By August 2012, Mr Diener concluded JD Bester could not be rescued and brought an application to convert the business rescue into liquidation proceedings. JD Bester was liquidated on 27 August 2012, having been in business rescue for just over two months. Mr Diener submitted claims for his fees (R112,918.40) and Cawood Attorneys' fees (R34,447.51) to the joint liquidators, asserting these should have "super preference" over all creditors including secured creditors. The liquidators disagreed on ranking, and the Master upheld that Mr Diener had failed to prove a claim under section 44 of the Insolvency Act and that the expenses were unsecured claims. Mr Diener challenged this decision through review proceedings.

• Whether sections 135(4) and 143(5) of the Companies Act create a 'super preference' for business rescue practitioners' remuneration and expenses over all creditors, including secured creditors, when business rescue is converted to liquidation
• The correct interpretation of section 135(4) of the Companies Act regarding post-commencement finance preferences upon liquidation
• The correct interpretation of section 143(5) of the Companies Act regarding practitioners' claims in priority to secured and unsecured creditors
• The interaction between the Companies Act provisions and the Insolvency Act provisions, particularly sections 89(1), 95, and 97
• Whether practitioners' remuneration and expenses can be paid from proceeds of secured assets when business rescue converts to liquidation

1. The application for leave to file a replying affidavit is dismissed. 2. The application for condonation for the late filing of the third respondent's written submissions is granted. 3. Leave to appeal is refused. 4. There is no order as to costs in this Court.

Sections 135(4) and 143(5) of the Companies Act 71 of 2008, properly interpreted in their context and having regard to the purpose of business rescue and the provisions of the Insolvency Act, do not confer a "super preference" on business rescue practitioners' remuneration and expenses over secured creditors when business rescue proceedings are converted to liquidation. Section 135(4) retains preferences created for post-commencement finance in liquidation, subject to liquidation costs, but does not create a preference over pre-business rescue secured creditors' claims to secured assets. Section 143(5) ranks practitioners' remuneration in priority before secured and unsecured creditors during business rescue proceedings in relation to post-commencement finance, but this preference does not extend to give practitioners priority over secured creditors' claims to secured property in liquidation. When business rescue converts to liquidation, practitioners' remuneration and expenses rank after liquidation costs (section 135(4)) and are payable from the free residue, not from proceeds of secured property except as provided in section 89(1) of the Insolvency Act. Any other interpretation would upset the balance of stakeholder interests that underpins Chapter 6 of the Companies Act and conflict with sections 95 and 97 of the Insolvency Act.

The Court made several non-binding observations: (1) The provisions of Chapter 6 of the Companies Act are "not always clearly drafted" and create some ambiguities and anomalies under either interpretation. (2) There is an unresolved question about what independent meaning can be given to section 143(5) if "all other secured and unsecured creditors" refers only to post-commencement finance creditors, and whether section 143(5) creates a broader preference during business rescue proceedings than section 135(3). The Court declined to resolve this as it was not fully argued and relates to business rescue rather than liquidation. (3) The Court noted that practitioners can protect themselves by insisting on deposits or reaching agreements with creditors to ensure payment, and that the risk of non-payment might actually improve the business rescue regime by deterring practitioners from accepting appointments where companies are not viable rescue candidates. (4) The Court observed that claims that practitioners will be unwilling to take appointments under this interpretation are speculative and unsupported by evidence, noting that liquidators also do not enjoy preference over secured creditors yet liquidations still occur. (5) The Court noted that safeguards exist to hold practitioners accountable (sections 138-141) but acknowledged courts have been reluctant to find liability for fruitless expenses where practitioners acted in good faith. (6) The Court suggested that proper assessment of viability before commencing business rescue is essential and that JD Bester was never a suitable candidate for business rescue.

This case provides authoritative guidance on the ranking of business rescue practitioners' claims when business rescue proceedings convert to liquidation. It clarifies that practitioners do not enjoy a "super preference" over secured creditors in liquidation, but rather their claims rank after liquidation costs and are paid from the free residue before other unsecured claims and post-commencement finance claims. The judgment emphasizes the importance of balancing stakeholder interests in business rescue and guards against abuse of the business rescue mechanism where companies are not viable candidates for rescue. It confirms that the business rescue provisions must be interpreted in harmony with the Insolvency Act and that secured creditors' rights are not diluted by practitioners' fees when liquidation supervenes. The case has significant implications for practitioners' willingness to accept appointments, encouraging them to properly assess viability before commencing business rescue. It also protects secured creditors from having their security eroded by practitioners' fees in failed business rescues, while preserving practitioners' preference during ongoing business rescue proceedings.