The Supreme Court of Appeal recently made judgment on whether payments made to business rescue practitioners after the conversion of business rescue proceedings to liquidation proceedings are void in terms of s341(2) as read with s348 of the Companies Act 61 of 1973.
A company that finds itself in a financially distressed position by nature has limited financial resources available, including the resources to attend to the payment for professional services rendered. There have been various disputes between business rescue practitioners and liquidators regarding the payments made to Business Rescue Practitioners.
The Supreme Court of Appeal has provided further clarity on whether payments made to Business Rescue Practitioners during the period between a companies provisional and final liquidation is deemed to be a voidable disposition and is to be repaid to the insolvent estate.
In the matter of Mazars Recovery & Restructuring (Pty)Ltd and Others v Montic Dairy (Pty)Ltd and Others (526/2021) ZASCA 135 the Western Cape Division of the High Court found that payments made during the aforementioned period are deemed voidable and accordingly are to be paid to the insolvent estate.
On 2 November 2015 the company was placed under business rescue. Despite some prior developments, including an application for the liquidation of the company by some of its creditors, the Business Rescue Practitioners themselves sough an order on a urgent basis for the winding-up the company in terms of s141(2)(a) of the Companies Act 71 of 2008 (“hereinafter referred to as the Companies Act 2008”).
The order for the winding-up of the company was granted on the 14 June 2016. On 23 May 2016 and 2 June 2016, whilst the application was pending a total of R1.5 million was paid by the Business Rescue Practitioners towards their fees and expenses.
The appointed liquidators, subsequent to their appointment, sought an order to declare these payments void in terms of s341(2) and s348 of the Companies Act 1973 which sections remain applicable by virtue of item 9(1) of schedule 5 of the Companies Act 2008.
Section 341(2) states:
‘Every disposition of its property (including rights of action) by any company being wound-up and unable to pay its debts made after the commencement of the winding-up, shall be void unless the Court otherwise directs'
S348 provides that a winding-up is deemed to have commenced at the time of the presentation of the application for the winding-up to the court. In essence, the winding-up commences upon the issuing of the application at court.
The Business Rescue Practitioners on arguments included that they were obliged to continue with their duties during the period in question and that their payment was statutorily mandated in terms of s135(3), s143(1) and s143(5) of the Companies Act 2008 and that such dispositions were made by the company and not business rescue practitioners themselves.
The Court cited findings made in the matters of Eravin Construction CC v Bekker NO and  ZASCA 30; 2016 (6) SCA 589 (SCA) pertaining to the application of s341(2) as well as the matter of Pride Milling Company (Pty)Ltd v Bekker NO and Another  zasca127;  4 All SA 696 (SCA); 2022 (2) sa419 (SCA) (hereinafter referred to as “Pride Milling Case”)
In the Pride Milling case re Court held that:
‘The provisions of s341(2) could not be clearer. They, in unequivocal terms, decree that every disposition of its property by a company being wound-up is void. Thus, the default position ordained by this section is that all such dispositions have no force and effect in the eyes of the law i.e. the disposition is regarded as if it had never occurred. The mischief that s 341(2) seeks to obviate is plain enough. It is to prevent a company being wound-up from dissipating its assets and thereby frustrating the claims of its creditors'
There is a proviso in s341(2), which the business rescue practitioners did not seek to pursue in the current matter.
The proviso was canvassed by the Court in the Pride Milling matter where it stated that:
‘As to the rider to s341(2), its manifest purpose is to give a court an unfettered discretion to decide whether or not to direct otherwise and thus depart from the default position decreed by the legislature. As already discussed, this discretion is only exercisable in relation to payments made between the date of lodging of the application for the winding-up and the grant of a provisional order. In exercising this discretion, a court will, amongst other relevant factors, naturally have regard to the underlying provision in the context of winding-up a company unable to pay its debts, in the interest of the creditors and those of the beneficiary of the disposition. It bears mentioning that the consequences of visiting dispositions of the kind dealt with in s341(2) with voidness, will not always be harsh. This is so especially when the potential countervailing harshness of allowing the disposition, which would invariably denude the company of its assets in proportion to the prejudice of its creditors, is borne in mind…'
The Supreme Court of Appeal as well as the Constitutional Court, although considering a different argument that was proffered in the current case, in the matter of Diener NO v Minister of Justice and Others  ZASCA 180;  1 All SA 317 (SCA); 2018 (2) SA 399 (SCA); 2019 (4) SA 374 (CC) held that Practitioners claims for remuneration were not given ‘super-preference' including where a business rescue is converted to liquidation.
The judgment will no doubt place the conduct of business rescue practitioners under further scrutiny and place a further emphasis on practitioners to attend to proper pre-assessments prior to accepting appointment as practitioners.
Our office is fully equipped to advise parties that are considering business rescue proceedings or require further guidance on the business rescue process whether it be as the distressed company or as a creditor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.