Business Rescue Practitioners' Remuneration after Institution of Liquidation Proceedings

Abstract

Business rescue is a relatively new concept in the South African debt restructuring and reform scene, which was introduced by the 2008 Companies Act. The business rescue practitioners incur costs and expenses during the said rescue procedure, and once it is established that business rescue did not succeed to change the financials of the financially distressed company to that of a viable and financially healthy company again, then liquidation proceedings are instituted. During business rescue procedures, the matter is regulated by law – specifically section 143, read in conjunction with regulation 128. The main focus of this study is the remuneration of business rescue practitioners, during the business rescue process and after the order is granted to liquidate the company currently under business rescue. I consider the repercussions of conversion from business rescue to liquidation in respect of the fees claimed for services rendered prior to conversion but after the decision has been made to liquidate the company – whether business rescue was not a viable option right from the start or failed due to other factors such as low realisation proceeds for assets. It is quite evident out of the definition that when a company is in financial distress, and unable to commit to or service its debt, a reasonable prospect must exist for such a company to be rescued. There is a disconnect when it comes to the test applied by the court (and the board of directors) to determine whether a company should be placed under supervision in business rescue. The finding by the court of a ‘reasonable prospect’ of rescue may differ from later findings by the business rescue practitioner that there are no prospects of rescuing the company irrespective of which outcome is considered. The successful granting of a business rescue order by the court, the decision to file a resolution to commence business rescue, and even the adoption and implementation of a business rescue plan, are sometimes not enough to prevent the liquidation of the insolvent company. Throughout the process, all eyes are on the business rescue practitioner. During this time, the business rescue practitioner delivers professional services as can be seen from the licensing requirements and duties, and the factors that the court considers to determine the remuneration that a business rescue practitioner is entitled to during business rescue proceedings. Although this study deals with the remuneration of business rescue practitioners, it is important to understand that a clear link exists between the possibility to salvage a business with financial woes, to turn it into a financially sound business again or to obtain a better outcome for all stakeholders regarding a better dividend, and the remuneration of the business rescue practitioner. Should this not be possible, the business rescue practitioner must have the integrity to acknowledge the dire financial straits the business is in – again, notwithstanding that the court may have come to a different conclusion (perhaps based on different facts in front of it). The reason is to rather refer this entity to be liquidated, and for the business rescue practitioner to lose money but to save his good reputation. This dilemma underlies the study. A business rescue practitioner’s remuneration is not included as costs in the list of section 97 of the Insolvency Act 24 of 1936, of those who render a service. The business rescue practitioner could not be included because of the distinction between business rescue proceedings and liquidation proceedings. A practitioner must prove a claim in terms of section 44 of the Insolvency Act. With this is it stated that a business rescue practitioner is an unsecured creditor of the estate in liquidation. The concern is if there are not surplus funds in the free residue account, the business rescue practitioner’s claim will not be paid and the business rescue practitioner stand a chance of being liable for contribution. Should there be funds available in the free residue account, there is a ranking of creditors who will receive their funds before a dividend may be paid to the practitioner who managed to successfully prove a claim for a ‘reasonable’ amount. This position prevails notwithstanding that the practitioner is entitled to remuneration in terms of the Companies Act 71 of 2008.