The banks’ early “Christmas Gift”

Banks and other lenders must be breathing a sigh of relief, and celebrating an early “Christmas gift” from the Supreme Court of Appeal. The gift was delivered in Diener N.O. v Minister of Justice (1 December 2017).

Two of the questions before the court were: whether or not a business rescue practitioner enjoys “super-preference” over all secured and unsecured creditors in respect of the practitioner’s fees and expenses in the event that a company, that was in business rescue, goes into liquidation; and whether or not the practitioner must prove a claim in the estate of the company which has subsequently gone into liquidation.

The company in question was in business rescue before being placed in liquidation. When the liquidation order was granted, the practitioner’s fees and expenses were unpaid by the company and owing to the practitioner. The practitioner argued that he enjoyed “super-preference” over secured and unsecured creditors in respect of the payment of his fees and expenses.

If the court upheld the practitioner’s argument, this would mean that the practitioner’s fees and expenses would be been payable from the proceeds realised from the sale of a secured asset. To the expected delight of banks and lenders, the court did not agree with the practitioner.

The court held that the practitioner does not enjoy “super-preference” over all creditors. The practitioner only enjoys preference in respect of the free residue after payment of the costs of liquidation. The practitioner enjoys no preference over, and has no right to be paid from, the proceeds of secured assets. 

Here is an example to illustrate the court’s finding: after a liquidator sells a piece of land over which a mortgage bond is registered in favour of a bank, only the costs of maintaining, conserving and realising the piece of land may be deducted from the selling price before the net amount is paid to the bank (this being the current legal position in terms of insolvency law). The practitioner’s fees may only be paid from the free residue, if any, and not from the net proceeds of the piece of land. 

The practitioner also argued that he did not have to prove a claim in the estate of the company, just as a liquidator is not required to prove a claim for liquidation fees and expenses. The court held that the practitioner must, when the company goes into liquidation, prove a claim in the estate of the company, like any other creditor of the estate. The position of a practitioner is not the same as that of a liquidator.

It is expected that banks and lenders will be delighted by this judgment as it means that proceeds of secured assets may not be used to pay business rescue practitioners’ fees and expenses in the event that the business rescue proceedings are terminated and the company goes into liquidation.