How, if at all, should a BRP receive payment for his services in the face of a pending liquidation application? This recurring question has finally been addressed in a recent SCA judgement that offers further insight into an important section of the Companies Act, writes Dawie van der Merwe, Director at BDO.
Every court judgement, as it goes, pleases one party at the expense of the other. This old adage once again came to the fore in the recent judgement by the SCA in the case of Mazars Recovery & Restructuring (Pty) Ltd vs Montic Dairy (Pty) Ltd (In liquidation).
In this judgement, the court was ruling on a matter that brought into question the long established and impenetrable wall of the concursus creditorum in Insolvency, with Mazars arguing for a statutory carve out for BRPs, for their fees incurred after the effective date of liquidation.
Before getting to the details of the argument and ruling, some facts:
- Montic commenced business rescue proceedings in November 2015.
- On 14 April 2016, a creditor of Montic commenced liquidation proceedings against the company.
- On 23 May and 2 June 2016, the BRPs received payments for their fees.
- On 14 June, Montic was liquidated.
So, why the need to go to court? The case boiled down to a question regarding the well-established principles laid out in Section 341(2) of the Companies Act. As recently as 2021, the SCA said the following about this section:
“The provisions of Section 341(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… is that all such dispositions have no force and effect in the eyes of the law… The mischief the Section 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 creditors.
In this case, the effective date liquidation commenced, known as concursus creditorum, on 14 April 2016. Taking the above principles into account then, the subsequently appointed liquidators demanded repayment from the BRPs of the two payments made after concursus creditorum, but before the order for liquidation was granted.
The matter at hand
For decades our Courts have steadfastly protected the provision of Section 341(2) — which has served the Insolvency law well, providing structure and certainty. And so, in bringing this case to the SCA, the trite law on Section 341(2) has once again been revisited against the background of seemingly competing provisions of Chapter 6 of the new Companies Act, as it relates to the remuneration of BRPs.
The simple question presented to the court was whether the remuneration of BRPs in the period between the issuing of a liquidation application and the subsequent granting of the order, should be “carved out” of the general principles of section 341(2)?
Here the BRPs argued that as they are obliged to continue with their duties, even as the liquidation application is underway, they should be entitled to payment for their services and not considered “dispositions by the company”.
In this case, the BRPs effectively wanted the SCA to confirm they had the right, by law, to be paid their fees, without having to submit themselves to the liquidation process as all other creditors would have to.
At face value, it would seem unfair for BRPs to have to remit “dispositions made” and then “sing for their dinner” later by having to submit a claim like all other creditors in the liquidation process. The BRPs are however not alone in this quandary. The diligent attorney, for instance, who unsuccessfully defends a company against a liquidation application, is faced with the reality of having to remit to a liquidator any payments received after the commencement of liquidation proceedings.
So, why then should a BRP be in a better position?
The answer has once again been confirmed by the SCA that a BRP, like any other creditor faced with a request for repayment, is not without remedy. The very Section that imposed these strict provisions also contains the provision to allow a Court to deviate from it, reading:
Every disposition of its property… by any company being wound up … made after the commencement of the winding up, shall be void unless the Court otherwise orders.
The provision, while seemingly uncompromising, gives a Court the discretion under circumstances it deems appropriate while balancing the rights of all parties, to order the payments “otherwise” than dispositions.
The SCA had previously clearly set out that this rider to Section 341(2) gave the Court unfettered discretion to decide whether or not to depart from the default position decreed by the legislature. In exercising this discretion, according to the SCA, a Court will consider the underlying purpose of the provision in the context of a company’s liquidation, the interest of the creditors, and those of the beneficiaries of the disposition (in this case the BRPs).
Unfortunately, the BRPs of Montic did not seek the Court’s consideration to apply its discretion, but rather placed all their eggs in one basket, arguing that the provisions of Chapter 6 as they relate to their fees, should be interpreted as authority for an exception to the general provisions of Section 341(2).
The Ruling
The SCA ultimately rejected the BRPs argument and reaffirmed their support of the well-established principles as they relate to Section 341(2). As the BRPs did not seek, even as an alternative to their main application , the Court’s consideration to apply its discretion in allowing these dispositions, we unfortunately still do not have any authority to guide us in matters related to how a Court will come to a BRP’s aid in applying its discretion.
The judgment may leave a sour taste in the mouth of some BRPs, but the flip side of the judgement is that it has reaffirmed that a BRP has two alternative bites at the cherry. The first is the already referred to Court application in terms of Section 341(2) and option two is the already established preference that a BRP will enjoy from the proceeds of the free residue assets.
The Montic BRPs were unsuccessful in convincing our Courts that BRPs should in general not be held subject to the provisions of Section 341(2). What we did receive from this ruling — as was the case in the Diener judgement — is clarity on yet another aspect of the ever-evolving business rescue environment.
Some in the BRP community may see this judgement as yet another limitation on their remuneration regime, but in balancing the interests of all concerned, the interpretation of the law by the SCA is without fault. As a BRP it may leave a sour taste, but as a jurist it is without a doubt the sweet taste of the application of good law.