Post-Commencement Financing and the Ranking of Claims Prof Anneli Loubser

Introduction The need for post-commencement financing UNCITRAL Legislative Guide on Insolvency Law Southern Palace Investments Global problem INSOL Survey January 2010 INSOL Survey June 2010

Too little or too late Neckermann in Germany Sanyati in South Africa

Judicial management Requirement for judicial management order: reasonable probability that company will be enabled to pay (all) its debts and become successful concern – very little on post-commencement claims or their ranking – no mention of employees; labour law applicable Court order may include power, subject to rights of (pre-commencement) creditors, to raise money in any way without authority of shareholders (s 428(1) and s 431(3))

Judicial management (continued) Pre-commencement creditors may consent to preference of liabilities incurred by judicial manager in conduct of company’s business (s 435(1)) – over all unsecured claims except claims arising out of costs of judicial management – Preference will remain in subsequent liquidation Application of money becoming available to judicial manager (s 434) – Costs of jm and in conduct of company’s business – Payment of pre-commencement creditors if possible – Payments to be in accordance with insolvency law

Business rescue proceedings Section 135 dedicated to post-commencement finance and ranking of claims Preferences are as set out in this section and will remain in force if superseded by liquidation except for claims arising out of costs of liquidation Hindrance or help? – Conflicts with Insolvency Act – Uncertainty in interpretation

Post-commencement finance Remuneration, reimbursement for expenses or other amount relating to employment becoming due and payable to an employee during business rescue declared post- commencement finance – Section 136: employees must remain employed on same terms and conditions

Post-commencement financing Company may obtain (other) post-commencement financing (s 135(2)) May be secured by use of unencumbered assets of company Part of normal or usual powers, no specific authorisation necessary

Ranking of post-commencement claims (135(3)) 1. Business rescue practitioner’s remuneration, expenses and other claims arising out of the costs of business rescue proceedings 2. “Post-commencement financing” of employees – all claims treated equally – preference over all claims for other post- commencement financing whether secured or unsecured

Consequences and questions Claims of employees not part of costs – Lower ranking than in judicial management No limit placed on employees’ claims in subsequent liquidation – is this in addition to claim for pre-commencement claims limited to 3 months (or R12000) for salary, and smaller amounts for leave or other paid absences i.t.o. Insolvency Act?

Ranking (continued) 3. Claims for (real) post-commencement financing – preference in order in which they were incurred over all unsecured claims against company – no mention of differentiation between secured and unsecured post-commencement claims – are all post-commencement debts, e.g. supplies and services delivered post-commencement financing or not?

Effect of post-commencement claims Section 135 Companies Act 2008: Order of preference Remuneration and expenses of practitioner, post-commencement payments due to employees during business rescue proceedings but not paid, post-commencement loans all unsecured claims against the company Merchant West Working Capital Solutions (Pty) Ltd v Advanced Technologies and Engineering Company (Pty) Ltd and Gainsford (NO) (Case no 12406/2013 South Gauteng High Court 10 May 2013 Redpath Mining South Africa (Pty) Ltd v Piers Marsden NO (Case No 18486/2013 South Gauteng High Court 14 June 2013)

Subsequent liquidation Claims arising out of the costs of liquidation Practitioner’s remuneration and expenses as in s 143, and other claims arising out of costs of business rescue proceedings (regulation 128(3)) Secured pre-commencement claims Post-commencement claims by employees Secured and unsecured claims for real post-commencement financing Claims enjoying preference i.t.o. Insolvency Act (SARS etc) Unsecured claims of pre-commencement creditors and possibly post-commencement creditors not regarded as providers of PCF or included in “costs”

Conclusion Uncertainty over several aspects such as – Which claims to treat as post-commencement financing – Difference between secured and unsecured post- commencement financing claims – What is included under “costs of business rescue proceedings”