Introduction

Concurrent creditors are creditors who have neither secured nor preferent claims against the company and they are paid out of the free residue (i.e. the unencumbered part of the company’s assets) after any preferent creditors have been paid. They rank equally, and if there is not enough money left in the free residue to pay all their claims, a concurrent creditor is paid proportionately by way of a dividend.

On 31 October 2012, Judge Fourie, in the Western Cape High Court, handed down judgment in Commissioner for the South African Revenue Service v Beginsel NO & Others.  This judgment dealt with the manner in which concurrent creditors will be treated in business rescue proceedings.

This judgment, once and for all, shed light on the manner in which SARS and other concurrent creditors will vote in business rescue proceedings.

Background

Section 7(k) of the Companies Act 71 of 2008 (“the Act”), states that one of the purposes of the Act is: “to provide for the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders.”

The Third Respondent (“the Company”) had experienced financial difficulties which led to the creditors of the company taking legal action against the Company.  An order was subsequently made by the South Gauteng High Court, placing the Company under provisional liquidation.

The First and Second Respondents were appointed as business rescue practitioners (“the BRP’s”) to the company.

At the first meeting of creditors of the Company it was determined that the BRP’s should take the required steps to prepare and publish a business rescue plan for the Company. At that stage the Applicant (“SARS”) had provided the BRP’s with proof of the Company’s indebtedness to it, which amounted to R11 194 677.39. Subsequent thereto, the BRP’s made several unsuccessful attempts to reach a compromise with SARS.

In their proposed business rescue plan, the BRP’s expressed the view that, having taken legal advice, the SARS is not a preferent creditor in terms of business rescue proceedings. SARS would not enjoy preference over any of the other creditors, and claims would be made in the usual order of preference, i.e. payment of secured claims, followed by preferent claims of employees in agreed amounts and thereafter payment of the concurrent claims, as contemplated in section 150 (2) (b) (v) of the Act. SARS was consequently reflected as a concurrent creditor in the annexures to the business rescue plan, with a claim of R12 392 706.26.

In a subsequent letter to the BRP’s, SARS insisted that it should be ranked as a preferent creditor and that the adoption of the business rescue plan by the creditors was unlawful and invalid. SARS contended that by treating its voting power as the same as that of concurrent creditors, who would get nothing if the company was liquidated, it is deprived of the statutory preference to which it is entitled to when companies are liquidated. SARS subsequently made an urgent application to the court for clarification of its rights.

Ratio:

The court held that the Act does not create statutory preferences such as those provided for in terms of sections 96 to 102 of the Insolvency Act 24 of 1936, and that if the legislature had intended to prefer SARS above other creditors in business rescue proceedings; it would have clearly stated so. Thus, the court held that SARS is not a preferent creditor in business rescue proceedings.

The court stated that the Act differentiates between secured and unsecured creditors in section 145(4) (a), with concurrent creditors forming part of the latter group. The court went on to say that concurrent creditors can further be divided into “preferent” or “concurrent” unsecured creditors.

The court held that the term “preferent creditor” generally refers to a creditor whose claim is unsecured, but which ranks above the claims of concurrent creditors (i.e. unsecured preferent creditors). In assigning the phrase its ordinary meaning, the court could not interpret the words “unsecured creditor” to refer only to “preferent unsecured creditors”. Therefore, in business rescue proceedings, the court held that SARS is to be treated like any other concurrent creditor of the company.

Concurrent creditors now vote in accordance with the value of their claim against the company.  This case has set in stone that concurrent creditors stand alongside secured creditors and have the opportunity to have their say, namely, to vote, either for the approval of the plan or for the rejection thereof.

This judgment therefore simplified the extremely important aspect of the way in which concurrent creditors are to vote in business rescue proceedings. Concurrent creditors now stand alongside secured creditors.  This has the effect that all creditors in companies facing business rescue, will have an equal say about the company’s future.