The document discusses key issues regarding post-commencement finance (PCF) in business rescue proceedings. It summarizes that PCF refers to financing obtained by distressed companies undergoing business rescue to facilitate restructuring. While PCF is prioritized for repayment under the Companies Act, the proper ranking of PCF claims relative to pre-existing secured creditors requires further clarification. Additionally, it is unclear if PCF creditors could invoke the Insolvency Act to challenge dispositions made to other PCF creditors during liquidation proceedings. Judicial rulings are still needed to provide guidance on interpreting these provisions.

1. July 2015 15
(i) all such activities are carried on in a non-profit manner and with an
altruistic or philanthropic intent; and
(ii) no such activity is intended to directly or indirectly promote the economic
self-interest of any fiduciary or employee of the organisation, otherwise
than by way of reasonable remuneration payable to that fiduciary or
employee(c)
where:
(i) each such activity carried on by that organisation is for the benefit of, or
is widely accessible to, the general public at large, including any sector
thereof (other than small and exclusive groups)."
When we refer to a PBO, it is, unlike the previous examples, a status
granted to an organisation rather than the establishment and registration
of a charity vehicle. The purpose of PBO status is to allow an organisation
exemption from taxation. In order to qualify for PBO status, an organisa-
tion must, among others, conduct one or more of the numerous "public
benefit activities" in terms of the Income Tax Act.
An application for PBO status is made at the South African Revenue
Service (SARS). Submission of the application must be done by hand at
a SARS branch and the registration process takes approximately eight
weeks from date of submission.
It is important to note that although the charity vehicles have dif-
ferent characteristics and different purposes, the operation of the one
does not preclude the operation of the other. In other words, an
organisation may register as a PBO, NPO and an NPC, as long as all
the criteria and requirements are satisfied in terms of the relevant leg-
islation. N
De Beer is a candidate attorney with Hogan Lovells. The article was
overseen by Candice Pillay, a partner.
CompanylawCompanylaw
A vital component of the success of business rescue is the financially dis-
tressed company’s ability to access turnaround finance from lenders. The Act
therefore makes provision for “post commencement finance” (PCF) which has
not only affected the ranking of creditors of a company in liquidation but
raises queries surrounding the application of voidable dispositions as provided
for in s29(1) of the Insolvency Act (24 of 1936).
Business rescue provides a lifeline for financially distressed companies in
an effort to restructure, re-organise and “have another go” at trading success-
fully. The determination of what classifies a company as “financially dis-
tressed” is gleaned from s128(1)(f) in which it states that a company will be
deemed financially distressed when:
(i) “it appears to be reasonably unlikely that the company will be able to pay all of
its debts as they become due and payable within the immediately ensuing six
months; or
(ii) it appears to be reasonably likely that the company will become insolvent with-
in the immediately ensuing six months;”
Whilst it is the debts that put a company into a situation where business
rescue procedures are required, it is also the creditors who play a vital role in
getting the company out of it successfully.
A critical component of a successful business rescue is the ability of a
company to obtain turnaround finance as soon as possible following the
commencement of proceedings. For this reason, the Act makes provision for
two types of PCF in s135, namely:
135(1) “…any remuneration, reimbursement for expenses or other amount of
money relating to employment becomes due and payable by a company to an
employee during the company’s business rescue proceedings, but is not paid to
the employee…”
and
135(2) “…financing other than as contemplated in subsection (1)”.
Section 135(2)(a) provides that the financing referred to in s135(2)
“…may be secured to the lender by utilising any asset of the company to the extent
that it is not otherwise encumbered.”
Whilst s135(2) is silent on the actual sources of PCF, it would appear that
such sources could include Banks, customers possibly seeking investment oppor-
tunities, shareholders of the company, development finance institutions and
alternative financiers such as private equity firms and venture capital providers.
Finding a source for PCF largely depends on the risk appetite of lenders.
Traditional lenders, such as banks and development finance institutions, seem
Can a company in liquidation
avoid the voidable?
K E S H I A D E K L E R K
T
he promulgation of the Companies Act (71 of 2008)
saw the introduction of a myriad new rules relating
to the application of Law and Regulations to com-
panies.Amongst these were the provisions dealing with
rehabilitation of financially distressed companies in an effort
to avoid liquidation, namely business rescue, a principle jux-
taposed with the failed regime of judicial management.

2. 16 July 2015
averse to the high risk nature of PCF. This is certainly a contributing factor as
to why, practically speaking, PCF has not been a resounding success.
In an effort to entice PCF lenders to provide financial assistance to com-
panies under business rescue, s135(3)
ranked the payment of PCF creditor
claims above all unsecured creditors
of a company and s135(4) confirms
that this preference must remain in
force if business rescue proceedings
are superseded by a liquidation order.
When considering the wording of
s135(3) of the Act within the con-
text of business rescue proceedings,
the ranking of creditors’ claims can
be understood:
Payment of all costs of business
rescue proceedings and liquida-
tion.
Employees for any remuneration
which became due and payable
after business rescue proceedings began i.e. post commencement finance.
Secured pre-business rescue creditors (insofar as it pertains to proceeds to
be received from the secured assets).
Secured and unsecured post business rescue creditors, that is post-com-
mencement finance.
Employees for any remuneration which became due and payable before
business rescue proceedings began.
Unsecured pre-business rescue creditors.
This understanding has, however, been contradicted by Judge Kgomo in
the case of Merchant West Working Capital Solutions Proprietary Limited v
Advanced Technologies & Engineering Company Proprietary Limited &
Gainsford States (13/12406) [2013] ZAGPJHC 109 (10 May 2013). Judge
Kgomo confirmed the ranking of creditors as follows:
“The practitioner, for remuneration and expenses, and other persons (including
legal and other professionals) for costs of business rescue proceedings.
Employees for any remuneration which became due and payable after business
rescue proceedings began.
Secured lenders or other creditors for any loan or supply made after business
rescue proceedings began, i.e. post-commencement finance.
Unsecured lenders or other creditors for any loan or supply made after business
rescue proceedings began, i.e. post-commencement finance.
Secured lenders or other creditors for any loan or supply made before business
rescue proceedings began.
Employees for any remuneration which became due and payable before business
rescue proceedings began.
Unsecured lenders or other creditors for any loan or supply made before busi-
ness rescue proceedings began.”
Whilst there can be no debate regarding the super priority status of busi-
ness rescue and liquidation costs, Judge Kgomo’s ranking of PCF creditors
above the secured pre-business rescue creditor’s claims does not appear to be
in line with the intention of the legislature. The wording of s135(3) states
that claims of PCF creditors “…will have preference over all unsecured claims
against the company.” (Own emphasis added).
As the only judicial authority on this ranking of creditors, does Judge
Kgomo’s order of preference mean that PCF creditors are entitled to “dip”
into the proceeds of secured assets of pre-business rescue creditors? Whilst
this ranking would certainly improve the incentive for providing financing
for companies that are financially distressed, a pertinent question is perhaps
what impact this will have on the mindset of creditors providing loans or
supplies to companies within the solvent trading environment?
Another potential point of contention that may require judicial adjudica-
tion would be the application of s29(1) of the Insolvency Act within the
context of business rescue proceedings which are superseded by liquidation
orders.
The effect of the ranking of PCF creditors in terms of s135(3)(b) is that
the claims of third parties which provided funding during business rescue
procedures (PCF Lender) will be paid in the order in which they occurred.
By way of example, PCF Lender A, who provided financing within the first
month of business rescue proceedings, will be paid before PCF Lender B who
provided financing during the final month of business rescue proceedings.
The established rules of liquidation tell us that secured creditors rank higher
than unsecured creditors (insofar as it pertains to proceeds to be received
from the secured assets). Therefore, if PCF Lender B provided finance in
exchange for a form of security from the company, his claim would be paid
before PCF Lender A’s claim, even though PCF Lender A was the first
provider of finance. It must be pointed out at this juncture that it is not a
requirement for a PCF Lender to obtain security before obtaining the overall
preferential treatment afforded to PCF Lenders.
Section 29(1) of the Insolvency Act (read with s339 and s340 of the
Companies Act 61 of 1973 as well as item 9 of Schedule 5 of the Act) reads:
“Every disposition of [a company’s] property made by [the company] not
more than six months before [liquidation]…which has had the effect of preferring
one of [its] creditors above another, may be set aside by the Court if immediately
after the making of such disposition the liabilities of the [Company] exceeded the
value of [its] assets, unless the person in whose favour the disposition was made
proves that the disposition was made in the ordinary course of business and that it
was not intended thereby to prefer one creditor above another”.
A disposition in terms of the Insolvency Act means “…any transfer or
abandonment of rights to property and includes a sale, lease, mortgage, pledge,
delivery, payment, release, compromise, donation or any contract therefor, but
does not include a disposition in compliance with an order of the court”.
Therefore, if the security provided to PCF Lender B constituted a disposi-
tion which occurred not more than six months prior to liquidation (and on
the assumption that, whilst in business rescue the company’s liabilities
exceeded its assets), would PCF Lender A be entitled to bring an application
to have this disposition set aside due to the fact that it had the effect of pre-
ferring PCF Lender B to PCF Lender A under circumstances where PCF
Lender A would have otherwise ranked higher?
As the implementation of the Act is just over four years old, our judicial
system has not been given sufficient opportunity to adjudicate thoroughly on
the various provisions of the Act which require clarity. It is certainly not pos-
sible within the context of this article to address all aspects requiring atten-
tion. However, it is undoubtedly evident that the application of s135 in par-
ticular will require judicial scrutiny and guidance when the provisions are
applied in the context of liquidations. N
De Klerk is a senior associate with VDMA.
CompanylawCompanylaw
De Klerk