The extent of the preference afforded to employees under business rescue – By Don Mahon

“The way your employees feel is the way your customers will feel. And if your employees don’t feel valued, neither will your customers.” – Sybil F. Stershic

 

 

Section 135 of the Companies Act 71 of 2008 provides as follows:

135     Post-commencement finance

  • To the extent that 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 –
  • The money is regarded to be post-commencement financing; and
  • Will be paid in the order of preference set out in subsection (3)(a).
  • After payment of the practitioner’s remuneration and expenses referred to in section 143, and other claims arising out of the costs of the business rescue proceedings, all claims contemplated –
  • In subsection (1) will be treated equally, but will have preference over –
  • all claims contemplated in subsection (2), irrespective of whether or not they are secured; and
  • all unsecured claims against the company; or
  • In subsection (2) will have preference in the order in which they were incurred over all unsecured claims against the company.
  • If business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of this section will remain in force, except to the extent of any claims arising out of the costs of liquidation.”

There is seemingly a view held by certain business rescue practitioners (“BRP’s”) that a debt which becomes due and which becomes payable during the company’s business rescue proceedings is covered by the provisions of section 135, whereas a debt which is payable prior to the commencement of business rescue proceedings but which transforms into a debt which is both due and payable during the business rescue proceedings is not covered by section 135. The rationale in seeking to exclude such employees is not clear.

APPLICABLE LEGAL PRINCIPLES

Preliminary Observations

Brief recourse must be had to the meaning of the words “due and payable” which appear in section 135(1):-

  • a debt is “due” when it is immediately claimable, that is, when it has matured and that, as its correlative, it is immediately payable.

See:            White v  Municipal Council Of Potchefstroom 1906 TS 47; Hmbmp Properties (Pty) Ltd v  King 1981 (1) SA 906 (N) At 909D

  • the word “payable” means “that which may be paid or may have to be paid” and denotes an obligation to pay, either immediately, or at some point in the future.

See:            Marine & Trade Insurance Co Limited v  Katz NO 1979 (4) SA 961 (A) At 975-976

  • therefore, a debt may be payable without yet being due but once a debt is due it must also be payable.

A debt can only become payable if, despite any uncertainty as to when it may fall due or the amount which is owed, payment of an amount on a future date is, nonetheless, a certainty. The obligation to pay (as opposed to the amount of or date for payment) must be unconditional.

It is accordingly submitted that even if the debts in question were payable prior to the commencement of business rescue proceedings but payment only fell due after the commencement of business rescue proceedings, such employees would nonetheless be afforded protection under section 135 of the Act. The section contemplates a debt as having become due and payable once it is bothdue and payable. Therefore, if the moment at which both criteria are met (that is, the debt being both due and payable) occurs during the company’s business rescue proceedings, then the claim will be preferent in terms of section 135(3)(a)(i) of the Act.

Interpretation

The proper approach to interpretation of statutes, as set out by Wallis JA in Natal Joint Municipal Pension Fund v  Endumeni Municipality 2012 (4) SA 593 (SCA) is, by now, well-known. The point of departure is the language of the relevant provision itself, read in context and having regard to the purpose of the provision and the background to the preparation and production of the document.

It is accordingly necessary to consider each of the component parts which make up section 135(1) of the Act:-

  • The claim must be for remuneration, reimbursement for expenses or other amounts of money relating to employment;
  • The amount claimed must have become due and payable by the company to an employee during the company’s business rescue proceedings;
  • Alternatively, the claim must arise from employment services carried out during the company’s business rescue proceedings.

Remuneration or other amount of money relating to employment

According to the Oxford English Dictionary (2ndEd, Revised), “remuneration” means:

“n. [mass noun] money paid for work or a service”.

It has been held that remuneration:

  • means a quid pro quofor services rendered in terms of an agreement.

See:            Commissioner, South African Revenue Service v  Dyefin Textiles (Pty) Ltd 2002 (4) SA 606 (N) at 612G

  • includes commission earned by employees.

See:            Small v  Noella Creations (Pty) Ltd 1986 ILJ 614

Due And Payable During Business Rescue

A preliminary examination of section 135 of the Act discloses two possible meanings, namely:

  • a debt which becomes due and which becomes payable during the company’s business rescue proceedings; or
  • a debt which may be payable prior to the commencement of business rescue proceedings but which transforms into a debt which is both due and payable during the business rescue proceedings.

For the reasons set out below, it is submitted that the section contemplates both of these scenarios.

Moreover, it would be more reasonable and business-like, to attribute a meaning to section 135 which is directed at the preservation of employees’ claims which do not fall within the purview of section 144(2). One would, on such an interpretation, regard a debt as having become due and payable once it is bothdue and payable. Therefore, if the moment at which both criteria are met (that is, the debt being both due and payable) occurs during the company’s business rescue proceedings, then the claim will be preferent in terms of section 135(3)(a)(i). An employee who has not been paid must either fall within the provisions of section 135(1) or section 144(2). This is dealt with more fully below.

Section 135: Purpose and Context

Section 135 of the Act must be interpreted in light of the object, purpose and context of the Act as a whole.

Section 5 of the Act provides that the Act must be interpreted and applied in a manner that gives effect to the purposes set out in section 7.

The purposes of the Act, as set out in section 7, include:

  • to reaffirm the concept of the company as a means of achieving economic and social benefits; and

See:            section 7(d) of the Act

  • 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.

See:            section 7(k) of the Act

In terms of section 128 of the Act:

’business rescue’ means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for—

  • the temporary supervision of the company, and of the management of its affairs, business and property;
  • a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
  • the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.”

Thus, the provisions of section 135 must be interpreted in light of the purposes of the Act provided for in section 7 and the definition of business rescue:-

  • The Act gives recognition to the interdependent relationship between a company and its stakeholders, and to the fact that a company’s ability to create value for itself depends on its ability to create value for others (including its employees, as material stakeholders).

See:            The International Integrated Reporting Council, The International <IR> Framework, (13 December 2013), p 10[1]

  • An organisation becomes attuned to the opportunities and challenges posed by the context in which it operates by having regard to the needs, interests and expectations of material stakeholders (including employees).

See:            Robert G. Eccles and Tim Youmans, “Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality”, Harvard Business School, Working Paper 16 – 023, September 3, 2015

  • The devastating effect of liquidations on a nation’s economy has been recognised by our courts.

See:            Oakdene Square Properties (Pty) Ltd And Others v  Farm Bothasfontein (Kyalami) (Pty) Ltd And Others 2012 (3) SA 273 (GSJ)

  • Therefore, the primary aim of business rescue in facilitating the continued existence of a company in a state of solvency is not to be considered in vacuo– the underlying motive behind the continued state of solvency is to afford protection to its stakeholders. Indeed, this is supported by the fact that the alternative aim of business rescue is to provide a better return for creditors (which would include employees if the company is not to continue) than they would derive from a liquidation (in which event employees would be preferent under section 98A(1)(a)(i)of the Insolvency Act 24 of 1936(“the Insolvency Act”).

It is for this reason that employees are afforded special protection under the rubric of business rescue. Not only are employees integral to the proper functioning of the company, making them pivotal stakeholders in the company, but almost invariably, their livelihoods (and that of their families) depend on the company. Moreover, the impact of the failure of companies is felt most keenly by its employees who lose their jobs and benefits.

The acceptance of this interpretation of section 135 does not necessitate a finding that employee protection is its primaryobjective. It merely necessitates an acknowledgement of the existence of such an objective.

Such an interpretation seeks to balancethe rights and interests of all relevant stakeholders. There is no reason why the conferment of a preference should be an obstacle to the continuation of the company on a solvent basis.

Indeed, in Oakdenethe court expressed the view that the new provisions in the Act were in line with modern trends in corporate rescue regimes in that they attempted to secure and balance the competing interests of creditors, shareholders and employees, and envisaged a shift away from only having regard for creditors’ interests, and are predicated on the belief that to preserve a business and the experience and skill of its employees, might, in the end prove to be a better option for creditors and enable them to secure a better recovery of their debts from their debtor.

See:      Oakdene Square Properties (Pty) Ltd And Others v  Farm Bothasfontein (Kyalami) (Pty) Ltd And Others 2012 (3) SA 273 (GSJ) at para [12]

Because of their dual role of both primary benefactor and beneficiary of the company’s existence, employees are afforded preferent status. Such status is afforded to employees, either by section 144 of the Act (which provides protection to employees whose claims became due and payable before business rescue) or by section 135(1) of the Act (which provides for protection to employees whose claims became due and payable after the commencement of business rescue.

A contrary interpretation of section 135(1) would have the effect of arbitrarily excluding from such protective umbrella, employees who rendered services to the company but whose claims became due after the commencement of business rescue. This could never have been the intention of the legislature.

By way of illustration, employees’ claims against a company in business rescue can logically fall into one of three categories, namely:

  1. employees who rendered services prior to business rescue and in respect of which services remuneration became both due and payable prior to the commencement of business rescue;
  2. employees who rendered services after the commencement of business rescue and in respect of which services compensation became due after the commencement of business rescue; and
  3. employees who rendered services prior to the commencement of business rescue but in respect of which services compensation became due after the commencement of business rescue proceedings. In other words, where a business rescue has intervened in between the rendering of the services and the due date for payment.

If a contrary interpretation is given to the section, the employees referred to in paragraphs 1) and 2) above, would be afforded protection in terms of the Act under sections 144 and 135 respectively but employees referred to in paragraph 3) above would be excluded from such protection. Neither a literal nor a purposive approach to the interpretation of the Act inclines one to such a conclusion. On the contrary, there is no reason why the legislature would have seen fit to afford special protection to employees under a business rescue but then seek to exclude one category of employees from such protection.

On the interpretation advocated in this article, the employees referred to in paragraph  1) above are afforded preference under section 144 whereas employees who fall into the categories referred to in paragraphs 2) and 3) above, are afforded protection under the provisions of section 135(1).

It is eminently more reasonable andbusiness-liketo attribute a meaning to section 135 of the Act which is directed at the preservation of employees’ claims which do not fall within the purview of section 144(2). An employee who has not been paid must either fall within the provisions of section 135(1) or section 144(2) of the Act.

[1]Available at http://integratedreporting.org/resource/international-ir-framework/

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EMPLOYEES CLAIMS AND THE TREATMENT OF CONCURRENT CREDITORS IN A BUSINESS RESCUE – By Don Mahon, Lisa-Marie Bowes and Kyle Telfer

The Employer generally gets the employees he deserves.” – J. Paul Getty

 

The introduction of the Business Rescue regime into South African Company Law has been a boon for litigators, whilst stakeholders and business rescue practitioners navigate their way through a minefield of difficult legislative provisions in an effort to give effect to the purpose of the regime.

In this article, we intend dealing with two aspects, namely:

  • a proper interpretation of section 135 of the Companies Act 71 of 2008 (“the Act”) dealing with the preferent rights of employees; and
  • whether creditors are obliged to accept a payment of less than what is owed to them, on the basis that their claims may be classified as concurrent.

 

A Proper Interpretation of Section 135 of the Act

 

Section 135 of the Act provides as follows:

(1)    To the extent that 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 –

  • the money is regarded to be post-commencement financing; and
  • will be paid in the order of preference set out in subsection (3)(a).

(3)     After payment of the practitioner’s remuneration and expenses referred to in section 143, and any other claims arising out of the costs of the business rescue proceedings, all claims contemplated –

(a) in subsection (1) will be treated equally, but will have preference over –

(i) all claims contemplated in subsection (2), irrespective of whether or not they are secured; and

(ii) all unsecured claims against the company…

(4)     If business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of this section will remain in force, except to the extent of any claims arising out of the costs of liquidation.

[Our emphasis]

The question arises as to what meaning must be attributed to the words “becomes due and payable”. Although the section, at first blush, does not induce a sense of ambiguity, upon closer analysis it appears that two possible interpretations could be extracted from the wording used, as is set out more fully below.

It has been held that a debt is “due” when it is immediately claimable, that is, when it has matured and that, as its correlative, it is immediately payable.

See    White v Municipal Council Of Potchefstroom 1906 TS 47; And HMBMP Properties (Pty) Ltd V King 1981 (1) SA 906 (N) At 909d

It has also been held that the word “payable” means “that which may be paid or may have to be paid” and that “payable by him” means “for which he is liable in respect of such future loss”.

See    Marine & Trade Insurance Co Limited V Katz No 1979 (4) SA 961 (A) at 975-976

It can therefore be observed that if a debt is “due” then it must also be “payable”, but that a debt may be “payable” without yet being “due”.

A preliminary examination of section 135 of the Act discloses, in our view, two possible meanings, namely:

  • a debt which becomes due and which becomes payable during the company’s business rescue proceedings; or
  • a debt which may be payable prior to the commencement of business rescue proceedings but which transforms into a debt which is both due and payable during the business rescue proceedings.

In order to overcome the interpretational difficulty posed by section 135, one must apply the principles enunciated by Wallis JA in the judgment of Natal Municipal Joint Pension Fund v Endumeni 2012 (4) SA 593 (SCA).

We are thus enjoined to attribute meaning to the words used, having regard to the context provided by reading the particular provision in the light of the statute as a whole, giving due consideration to the language used in the light of the ordinary rules of grammar and syntax, the context in which the provision appears, the apparent purpose to which it is directed, and to weigh each possible interpretation against each of these factors. A sensible meaning is to be preferred to one that leads to insensible or un-businesslike results or one that would undermine the purpose of the Act.

The purpose of the Act can be ascertained from section 7 thereof, the most apposite subsection being section 7(k), which directs the purpose of the Act to “… the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders …”.

Section 144(2) of the Act provides that:

To the extent that any remuneration, reimbursement for expenses or other amount of money relating to employment became due and payable by a company to an employee at any time before the beginning of the company’s business rescue proceedings, and has not been paid to that employee immediately before the beginning of those proceedings, the employee is a preferred unsecured creditor of the company for the purposes of this Chapter.

It can immediately be observed that section 144(2) refers to amounts of money which became “due and payable” prior to the commencement of business rescue proceedings where a mere reference to a debt which had become “due” would suffice to bear the same meaning. One can therefore not presume that the Act necessarily seeks to distinguish between debts which are due and payable on the one hand, and debts which are payable but not due on the other hand.

If the provisions of section 135 were to be interpreted on the basis that they refer only to debts which became payable during business rescue and not before, this would lead to insensible or unbusinesslike results or a result that would undermine the purpose of the Act.

We say this because, implying such an interpretation, the Act would give preferent status:

  • to employees to whom payment had become due prior to the commencement of business rescue proceedings; and
  • to employees in respect of whom employment-related claims arose and became due during business rescue proceedings.

Protection would, however, on such an interpretation, not be afforded to employees in respect of whom employment-related claims arose prior to business rescue but which only became due subsequent to the commencement of business rescue. We fail to see any legitimate basis for seeking to exclude this category (and only this category) of employees from the protection afforded by the Act through preferent status.

It would be more reasonable and businesslike, in our view, to attribute a meaning to section 135 which is directed at the preservation of employees’ claims which do not fall within the purview of section 144(2). One would, on such an interpretation, regard a debt as having become due and payable once it is both due and payable. Therefore, if the moment at which both criteria are met (that is, the debt being both due and payable) occurs during the company’s business rescue proceedings, then the claim will be preferent in terms of section 135(3)(a)(i). In our view, an employee who has not been paid must either fall within the provisions of section 135(1) or section 144(2).

 

­Can Concurrent Creditors Lose the Right to Enforce Their Debt or a Part Thereof

 

We have witnessed an increasing practice on the part of Business Rescue Practitioners to make provision in the proposed business rescue plan for payment to creditors which they have classified as concurrent, of a concurrent dividend which is less than the full amount of their claim. This is similar, in principle, to how concurrent creditors are treated in liquidation proceedings.

Where all of the creditors concerned agree to such a proposal, no difficulty arises. However, can a creditor be forced to accept such a proposal, if he has unsuccessfully voted against the adoption of the proposed business rescue plan?

In our view, this approach is contrary to the provisions of section 154(1) of the Act which provides as follows:

A business rescue plan may provide that, if it is implemented in accordance with its terms and conditions, a creditor who has acceded to the discharge of a whole or part of a debt owing to that creditor will lose the right to enforce the relevant debt or part of it.

In DH Brothers Industries v Gribnitz No 2014 (1) SA 103 (KZP) At Para [67], Gorven J held that a business rescue plan may only provide that a creditor “who has acceded to the discharge of a whole or part of a debt” may be deprived of the right to enforce its claim. Since section 152(4) makes an adopted plan binding on non-consenting creditors and section 154(2) allows enforcement of pre-business rescue debts only to the extent allowed for in a plan, any provision in a plan which goes beyond a voluntary discharge of a whole or part of a debt is not competent.

We are mindful of the provisions of section 128(1)(b)(iii) of the Act, which contemplates a plan which results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company under circumstances where it is not possible for the company to continue to exist on a solvent basis.

At first blush this would seem to suggest that a business rescue plan may lawfully contemplate the discharge of a portion of debts owed to concurrent creditors for so long as the dividend which is paid to such creditors would constitute a better return than that which would prevail in the event of an immediate liquidation.

However, the Supreme Court of Appeal, in Oakdene Square Properties v Farm Bothasfontein (Kyalami) 2013 (4) Sa 539 (SCA) at para [33], has held that an alternative, informal kind of winding up of the company outside the liquidation provisions of the 1973 Companies Act was not the intention of the legislature when creating business rescue as an institution and that a winding-up of the company in order to avoid the consequences of liquidation is not what is contemplated by the Act.

A similar view was taken in the decision of Gormley v West City Precinct Properties (Pty) Ltd And Another, Anglo Irish Bank Corporation Ltd V West City Precinct Properties (Pty) Ltd And Another (19075/11, 15584/11) [2012] ZAWCHC 33 (18 April 2012) At Para [12].

In light of these decisions, one cannot help but wonder what was intended by the latter provisions of section 128(1)(b)(iii) of the Act and, as far as we are aware, the Supreme Court of Appeal is yet to provide meaningful guidance in this regard in light of what is stated Oakdene.

 

Adv Don Mahon

Attorney Lisa-Marie Bowes

Attorney Kyle Tristan Telfer