Think twice before compromising a statutory preference in a business rescue plan

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27 May 2021

The practice of compromising statutory preferences in business rescue plans has been a bone of contention in the business rescue industry for some time.

Certain practitioners are of the view that statutory preferences are capable of being compromised provided that a business rescue plan is properly voted on and adopted at a meeting held for this purpose in terms of section 151 of the Companies Act 71 of 2008 (“the Companies Act”).

This practice has recently been shown to be unlawful. In a dispute resolution between the South African Pilots’ Association (“SAAPA”) and South African Airways (“SAA”) held before Retired Justice Harms on 6 May 2021, this particular issue was examined in detail (among other issues that are not relevant to this editorial).

SAAPA, which had a pre-commencement claim in respect of domestic and international meal allowances, contended that the business rescue plan of SAA incorrectly characterised its members’ pre-commencement claim as a concurrent claim. The correct ranking according to SAAPA being that of an unsecured preferent claim in terms of section 144(2) of the Companies Act, which reads as follows:

“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 had 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.”

SAA’s response to SAAPA’s submission was that the adoption of a business rescue plan overrides a section 144(2) employee preference (as set out in section 152(4) of the Companies Act) and that in order to enforce this claim, SAAPA would have to set aside the business rescue plan.

This is an endeavour that is rarely achieved in practice.

In reaching a conclusion on the matter, Retired Justice Harms had the following to say at paragraphs 13 to 15 of his determination:

“[13] Although the Act [the Companies Act] does not in express terms prohibit the negation of the preferential right, it must follow as a matter of interpretation and logic that such a result could not have been intended by the Legislature. The first reason is that if the Plan [the business rescue plan] could adopt any order of preference by qualifying vote, the provision [section 144(2) of the Companies Act] would have been unnecessary, and the order of preference would have been left to the practitioners and the majority to decide.

The second is the structure of the chapter. The rights of employees are attended to first before the rights of other creditors (One finds a similar concern about the rights of employees in the amendments to the Insolvency Act 1936 and other legislation).

The third is the wording of the provision [section 144(2) of the Companies Act]: the employee is namely a preferred unsecured creditor of the company “for the purposes of this Chapter”. This means the preferred right is overarching and it covers section 152(4) [and] the adopted Plan, which is part of the same chapter.

[14] I therefore conclude that [the] adoption of the Plan could not override the preference created by section 144(2) and to the extent it does, the Plan is ultra vires. This does not mean, as the defendant [SAA] originally submitted, that the Plan must be set aside by a competent court before the claimant [SAAPA] could succeed.

[15] The eventuality is covered by clause 49 of the Plan [which reads]:

Any prohibition in the Business Rescue Plan which is or may become illegal, invalid or unenforceable shall be ineffective to the extent of such prohibition or unenforceability and shall be treated pro no scripto and severed from the balance of this Business Rescue Plan, without invalidating the remaining provisions of this Business Rescue Plan or affecting the validity or enforceability of such provision in any other jurisdiction…”

(the additions in square brackets are the author’s)

Retired Justice Harms ultimately determined that:

  • SAAPA’s meal allowance claim is a claim as envisaged in section 144(2) of the Companies Act;
  • any provision in the business rescue plan that derogates from that right is ultra vires; and
  • the receivers are to implement the business rescue plan according to his determination.

This determination provides welcome certainty on a long debated issue in the industry. Retired Justice Harms, who served as a judge of the Supreme Court of Appeal between 1993 and 2008 and as its Deputy President between 2008 and 2011, is widely considered as being one of the pre-eminent legal minds of his generation. His opinion on this issue is accordingly extremely persuasive.

Whilst it remains uncertain whether our courts will follow suit and adopt the same view, it is clear that business rescue practitioners and legal practitioners alike should exercise caution when seeking to compromise preferences entrenched in the Companies Act.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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