When a company experiences financial difficulties, it may opt to commence business rescue proceedings. The aim of business rescue proceedings is to provide the company with some relief in respect of its financial obligations.
Business Rescue Proceedings
Business Rescue Proceedings are regulated in terms of Chapter 6 of the Companies Act 71 of 2008 (hereinafter “the Act”). Briefly, such proceedings place the company under the temporary supervision of a business rescue practitioner, suspends most legal proceedings and involves the development of a plan in order to attempt to bring a company out of debt and stave off liquidation proceedings. If the rescue is successful, the creditors may receive a greater dividend than they would receive if the company is liquidated. However, the likelihood of receiving a dividend and the amount of the dividend received, depends on the ranking of the creditor’s claim.
Ranking of claims
Claims in rescue proceedings are divided into two categories: those debts that arose before the rescue proceedings commenced and those which arose thereafter. Once business rescue proceedings commence, all debts incurred by the company is subject to the provisions of section 135 of the Act. These debts are known as post-commencement financing.
Section 135 of the Act provides that post-commencement financing is ranked first when claims are paid. Even if a creditor has a secured claim against the company, post-commencement financing takes preference over those claims, whether the post-commencement financing is secured or unsecured.
Arrear rental, however is currently not considered as post-commencement financing, as confirmed in South African Property Owners Association v Minister of Trade and Industry and Others 2018 2 SA 523 (GP). This effectively means that landlords are ranked among the last creditors to be paid for arrear rental. However, a way in which a landlord may mitigate some of its losses is by securing its claim before rescue proceedings commences.
Securing a landlord’s claim
A landlord has an automatic hypothec against the movable property of the company for any arrear rental. However, since the hypothec is only a personal right, it has no legal force. In order to turn it into a real right, the landlord must “perfect” its hypothec. This is done by either obtaining an automatic rent interdict or an order for the attachment of the property in terms of section 32 of the Magistrates Court Act 32 of 1944. Until such time as the landlord’s right is perfected, the company (as the tenant and debtor) may remove the movable property without being prevented from doing so.
Upon attachment or service of the automatic rent interdict, the landlord’s claim becomes secured. However, the landlord still only ranks among the last creditors to be paid in the business rescue proceedings for arrear rental. Although a secured claim is paid before an unsecured claim, which is paid last with all the concurrent creditors, a landlord may still sustain losses. Having a secured claim may at least mitigate some of these losses. However, the proposed Companies Amendment Bill 2018 is attempting to change this.
The Companies Amendment Bill 2018
In terms of the Companies Amendment Bill 2018, arrear rental is specifically included as part of the post-commencement financing. This means that landlords do not have to secure its claim before the commencement of the business rescue proceedings, as they will be among the first creditors to be paid. The proposed amendment will protect landlords financially and may furthermore encourage them to continue with leasing the property to the distressed company, improving the likelihood of the business rescue proceedings being successful. However, until such time that the Bill is accepted and promulgated, the landlord may incur substantial losses for arrear rental when a company enters into business rescue proceedings.
In order to mitigate possible losses as a result of defaulting tenants going under business rescue, landlords of commercial properties should consider instituting legal proceedings which secures their claims sooner rather than later. Although landlords may be reluctant to institute legal proceedings in the current economic climate as a result of the fear of being left with unoccupied properties, this risk should be carefully weighed up against the risk of not being able to recover any funds whatsoever.
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Gabriel Smit is a candidate attorney in the litigation department of Barnard Incorporated Attorneys in Centurion.
Legalex (Pty) Ltd, registration number 2003/003715/07, is an authorized Financial Services Provider (FSP 5277) and underwritten by Guardrisk Insurance Company Limited (FSP 26/10/75)