The Companies Amendment Bill 2021 could have unintended consequences for business rescue

​​​​Proposed amendments to sections 135 and 145 of the Companies Act raise various concerns related to post-commencement financing in the business rescue process

In their current form, the proposed amendments in the Companies Amendment Bill, 2021 (the 2021 Bill) published for public comment on 1 October will, in our view, probably create more difficulties than solutions, as a result of their unintended consequences.

Moreover, taking into account the numerous and detailed proposals submitted in support of an entire raft of amendments to Chapter 6 of the Companies Act, it is difficult to understand why it was decided to implement this particular amendment rather than any of the others proposed.

In a similar way to the amendments that were proposed (but never implemented) in the Companies Amendment Bill, 2018 (the 2018 Bill), the 2021 Bill proposes amendments to sections 135 and 145 of the Companies Act, 71 of 2008 (the Act).

We deal with each proposed amendment in turn.

The first amendment is the introduction of a new section 135 (1A) which provides as follows:

"(1A) To the extent that any amounts due to the landlord, subject to a contract by the company which is placed in business rescue proceedings, are not paid to the landlord during business rescue proceedings, in respect of and not exceeding the aggregate for all public utility services, such as, the company’s share of rates and taxes, electricity, water, sanitation and sewer charges paid by the landlord to third parties during the business rescue period referred to in this section, is regarded as post-commencement financing as contemplated in section 135(1).

For the purposes of this note, we will refer to these costs as "operating expenses".

It is not clear whether the amendment is intended to include rental or not. It appears that it does not, given the inclusion of the words "in respect of…" and "… paid by the landlord to third parties". Therefore, only the operating expenses paid by the landlord on behalf of the company in business rescue should be considered as post-commencement financing (PCF), not unpaid rental.

In the matter of The South African Property Owners Association v Minister of Trade and Industry and Others 2018 (2) SA 523 (GP) (29 November 2016) (the SAPOA judgment) the following order was sought:

"1. Declaring that the amounts payable by a company in business rescue proceedings in respect of the rent for immovable property occupied by the company including amounts payable for the company's share of rates and taxes and for public utility services including electricity, water, sanitation and sewage charges and payments to other service providers that are disbursed by the lessor of such premises:

    1.1 Constitute "financing” as contemplated in section 135(2) of the Companies Act, 2008; or

    1.2 Constitute "costs of the business rescue proceedings” as contemplated in section 135(3) of the Companies Act, 2008."

The Court found as follows:

"22. In my opinion, and applying the principles of interpretation, the financing intended in subsection 2 of section 135 of the Act relates to the obtaining of financing in order to assist in managing the company out of its financial distress, hence the provision that any asset of the company may be utilised to secure that financing to the extent that the asset is not otherwise encumbered. It does not lean to an interpretation that encompasses existing obligations, other than to company employees, of the company that are utilised to assist in managing the company during the business rescue proceedings. Further in this regard, sections 133 and 136(2) of the Act militate against such interpretation.

23. Section 135(3) of the Act provides for two categories of costs. The first being those provided for in section 143 of the Act and other costs incurred due to the business rescue proceedings.

24. The costs contemplated by the applicant and relating to the lease agreement (either as part of rental or in addition thereto), are costs incidental thereto and are consequent upon the existence of the lease agreement. Those costs are a direct result of the terms of the relevant lease agreement.

25. It follows that those costs cannot constitute "post-commencement financing”. Neither can those costs be classified as costs occasioned by the business rescue proceedings

26. In my opinion, should it be held to be "post-commencement financing", or for that matter "costs arising out of the costs of the business rescue proceedings”, the lessor would enjoy a preference over other creditors. To hold so, would defeat the purpose or aim of business rescue proceedings intended in section 128(1)(b) of the Act. The legislator could not have intended such a result or interpretation."

The latest amendments appear to carve out the treatment of operating expenses from the application of the findings of the Court, although the amendments do not treat rent in the same manner.

As pointed out by van der Westhuizen AJ in the SAPOA judgment, the operating expenses are costs incidental to and consequent upon the existence of a lease agreement. A business rescue practitioner (BRP) could, arguably, suspend the obligations of the company to pay operating expenses, thus giving the landlord a damages claim in terms of section 136(3) of the Act.  Presumably, the reason behind the amendment is that a landlord is compelled to pay these costs on behalf of the company in rescue, to avoid being sued by the third party, and it would be harsh to expect the landlord to pay them and only be able to lodge an unsecured damages claim.

However, a landlord does have a remedy: to cancel the lease, which makes the company an unlawful occupier, and then evict it. The risk of having to pay operating expenses that a tenant fails to pay is one that any landlord faces in the ordinary course of the lease of property. In this event, that claim would be an unsecured concurrent claim against the company.

The next proposed amendments are:

  1. By the addition of the underlined words in section 135(3):
  2. "(3) After payment of the practitioner’s remuneration and expenses referred to in section 143, post-commencement financing, and other claims arising out of the costs of the business rescue proceedings, all claims contemplated—"; and

  3. By the insertion of the following subsections at section 135(3):

"(3)(b) in subsection (1A) will rank below the claims contemplated in subsection (1), but ahead of all the secured and unsecured claims against the company; and

    (c) in subsection (2) will have preference in the order in which they were incurred over all unsecured claims against the company.

Although the amendments propose that operating expenses be considered as PCF, they would be the lowest-ranking form of PCF. What makes the proposed amendments even more confusing is that this lowest-ranking form of PCF is explicitly given a voting interest, while the higher-ranking forms are not. Below, we deal with the implications of this.

Finally, and arguably the most problematic, is the proposed amendment to section 145(4) of the Act, with the proposed introduction of a new paragraph (c), which reads as follows:

"(c) a landlord referred to in section 135(1A) has a voting interest equal to the amount referred to in that section."

As presently drafted, section 145(4) of the Act reads as follows:

(4)  In respect of any decision contemplated in this Chapter that requires the support of the holders of creditors’ voting interests—

    (a) a secured or unsecured creditor has a voting interest equal to the value of the amount owed to that creditor by the company; and

    (b) a concurrent creditor who would be subordinated in a liquidation has a voting interest, as independently and expertly appraised and valued at the request of the practitioner, equal to the amount, if any, that the creditor could reasonably expect to receive in such a liquidation of the company.

As is evident, PCF is not distinguished in any manner in this section. The wording is generic and quite simply a "secured or unsecured creditor has a voting interest equal to the value of the amount owed".

The proposed amendment has, however, specifically provided a voting interest for operating expenses that have been deemed PCF. The wording is clear and this provision seems to exclude all other forms of PCF.

There has long been a debate in the industry on whether or not PCF is afforded a voting interest in terms of section 145(4)(a). To date there have been no judgments on this issue, and the treatment of PCF depends on the subjective preference of the BRP dealing with the matter. PCF has been treated differently in many rescues, being afforded a vote in some matters and not in others.

The simple question arises: if the legislature intended that the current wording of section 145(4)(a) provided PCF claims with a voting interest, why did it propose the addition to section 145(4) in respect of operating expenses which have been proposed to be deemed as PCF?

The answer must be that the legislature intended that PCF claims do not enjoy a voting interest and are therefore not entitled to vote on a business rescue plan. If this was not the intention, there would have been no need for the proposed amendment to section 145(4), as all PCF claims, including the proposed section 135(1A) claims, would automatically be accorded a voting interest in terms of section 145(4)(a).

We believe that these amendments are going to raise concern in the business rescue industry. In particular, if our understanding of the amendments is correct, they may well prove to be a further barrier to the raising of PCF. If PCF claims are found not to have a voting interest, many lenders (of first or last resort) will be uncomfortable with the risks associated with lending into a distressed entity, where they have no formal say on the restructuring and repayment of the debt. In our view, any amendment to Chapter 6 should make it easier, not more difficult, to raise PCF. In addition, concurrent unsecured creditors will be penalised in that they will move even further down the ranking. This is also an undesirable outcome.

Finally,  considering the plethora of amendments proposed to the 2018 Bill, many of which dealt with issues of a more pressing nature, such as the ranking of secured claims, the submission of claims, the determination of disputes etc., it is unclear why the legislature has decided only to deal with these limited amendments. For the reasons expressed above, we believe these amendments should be reconsidered in their entirety, given the unintended consequences that will follow if they are passed. The more concerning amendments that have been proposed in the past should be given urgent consideration.

Note: The 2021 Bill is open for comment until 31 October 2021. Webber Wentzel will be submitting comments on this 2021 Bill. For further information, please contact your usual Webber Wentzel advisor or the author.


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Webber Wentzel > News > The Companies Amendment Bill 2021 could have unintended consequences for business rescue
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