Why concurrent creditors must support business rescue
In most instances concurrent creditors does not receive any dividend payments when a company is liquidated. The reason for this is that the dividend payable to the creditors during liquidation is influenced by their ranking.
It is therefore important for creditors to understand the ranking order of creditors.
Creditors are either classified as secured or unsecured creditors. Secured creditors are those who hold security for their claims such as Banks or Landlords.
Whereas unsecured creditors are those who do not hold security for their claims such as SARS and suppliers.
Unsecured creditors can be further divided into preferent and concurrent creditors.
When creditors are paid during a liquidation, secured creditors are paid first from the income received from the sale of the assets they hold as security, followed by preferent creditors and only thereafter concurrent creditors.
The Insolvency Act creates a statutory preference for SARS. The effect of this is that SARS is ranked before concurrent creditors and once they are paid, there is usually nothing left for concurrent creditors.
Whereas in business rescue, SARS does not enjoy the status of a preferent creditor.
This was held by Judge Fourie in the matter of SARS v Beginsel NO & Others. Judge Fourie held that the Companies Act does not create statutory preferences for SARS as it does in the Insolvency Act and that, if the legislature had intended to prefer SARS above other creditors in business rescue proceedings, it would have explicitly stated so.
Accordingly, in business rescue proceedings, SARS is therefore to be treated like any other concurrent creditor of the company.
This judgement clarified that concurrent creditors stand alongside secured creditors and have the opportunity to have their say, namely, to vote at value, either for the approval of the plan or for the rejection thereof.
As a result, all creditors in companies facing business rescue will have an equal say about the company’s future.
Therefore, creditors are advised to support business rescue proceedings when dealing with a financially distressed company.
Disclaimer: The contents and information provided above are generalised and must not be acted upon as legal advice
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