135. Post-commencement finance.

—(1) To the extent that any re…n employee during the company’s business rescue proceedings, bu 2021/01/21, 13:28

135. Post-commencement finance.—(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—

(a) the money is regarded to be post-commencement financing; and

(b) will be paid in the order of preference set out in subsection (3) (a).

[(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).: clause 18 (a) CAB]

(2) During its business rescue proceedings, the company may obtain financing other than as contemplated is
subsection (1), and any such financing—

(a) may be secured to the lender by utilising any asset of the company to the extent that it is not otherwise
encumbered; and

(b) will be paid in the order of preference set out in subsection (3) (b).

[Page 482(56)]
(3) 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—

[(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—: clause
18 (b) CAB]

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

[(a) in subsection (1) and subsection (1A) will be treated equally, but will have preference over—: clause 18 (c)
CAB]

(i) all claims contemplated in subsection (2), irrespective of whether or not they are secured; and
[Sub-para. (i) substituted by s. 86 (b) of Act No. 3 of 2011.]

(ii) all unsecured claims against the company; or

(b) in subsection (2) will have preference in the order in which they were incurred over all unsecured claims
against the company.
[Sub-s. (3) amended by s. 86 (a) of Act No. 3 of 2011.]

(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.

Notes
General Note.—In general terms, post-commencement finance refers to the funding that is made available
to a company after the commencement of the business rescue proceedings for the purpose of enabling the
company to continue trading. Without statutory provisions conferring preferential claims for post-
commencement financing, as this provision does, there would be very few, if any, lenders that would be
prepared to continue financing the company in circumstances where it is financially distressed and has been
placed under supervision (as to the meaning of “financially distressed” and “supervision”, see the notes on s
128, sv Financially distressed and Supervision).

Rather unusually, the post-commencement finance provisions contained in s 135 make specific provision for
employee entitlements (for the period after the business rescue process has commenced) to be treated also as
part of the post-commencement finance. Since the cost of employment in running the business of the company
would in any event form part of the expenses of the business rescue process (in terms of s 135 (3) – see further
infra sv Subsection (3) – and which are also paid in priority to the claims of new lenders), it is not clear why
the Legislature elected to treat employee claims in this manner. The result is that any unpaid amount of
remuneration, reimbursement for expenses or any other amount relating to employment that becomes due and

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135. Post-commencement finance.—(1) To the extent that any re…n employee during the company’s business rescue proceedings, bu 2021/01/21, 13:28

payable by a company to an employee during that company’s business rescue proceedings, the amount so
owing is regarded as post-commencement finance (see further infra sv Subsection (3)). It should be noted
here that the provisions of Chapter 6 confer on employees benefits that far outweigh those provided under the
provisions of the Insolvency Act (see s 38 of the Insolvency Act read with s 339 of the Companies Act 1973, the
latter of which, pursuant to the provisions of item 9 of Schedule 5 of the Act, continues to apply notwithstanding
the repeal of the 1973 Act with effect from 1 May 2011). It remains to be seen whether this misalignment of the
two Acts will lead to any attempted abuse of the business rescue procedure in future. See also the notes on s
136 in so far as they deal with the position of employees.

[Page 482(57)]

In addition to the amounts of post-commencement financing that may be incurred in the form of employee
entitlements, the company may also during its business rescue proceedings obtain other, more traditional, forms
of financing in order to allow it to continue trading. Any such financing that can be obtained may be secured
utilising any asset of the company to the extent that it is not otherwise encumbered. However, claims by lenders
for post-commencement financing will only be paid after the business rescue practitioner’s claim for
remuneration and expenses, and the employees’ claims, if any, have been paid in full, even if the lender’s claim
is secured. The ranking of claims was set out as follows in Merchant West Working Capital Solutions (Pty) Ltd v
Advanced Technologies and Engineering Company Ltd 13/12406, 10 May 2013 (GSJ):
“[21] Claims rank in the following order of preference:

1. The practitioner, for remuneration and expenses, and other persons (including legal and other professionals) for
costs of business rescue proceedings.

2. Employees for any remuneration which became due and payable after business rescue proceedings began.

3. Secured lenders or other creditors for any loan or supply made after business rescue proceedings began, ie
postcommencement finance.

4. Unsecured lenders or other creditors for any loan or supply made after business rescue proceedings began, ie
postcommencement finance.

5. Secured lenders or other creditors for any loan or supply made before business rescue proceedings began.

6. Employees for any remuneration which became due and payable before business rescue proceedings began.

7. Unsecured lenders or other creditors for any loan or supply made before business rescue proceedings began.”

This does not seem to be in accordance with the provisions of sub-s (3), inter alia, because the subsection does
not refer to secured claims “before business rescue began” as these are regulated by s 134 (see s 134 sv
Subsection (3); Juanitta Calitz and Giles Freebody 2016 De Jure 265–287). The ranking above was also used
in Redpath Mining South Africa (Pty) Ltd v Marsden NO and Others 18486/2013, 14 June 2013 (GSJ) para 60,
although the Court in this instance expressly referred to the rights of “secured” creditors as in s 134 (3). The
dicta in the Merchant West Working Capital Solutions (Pty) Ltd case supra and the Redpath Mining South Africa
(Pty) Ltd case supra were clearly obiter. See also National Union of Metalworkers of SA and Others v VR Laser
Services (Pty) Ltd and Others [2020] 2 All SA 536 (GJ) in respect of the ranking of post-commencement finance.
The question whether a creditor in respect of post-commencement financing can waive the particular preference
was left open on the facts of the National Union of Metalworkers of SA and Others case supra. On this question
in insolvency see Ex parte De Villiers NO: In re Carbon Developments (Pty) Ltd 1993 (1) SA 493 (A) at 505.

For a discussion of post-commencement financing and the problems with business rescue provisions in
general, see Helena Stoop and Andrew Hutchison 2017 PELJ 17.

Subsection (2).—Essentially this provision amounts to allowing the company to obtain new loans or credit
from lenders after the business rescue proceedings have commenced, the purpose of which is to allow the
company to continue to trade: see South African Property Owners Association v Minister of Trade and Industry
and Others 2018 (2) SA 523 (GP) para 22.

[Page 482(58)]

It is difficult to think of circumstances where a company under supervision will be able to continue to trade
without new money being injected into the business; by the same token it is difficult to imagine lenders rushing
to make new money available in circumstances where pre-commencement loans have not yet been repaid.

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135. Post-commencement finance.—(1) To the extent that any re…n employee during the company’s business rescue proceedings, bu 2021/01/21, 13:28

Lenders would be wary of throwing good money after bad in circumstances where the company is already
financially distressed, and it is for this reason that the Legislature has provided a mechanism whereby new
lenders can receive preferential payment for post-commencement loans, and also take security for such loans
should this be possible. Preferential provisions such as these are often referred to as “super preferences”.

Although security may be given to new lenders for the provision of post-commencement finance loans, this
can only be done with assets that have not already been given to pre-commencement creditors as security for
their claims. If a business practitioner suspends the lease obligations in terms of s 136 (2), but the company
under business rescue remains in occupation of the property, the lessor may, even though included in the lease
payment, remain liable to the particular parties/authorities for the rates and taxes and other payments for
public utility services. Payment of these charges by the lessor will not be post-commencement financing and so
also not claims arising out of the costs of business rescue proceedings in favour of the lessor as the lease, and
liability for the chargers, pre-dates the business rescue: South African Property Owners Association v Minister of
Trade and Industry and Others 2018 (2) SA 523 (GP) paras 8 and 24–26; Maleka Femida Cassim 2018 SA Merc
LJ 40–70.

Despite the preferential treatment accorded to post-commencement lenders, it is likely that these types of
loans will attract a high rate of interest; not only because of the high risk involved in providing the funding, but
also because of the preference accorded by the business rescue procedure to payment of the business rescue
practitioner’s expenses, and thereafter the claims of employees, prior to any repayment to the lenders (this is
the case even if the post-commencement lender has security for its claim).

Subsection (3).—See further the notes on s 150 sv Subsection (2) (b). In terms of the main part of this
subsection the first expenses to be paid in a business rescue proceeding are those of the business rescue
practitioner, and the expenses arising from the business rescue process itself. The expenses of the business
rescue practitioner include his remuneration and the expenses referred to in s 143 (see further the notes on s
143). To the extent that the business rescue practitioner’s remuneration and expenses are not fully paid, the
business rescue practitioner’s claim for those amounts ranks in priority before the claims of all other secured
and unsecured creditors.

Although the phrase “and other claims arising out of the expenses of the business rescue proceedings” in s
135 (3) is not defined or clarified anywhere in Chapter 6, it is submitted that these expenses will include all
costs that are necessarily incurred in the running of the company under the business rescue process, including
the costs incurred in bringing an application to place the company under supervision in terms of s 131. In Cape
Point Vineyards (Pty) Ltd v Pinnacle Point Group Ltd 2011 (5) SA 600 (WCC), the Court held that although
Chapter 6 does not specifically provide for the payment of costs incurred by an applicant in proceedings under s
131, the costs of the business rescue application qualify as costs “arising out of the costs of the business rescue
proceedings” under s 135 (3) (paras 3–10). The Court also held that [Page 482(59)] such costs should be taxed
on attorney and client scale (paras 9–10). If a company under business rescue continues to occupy leased
premises, the lease payment in respect of lease, if not remitted to the lessor due to the business rescue
practitioner exercising the rights to suspend the obligations in terms of s 136 (2), will not amount to post-
commencement financing and also not as claims arising out of the costs of business rescue proceedings. This is
also due to the fact that the particular lease pre-dates the business rescue: South African Property Owners
Association v Minister of Trade and Industry and Others 2018 (2) SA 523 (GP) paras 24–26; Maleka Femida
Cassim 2018 SA Merc LJ 40–70. An application to convert business rescue into liquidation in terms of s
141 (2) (a) would be costs of business rescue: Diener NO v Minister of Justice and Others (South African
Restructuring and Insolvency Association (SARIPA) and Others as Amici Curiae) [2018] 1 All SA 317 (SCA),
2018 (2) SA 399 (SCA) para 49 (application for leave to appeal against the order of the Supreme Court of
Appeal refused in Diener NO v Minister of Justice and Correctional Services and Others 2019 (2) BCLR 214 (CC),
2019 (4) SA 375 (CC); Nedbank Limited v Master of the High Court and Another (43581/16) [2019] ZAGPJHC
393 (31 October 2019)).

Any employee claims under s 135 (1) are paid after the business rescue practitioner’s remuneration and
expenses referred to in s 143 have been paid (see further the notes on s 143), but before any claims by post-
commencement finance lenders (including those which are secured) and the claims of unsecured creditors. All
employee claims under s 135 (1) are treated equally.

Claims by lenders for post-commencement financing are paid after the business rescue practitioner’s
remuneration and expenses, and the claims by employees. If there are multiple claims by lenders for post-
commencement financing, these claims qualify for preferential payment in the order in which they were
incurred; however, all such claims will have preference over the unsecured claims of the company: see also

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135. Post-commencement finance.—(1) To the extent that any re…n employee during the company’s business rescue proceedings, bu 2021/01/21, 13:28

Juanitta Calitz and Giles Freebody 2016 De Jure 265–287. The post-commencement secured creditors do not
have a preference above the pre-commencement secured creditors as provided for in s 134: s 134 sv
Subsection (3). See notes infra sv Subsection (4) for preference upon liquidation.

Subsection (4).—If the business rescue proceedings are superseded by liquidation proceedings, the
preferences created in terms of s 135 (3) remain in force and will only be subordinate to the costs of liquidation
arising out of the liquidation proceedings. The remuneration and expenses of the business rescue practitioner of
a company in respect of which the business rescue is superseded by a winding-up, to the extent that it has not
been paid during business rescue, rank after the costs as set out in s 97 of the Insolvency Act No. 24 of 1936
and cannot usurp the claims of creditors, whether secured or not, in liquidation: Diener NO v Minister of Justice
and Correctional Services and Others 2019 (2) BCLR 214 (CC), 2019 (4) SA 375 (CC) para 48. Subsection (4)
provides to the business rescue practitioner, after the conversion of business rescue proceedings into liquidation
proceedings, no more than a preference claim in respect of his or her remuneration against the free residue
after the costs of liquidation, but before claims of employees for post-commencement wages, of those who have
provided other post-commencement finance, whether those claims were secured or not, and of any other
unsecured creditors: Diener NO v Minister of Justice and Others (South African Restructuring and [Page
482(60)] Insolvency Association (SARIPA) and Others as Amici Curiae) [2018] 1 All SA 317 (SCA),
2018 (2) SA 399 (SCA) para 49 (application for leave to appeal against the order of the Supreme Court of
Appeal refused in Diener NO v Minister of Justice and Correctional Services and Others 2019 (2) BCLR 214 (CC),
2019 (4) SA 375 (CC); Nedbank Limited v Master of the High Court and Another (43581/16) [2019] ZAGPJHC
393 (31 October 2019)). Subsection (4) does not, whether taken individually or in conjunction with s 143 (5),
create a super preference in liquidation: Diener NO (SCA) case supra para 49; Diener NO (CC) case supra para
48. The business rescue practitioner must prove the remuneration and expenses and those are not deemed
costs of administration in terms of s 97 of the Insolvency Act: Diener NO v The Minister of Justice 30123/2015
(GP) paras 29, 50 and 60; confirmed on appeal: Diener NO (SCA) case supra para 62 and where the Court said
(para 61) that a business rescue practitioner could not be included in the list in s 97 because of the distinction
between business rescue proceedings and liquidation proceedings: see also Diener NO (CC) case supra para 21.
Section 132 (2) (a) (ii) provides that business rescue proceedings end when the Court has “converted the
proceedings to liquidation proceedings.” It would therefore appear that the business rescue has ended and that
the process of liquidation, and the rules pertaining thereto shall apply: see s 131 sv Subsection (6) in respect
of “liquidation proceedings”; s 137 sv Subsection (2) and s 342 sv Costs, charges and expenses under
Chapter XIV of the 1973 Act (see Appendix I post).

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