Many companies continue to face economic challenges stemming from the nationwide lockdown lifted in April 2022. Despite the resumption of economic activity, many companies struggle to break even and require financial support.
Financially distressed companies often find it difficult to secure financing due to their weakened financial positions. The Companies Act addresses this through a statutory finance mechanism known as post-commencement finance (PCF) for companies in business rescue. PCF covers not only financial aid but also includes remuneration, reimbursement for expenses, and other employment-related amounts incurred during business rescue.
Recognizing lenders’ need for security, the Act provides a statutory preference for PCF claims, prioritizing them above other claims. The court in Merchant West Capital Solutions established the following order of claim ranking in business rescue:
- Business rescue practitioners and other professionals for fees and expenses.
- Employees for remuneration due after business rescue proceedings commence.
- Secured creditors for post-business rescue loans or supplies.
- Unsecured creditors for post-business rescue loans or supplies.
- Secured creditors for pre-business rescue loans or supplies.
- Employees for remuneration due before business rescue proceedings.
- Unsecured creditors for pre-business rescue loans or supplies.
Under this framework, PCF claims are settled before other claims, providing reassurance that advanced capital will be repaid. However, in the event of liquidation following business rescue, the ranking of claims shifts significantly (as noted in Diener NO v Minister of Justice – SCA). PCF then ranks after secured creditors, liquidation costs, and BRP expenses.
Consequently, PCF providers must be mindful of the implications liquidation may have on the ranking of their claims.
Disclaimer: The content and information provided above are general and should not be construed as legal advice.