PCF and Creditor Priority, Common Misconceptions
Post-commencement finance under section 135 of the Companies Act 71 of 2008 (Republic of South Africa, 2008) ranks ahead of most pre-commencement claims. That is a true and important statement. It is also the statement most commonly overread by creditors who assume PCF ranks ahead of everything. It does not. Getting the priority stack right in the creditor's own head, and communicating it accurately in the rescue plan, is one of the disciplines that separates plans that pass their vote from plans that do not.
This piece sits under the m4 pillar on the first ninety days of business rescue. It sets out the actual priority order that section 135 creates, the common misconceptions about that order, and the practical consequence of each misconception for creditors and for plan design.
The section 135 priority order
Section 135(1) sets out three distinct ranking positions for post-commencement claims (Companies Act 71 of 2008, s. 135). The order, from highest to lowest priority within the post-commencement stack, is:
First: the practitioner's remuneration and reimbursement of expenses, and the costs of the rescue proceedings themselves.
Second: employees' post-commencement claims for remuneration and reimbursement, provided they arose during the rescue period.
Third: post-commencement finance advanced to the company, subject to the practitioner's costs above; unsecured PCF ranks equally within its class; secured PCF ranks according to the terms of its security.
This is the order within the post-commencement claims. The interaction with pre-commencement claims is where the misconceptions live.
Misconception one, PCF ranks ahead of pre-commencement secured claims
This is the most common misconception, and it is wrong. Section 135(2) makes clear that secured pre-commencement claims retain their security. A bank with a mortgage bond over the company's property before rescue keeps that mortgage bond position after rescue; PCF does not automatically leapfrog secured pre-commencement claims over the same collateral.
What section 135 does is give unsecured PCF priority over unsecured pre-commencement claims. Where the PCF lender takes security over previously-unencumbered assets, that security ranks according to its terms; where the PCF lender takes security over assets already encumbered, they take a junior position in the security stack.
The practical consequence: pre-commencement secured creditors are not disadvantaged by the section 135 priority in the way many creditors assume. Their security position is protected. What they lose is only the ability to enforce during the moratorium, and only for the duration of the rescue.
Misconception two, PCF ranks ahead of SARS
The treatment of the tax authority in South African business rescue is more nuanced than either "SARS is always paid first" or "PCF outranks SARS". The reality is more layered.
SARS pre-commencement tax debt ranks as a preferred claim in the liquidation priority order (which is imported by section 135 for the purposes of the rescue as a comparator). Post-commencement PAYE and VAT obligations are post-commencement liabilities and rank as such under section 135. The critical distinction is between pre-commencement tax arrears and post-commencement tax obligations.
Where the plan proposes to treat SARS pre-commencement debt in a specific way (a haircut, a payment plan), SARS as a creditor is entitled to vote on the plan under its classification and can vote against a plan it considers unfavourable. Cassim et al. (2021) note that SARS's willingness to engage constructively in rescue plans varies significantly with the specific facts and with the professionalism of the plan presentation; practitioners should treat SARS as a first-class creditor whose engagement requires serious preparation, not as an administrative counterparty who will accept whatever the plan proposes.
Misconception three, PCF creates a blanket priority for all lenders
Some creditors assume that a lender who has advanced PCF is placed in an omnibus preferred position for their entire exposure. This is not correct. Section 135 grants priority only to the post-commencement portion of the debt. Any pre-commencement exposure the same lender holds remains ranked according to its pre-commencement terms.
Practically, this means a bank that had a R100 million pre-commencement senior secured facility and then advances an additional R20 million as PCF holds two positions in the priority stack: the R100 million ranks according to its pre-commencement security, and the R20 million ranks under section 135. The lender's aggregate recovery position depends on the sum of these two ranks, not on a single blended priority.
Practitioners drafting rescue plans should be careful to model the aggregate recovery for each lender in the plan's rescue-versus-liquidation analysis, showing the recovery attributable to each portion of the lender's exposure separately. Failure to do so produces plan disclosure that is technically correct but that misleads creditors about the effective recovery position of any lender with mixed pre-and-post-commencement exposure.
Misconception four, the priority stack is the same in rescue and in liquidation
The priority order that governs the rescue period is not identical to the priority order that applies on a subsequent liquidation. The two overlap significantly but they are not the same.
In the rescue, the section 135 order governs the ranking of claims in the plan and in any distributions the plan makes. If the rescue succeeds and the plan is adopted, the section 135 order determines who is paid in what order under the plan.
In a subsequent liquidation (following either a section 153 application after a failed plan, or a plan-adopted resolution to wind up the company), the Insolvency Act 24 of 1936 priority order takes over (Republic of South Africa, 1936). Section 135 PCF priority is preserved, but it now sits alongside the full Insolvency Act ordering of preferred, secured, and concurrent claims. Practitioners drafting a liquidation dividend estimate for the plan's compared-to-what analysis must apply the Insolvency Act order, not the rescue order, to the liquidation scenario.
How the misconceptions affect the plan vote
Each of the misconceptions above, if it survives into the section 151 plan meeting, can move a marginal vote against the plan.
A pre-commencement secured creditor who believes (incorrectly) that PCF has ranked ahead of them will vote against the plan out of a defensive posture; a plan-drafting team who explains, in the plan itself, exactly where the PCF sits relative to the secured position, prevents the defensive vote.
A concurrent unsecured creditor who assumes PCF has swallowed all the recoveries will vote against; a plan that shows the actual recoveries for each class, with the PCF's post-commencement priority accurately accounted for, gives them the basis to vote yes.
SARS engaged transparently on the treatment of pre-commencement tax debt is more likely to abstain or vote yes than SARS treated as an administrative afterthought. Because SARS is often a material creditor in South African rescues, this vote can be decisive.
The advisor team's discipline
The financial and strategic advisor sitting alongside the practitioner has a specific job on priority: to build the priority stack for both the rescue scenario (section 135 order) and the liquidation scenario (Insolvency Act order), and to present both in the plan in a form that any creditor can inspect.
This is not glamorous work. It is bookkeeping-adjacent, careful, and detail-heavy. It is also the difference between a plan that wins because creditors understand it and a plan that loses because they do not.
Cross-border comparison
The priority position of DIP finance in the United States Chapter 11 framework is well-established and has generated substantial case law on the interaction between DIP claims and pre-petition secured claims. UK administration under the Insolvency Act 1986 has its own ordering of expenses of the administration and post-appointment claims. The EU Restructuring Directive standardises certain priority positions across member states (European Union, 2019). Rescues involving cross-border groups should coordinate the priority analysis across the affected jurisdictions to prevent classes of creditors being disadvantaged by the interaction of two ordering systems.
What good looks like
A plan that treats priority as a first-class disclosure discipline, that walks each class through the section 135 order as it applies to their claim, that shows the compared-to-what liquidation position on an Insolvency Act basis, and that engages SARS as a serious counterparty from the section 147 meeting onwards, produces plan votes that hold up. Plans that treat priority as a boilerplate paragraph produce plan votes that fail.
The CentraSolve Business Rescue module builds the priority stack for both the rescue and the liquidation scenario as a first-class artefact of the case, and generates the class-by-class recovery analysis in a form the plan can present transparently.
References
Primary legislation
Republic of South Africa. (2008). Companies Act 71 of 2008, Chapter 6, especially sections 135 and 143. Pretoria: Government Printer.
Republic of South Africa. (1936). Insolvency Act 24 of 1936, Part V (Ranking of Creditors' Claims). Pretoria: Government Printer.
Comparative sources
European Union. (2019). Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks. Brussels: Official Journal of the European Union.
Textbook and academic sources
Cassim, F. H. I., Cassim, M. F., Cassim, R., Jooste, R., Shev, J., and Yeats, J. (2021). Contemporary company law (3rd ed.). Cape Town: Juta.
Loubser, A. (2010). Some comparative aspects of corporate rescue in South African company law [Doctoral thesis, University of South Africa]. UNISA Institutional Repository. https://uir.unisa.ac.za