Lara Kahn | Partner | Webber Wentzel | mail me |
Sikelelwa Fumile | Associate | Webber Wentzel | mail me |
A landmark high court ruling found that business rescue practitioners can’t “have their cake and eat it too”. The case involving sugar giant Tongaat Hulett, balances the principles of corporate rescue with the broader societal imperatives of industry regulation.
About the matter
The crux of the matter was whether business rescue practitioners (BRPs) could suspend certain statutory obligations during business rescue proceedings. Tongaat has been in voluntary business rescue since October 2022. Its BRPs sought a declarator that they were entitled to suspend any obligation of Tongaat that arose under the Sugar Industry Agreement (SI Agreement) during business rescue. This included any local market redistribution payments and related levies that became due during business rescue. They also suspended payment of the redistribution and levies for the first six months of the business rescue.
The Sugar Industry Agreement is crucial for the sugar industry as it ensures that the industry is protected through a revenue-sharing mechanism whereby “overproducers” pay levies, which are then redistributed by the sector’s representative and regulator, the South African Sugar Association (SASA) to smaller producers. To this end, Tongaat, a miller and refiner, is required by the SI Agreement to pay levies to SASA. Levies that are not paid by one industry member must be covered by other industry members. After six months, Tongaat owed SASA levies of approximately ZAR 1 billion.
Section 136(2)(a) of the Companies Act 71 of 2008 (The Act) provides that:
…during business rescue proceedings, the practitioner may entirely, partially or conditionally suspend for the duration of the business rescue proceedings, any obligation of the company that (i) arises under an agreement to which the company was a party at the commencement of the business rescue proceedings; and (ii) would otherwise become due during those proceedings.
The BRPs argued that payment obligations arising under the SI Agreement (the payment obligations) are contractual in nature (and thus subject to suspension) and, alternatively, that section 136(2)(a)(i) of the Companies Act, is unconstitutional and invalid insofar as it fails to provide for the suspension of regulatory charges that become due during business rescue proceedings.
The matter before the court
RCL, Illovo, SASA and certain other industry bodies (the respondents) opposed the application and argued that the payment obligations were incapable of suspension as they arose from the SI Agreement, which is subordinate legislation rather than an “agreement” and that the BRPs do not have the power to suspend legislation.
The High Court agreed with the respondents, ruling that the payment obligations were statutory and thus incapable of suspension. The court further clarified that the payment obligations were essential “costs of doing business” and had to be paid if THL was to continue trading. The legislature did not intend that business rescue should prevail at any cost. Ultimately, the court dismissed the constitutional challenge.
This ruling has far-reaching implications for the business rescue process. It clarifies the limits of the power given to BRPs and reaffirms the importance of statutory obligations. For the broader sugar industry, it provides some certainty that it will be protected, even in the face of a company’s financial distress.
The battle is far from over as following this decision. The BRPs applied for leave to appeal which was refused by the High Court and they petitioned to the Supreme Court of Appeal for special leave which was granted. The outcome of this appeal will have a profound impact on the future of business rescue in the sugar and other regulated industries in South Africa. This case demonstrates the delicate balance between protecting creditors’ interests and preserving viable businesses through rescue processes.
Implications of the ruling
The sugar industry, facing economic pressures, is closely watching this case. If the appeal is dismissed, Tongaat will be compelled to honour its payment obligations to SASA, potentially impacting its restructuring efforts. This case serves as a reminder of the challenges that can arise when a company’s financial difficulties collide with statutory obligations and the broader public interest.
The final chapter in this saga remains unwritten, and its consequences will be felt by creditors, industry stakeholders, employees and the broader business community for years to come.
Related FAQs: Business Rescue payment obligations
Q: What are the payment obligations during the commencement of business rescue?
A: During the commencement of business rescue proceedings, the company must adhere to its existing payment obligations as outlined in the business rescue plan. Failure to comply may lead to the affected persons seeking remedies in terms of section 131 of the Companies Act.
Q: How does a moratorium affect payment obligations in business rescue?
A: The moratorium imposed during business rescue proceedings provides temporary relief from legal action against the company, which may affect the payment obligations. However, the company is still required to meet obligations as specified in the business rescue plan until the plan is adopted.
Q: What happens to creditors’ claims when a company is placed under business rescue?
A: When a company is placed under business rescue, creditors’ claims are subject to the business rescue plan. The plan must address how and when creditors will be paid, in compliance with the terms set out in section 129 of the Companies Act.
Q: Can a business rescue practitioner change the payment obligations outlined in the business rescue plan?
A: No, the business rescue practitioner must adhere to the approved business rescue plan. Any changes to payment obligations would require the consent of affected persons and must be in line with the purpose of business rescue.
Q: What is the role of the business rescue practitioner in managing payment obligations?
A: The business rescue practitioner is responsible for overseeing the implementation of the business rescue plan, including managing payment obligations. They must ensure that the company complies with the plan to facilitate the efficient rescue and recovery of financially distressed companies.
Q: How do affected persons influence payment obligations during business rescue?
A: Affected persons play a crucial role in the business rescue process, as they have the right to vote on the business rescue plan. Their feedback and consent are essential for determining the payment obligations outlined in the plan.
Q: What is the significance of having a reasonable prospect of rescuing the company in relation to payment obligations?
A: A reasonable prospect of rescuing the company must be established to justify the continuation of payment obligations. If it is determined that there is no such prospect, the company may face liquidation, and the payment obligations would shift accordingly.
Q: Are there specific deadlines for meeting payment obligations during business rescue?
A: Yes, the business rescue plan will typically outline specific deadlines for meeting payment obligations. These deadlines should be adhered to as part of the company’s efforts to comply with the terms of section 131 of the Companies Act.
Q: What happens if the business rescue plan is not adopted regarding payment obligations?
A: If the business rescue plan is not adopted, the company may revert to liquidation proceedings, and payment obligations would then be determined under the liquidation process as per chapter 6 of the Companies Act.
