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balances="" principles="" of="" corporate="" rescue="" with="" broader="" societal="" imperatives="" industry="" regulation.="" crux="" matter="" was="" whether="" business="" practitioners="" (brps)="" could="" suspend="" certain="" statutory=""
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HIGH COURT CONFIRMS THE STATUS OF PAYMENT OBLIGATIONS UNDER THE SOUTH AFRICAN
SUGAR INDUSTRY LEGISLATION DURING BUSINESS RESCUE
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ARTICLE ENQUIRY
High Court confirms the status of payment obligations under the South African
sugar industry legislation during business rescue
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HIGH COURT CONFIRMS THE STATUS OF PAYMENT OBLIGATIONS UNDER THE SOUTH AFRICAN
SUGAR INDUSTRY LEGISLATION DURING BUSINESS RESCUE
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17th September 2024
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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.
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, including 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.
Advertisement
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".
Advertisement
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.
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.
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.
Written by Lara Kahn, Partner & Sikelelwa Fumile, Associate from Webber Wentzel
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