Suspension of contractual obligations and the moratorium in South African business rescue

Business Rescue: the legal framework

The South African Companies Act, 2008 (the Companies Act) provides a statutory financial restructuring mechanism that a financially distressed company may seek to adopt in order to avoid liquidation or to render a better return for creditors than in a liquidation scenario. Two key features of a business rescue are:

• a general moratorium on legal proceedings against the company whilst in business rescue; and
• the ability of the appointed business rescue practitioner to temporarily suspend the company’s contractual obligations - and in instances, cancel those obligations - with leave of the court. However, the moratorium does not apply to creditors who are regulatory authorities, as defined in the Companies Act.

The Tongaat Hulett v South African Sugar Association case

The restructuring mechanism came under close scrutiny in the recent High Court case of Tongaat Hulett Limited (in business rescue) & Others v South African Sugar Association & Others[1].

Tongaat Hulett Limited (THL) is a large sugar milling company in Southern Africa and was placed into business rescue during 2022.

The South African Sugar Association (SASA) is an association that was initially established by agreement amongst sugar growers and millers and is now recognised as an entity constituted in terms of the South African Sugar Act, 1978 (the Sugar Act). Participants of SASA negotiate and agree on issues affecting the industry whilst SASA derives its powers from the Sugar Industry Agreement, 2000 (SI Agreement).

The SI Agreement provides for a revenue sharing arrangement reached amongst millers and growers in order to protect and sustain local sugar production.  Pursuant to this arrangement, THL is, by virtue of it being an overproducer of sugar and therefore refining and selling a greater percentage of sugar than its permitted quota, required to pay SASA redistribution amounts.

After being placed into business rescue, THL made no payments to SASA in respect of its obligations under the SI Agreement, which included the payment of redistribution amounts and industry levies. The business rescue practitioners published a business rescue plan (which sets out the terms of the proposed financial restructuring) but no provision was made for payment of the levies or redistribution amounts. SASA was reflected as an unsecured creditor.

In support of this position, the THL business rescue practitioners relied on:

• their rights under the Companies Act to suspend the payment obligations under the SI Agreement by contending that the SI Agreement is contractual in nature and therefore an “agreement” as defined in the Companies Act; and
• the general moratorium on legal proceedings, which in their view would in any event preclude SASA from instituting legal proceedings to enforce the terms of the SI Agreement and recover payments due to them. In this regard it was contended that SASA is not a “regulatory authority”.

With SASA disputing this position, the business rescue practitioners approached the High Court for a declaratory order to, amongst other alternative relief, confirm the above position.

The Court embarked on an in-depth interpretative exercise of the relevant provisions of the Companies Act, the Sugar Act, and the SI Agreement. The Court also considered the history of how SASA was established and how the SI Agreement came into effect.

Following this analysis, the Court disagreed with the business rescue practitioners and found that:

• an “agreement” for the purposes of the Companies Act (and therefore one which falls within the ambit of obligations that may be suspended) is a set of rights and obligations that are founded or created by, and derive their legal power from, a “contract”, “arrangement” or “understanding” “between or among” the persons who are party to it, thus arising under contract (ex contractu);
• there is a distinction between an obligation arising ex contractu and one arising as a matter of law (ex lege);
• the SI Agreement becomes binding on all millers, growers and refiners once gazetted by the government in terms of the Sugar Act and the obligations contained therein are imposed on all industry members as a matter of law (ex lege), rather than by agreement between the parties;
• the SI Agreement is therefore subordinate legislation and not an agreement as defined in the Companies Act; and
• SASA is established in terms of national legislation to regulate the Sugar Industry and as such falls squarely under the definition of ‘regulatory authority’, to which the moratorium does not apply.

Consequently, the Court held that THL’s ongoing obligations to SASA under the SI Agreement could not be suspended as they were not obligations under an agreement. Furthermore, they were not subject to the moratorium.

Key takeaways

Financially distressed companies (whether considering a business rescue or being in a business rescue) and their creditors must carefully consider the instruments pursuant to which the distressed company owes obligations to its creditors in order to determine whether the obligations are capable of suspension under the Companies Act.

Cognisance must be had to the creditor seeking to enforce any obligation and whether that creditor might fall within the ambit of a regulatory authority, to which the moratorium on legal proceedings does not apply.

These considerations might, depending on the amount or value of the obligation, be determinative on whether business rescue process is in fact a viable process to adopt by the financially distressed company, given that the key safeguards imposed by a business rescue might in fact not be available.