By Lara Kahn and Sikelelwa Fumile
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.
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 R1 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) were contractual (and thus subject to suspension) and, alternatively, that section 136(2)(a)(i) of the Companies Act was unconstitutional and invalid insofar as it failed 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 was subordinate legislation rather than an “agreement” and that the BRPs did 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.
The 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. After the 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 the appeal will have a profound impact on the future of business rescue in the sugar and other regulated industries in South Africa. The 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. The 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.
Lara Kahn is a partner and Sikelelwa Fumile is an associate from Webber Wentzel.
BUSINESS REPORT