The impact of business rescue proceedings on sureties

INTRODUCTION:

Chapter 6 of the Companies Act 71 of 2008 (as amended) (“the Act”) is one of the major themes in which a system for corporate rescue is created for the purpose to provide efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders.

Section 128 of the Act defines Business Rescue as follows:

(i) the temporary supervision of the company, and of the management of its affairs, business and property;

(ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and

(iii) the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company”

The most important consequence of the commencement of business rescue proceedings is that there is an automatic moratorium (a “freeze” or “stay”) on legal proceedings or executions against the company, its property and its assets, and on the exercise of the rights of creditors of the company (Section 133 of the Act).

Section 133 (2) of the Act only states that during business rescue proceedings, a guarantee of surety by a company in favour of any other person may not be enforced by any person against the company except with the leave of the court and in accordance with any terms the court considers just and equitable in the circumstances.

If a business rescue plan has been approved and implemented, a creditor is not entitled to enforce a debt owned by the company immediately before the commencement of the business rescue process, except to the extent provided for in the business rescue plan.

THE LEGAL QUESTION:

The question that should be answered here is: What is the effect of the implementation of the business rescue plan on the discharge and/or release of a surety’s obligation?

CASE LAW:

In the matter of TUNING FORK (PTY) LTD T/A BALANCE AUDIO VS J.M.J. GREEF & OTHER (18136/13)[2014]ZAWCHC 78 (28 MAY 2014) (“Tuning Fork) Rogers J relied on the common law position as there was a gap in the legislation. In terms of the common law the obligation of the surety is accessory in nature and thus the extinction of the principal obligation extinguishes the surety’s obligation. In his judgment, Rogers J stated that if a business rescue plan provided for the discharge of the principal debt by way of a release of the principal debtor, and the claim against the surety is not specifically preserved by such stipulations in the plan, the surety will be discharged.

The contrary position was taken in the judgment of Kathree – Setiloane J in AFRICAN BANKING CORPORATION OF BOTSWANA LIMITED VS KARIBA FURNITURE MANUFACTURES (PTY) LTD & OTHERS (2013) (6) SA 471 (GNP). Kathree – Setiloane J granted a declaratory order that the sureties for the company’s indebtedness remained liable for the debt, even though there was a duly approved and implemented business rescue plan providing for the compromising of the creditor’s claim.

NEW PORT FINANCE COMPANY (PTY) LTD AND ANOTHER V NEDBANK LIMITED (30/2014) [2014] ZASCA 210 (1 DECEMBER 2014) Wallis JA judgment created a grey area as he expressed reservations as to the correctness of the High Court’s decision in the Turning Fork-case which suggested that the effect of a debtor being wholly or partially discharged from liability for a debt under a business rescue plan, was to release the surety from liability. The court referred to Section 154 of the Act and found that it was capable of the interpretation that it deals only with the ability to sue the principal debtor and not the existence of the debt itself. Upon this interpretation, the liability of the surety would be unaffected by the business rescue, unless the plan itself made specific provision for the situation of sureties.

CONCLUSION:

In order for a creditor to protect himself, any business rescue plan should provide (on a tripartite basis) for a situation where the principal debtor, creditor and surety agree that the surety will not be released from any suretyship obligations.

As an alternative in seeking security in the form of suretyships, a creditor or lender could consider using guarantees. The guarantee can only be discharged by the fulfilment of the obligations that are so agreed unless otherwise agreed. In the case of business rescue proceedings, the creditor would be entitled to proceed with its claim against the guarantor notwithstanding the discharge of a debt under business rescue.

REFENCES:

• The Companies Act 71 of 2008 (as amended)
• The Law of Business Structures – Farouk HI Cassim, Maleka Femida Cassim, Richard Jooste, Joane Shev, Jacqueline Yeats.

Author:

Nihann van Rooyen, 12 February 2015