The ongoing business rescue proceedings of Mango Airlines (Pty) Ltd (“Mango”) have raised key legal considerations surrounding the cession of creditor claims during corporate restructurings. Central to the current matter is the legal distinction between the discharge of debt under Section 154 of the Companies Act 71 of 2008 (“the Act”) and the transfer (cession) of a creditor’s claim. These issues are significant in light of the plan adopted in Mango’s business rescue, which purports to affect the rights of creditors without clear consent.
Details of Mango’s Business Rescue Plan
Mango is a wholly owned subsidiary of South African Airways SOC Ltd (“SAA”), entered business rescue with SAA as its sole shareholder. SAA, however, opted not to provide further financial support to Mango and has distanced itself from the rescue process. The successful implementation of the rescue therefore hinges on financing from a third-party investor, as outline in the Business Rescue Plan (“the Plan”).
The adopted Plan entails that the remaining funds previously injected by SAA, after deducting employee claims and restructuring costs, will be distributed to concurrent creditors.
This estimated dividend payout to creditors equates to approximately 4.43 cents in the Rand, or R44 300 for every R1 million owed. This nominal return precedes the proposed sale of SAA’s shares in Mango to an investor at a nominal value.
Following the sale, the investor is expected to subscribe for new shares to capitalise the business, but the Plan provides little to no detail as to the amount, timing, or terms relating to that investment.
However, these unspecified funds flowing from the subscription is then intended to be used as a “top-up” payment to concurrent creditors, supplementing the initial dividend of approximately 4.43 cents in the Rand. This “top-up” will then effectively remain contingent on the successful capital injection by the third-party investor and is not guaranteed.
The Plan further provides that after the “top-up” payment the remaining balance of claims held by concurrent creditors will be ceded to the Investor at face value but for nominal consideration. The relevant cession clause in the Plan effectively seeks to transfer all residual creditor claims to the Investor following the dividend payments.
The Plan makes reference to Section 154(2) of the Act, and explains that once the business rescue Plan has been approved and implemented, creditors will be precluded from enforcing any debts owed by the company prior to the commencement of the rescue proceedings, except to the extent provided in the Plan.
Subsequently, the debts acquired by the Investor through the cession may be converted into equity or quasi-equity instruments, subordinated, or otherwise dealt with in a manner aimed at restoring the company’s solvency.
In essence the creditors are asked to consent to the cession of their claims to an undisclosed Investor on the basis that if at least 75% of creditors vote in favour, even dissenting or non-voting creditors will be bound, rendering their claims unenforceable under Section 154(2).
Conflation of Discharge and Cession
The Plan appears to rely on Section 154 of the Companies Act to support the proposed treatment of creditor claims. This provision provides that, once a business rescue plan has been adopted and implemented, creditors are precluded from enforcing debts that existed prior to business rescue, except to the extent provided for in the plan.
However, Section 154 deals specifically with the discharge of debts, not with the cession or assignment of claims. A discharge extinguishes a debt, whereas a cession merely transfers the right to claim to another party.
This is important as a ceded claim does not cease to exist. Rather, the original creditor (cedent) transfers their personal right to another (cessionary), and the claim remains valid and enforceable.
The Requirement of Consent for Valid Cession
It is well-established that cession is a bilateral juristic act and requires:
- • A right capable of being ceded; and
- • A clear intention to cede on the part of the cedent.
While cession does not require the debtor’s consent, it cannot be unilaterally imposed on a creditor by a third party. Cession involves the substitution of parties to an existing obligation but does not affect the substance of the right or the obligation itself.
The key flaw in the legal reasoning of the Plan lies in the apparent conflation of discharge with cession. Section 154 provides a statutory basis for limiting enforcement of pre-rescue claims once discharged, but it does not authorise the transfer or reassignment of creditor claims. A claim that has been ceded is not discharged, it continues to exist in full, albeit in the hands of a different legal holder.
Where a plan attempts to substitute or transfer creditor claims by operation of law, absent proper consent, it exceeds the legal boundaries of both cession and Section 154 of the Companies Act 71 of 2008. This may render the proposed treatment of claims unenforceable, particularly where creditors were not afforded a real opportunity to accept, reject, or negotiate the terms of such a transfer.
While Section 154 of the of the Companies Act 71 of 2008 allows for the discharge of pre-existing debt in certain circumstances, it does not authorise the cession or substitution of claims without creditor consent.
Creditors maintain the right to enforce their claims unless lawfully discharged, and any attempt to reassign or subordinate those rights without consent is contrary to the principles of South African contract and insolvency law. The Mango case underscores the need for business rescue practitioners and investors alike to ensure that restructuring efforts respect both the letter, the law, and the legislation governing cession and creditor rights.
