One of the BRPs’ powers is the ability to entirely, partially or conditionally suspend, for the duration of the proceedings, “any obligations” of the company that arise under an agreement to which the company was a party at the commencement of business rescue that otherwise become due and payable during those proceedings. The extent of the BRPs’ power to suspend certain contractual obligations has troubled stakeholders for some time and was recently considered in the judgment of Tongaat Hulett Limited (In Business Rescue) and Others v South African Sugar Association and Others [2023] JDR 4959 (KZD) (3 December 2023). The issue at hand was determining the scope of the BRPs’ powers under section 136(2) to suspend Tongaat Hulett’s contractual obligations to the South African Sugar Association (SASA).

Factual matrix

The genesis of this matter emanated from the Sugar Industry Agreement (SI Agreement) governing the sugar industry, which obliges Tongaat Hulett and other members of the sugar industry to pay SASA certain levies as a form of revenue sharing where those members have over-produced for their quota in the South African sugar market. When Tongaat Hulett was placed into business rescue, its BRPs sought to suspend the payment of these levies to SASA in terms of section 136(2) of the Companies Act.

SASA is statutory body created in terms of the Sugar Act 9 of 1978 (Sugar Act) whose sole purpose is to act as the regulator in the sugar industry. It derives its powers from subordinate legislation, namely the Sugar Act, which is given effect to through the SI Agreement.

As a result of the sugar industry being highly competitive and saturated, quotas were introduced, through the SI Agreement, that determined and controlled the production of sugar, whether refined or otherwise, that industry players were allowed to sell. Based on these quotas, industry players such as Tongaat Hulett could, and would be, penalised should they over or under produce in respect of their domestic and export quotas. Tongaat Hulett overproduced in respect of its domestic quota and ‘undersold’ in respect of its export market quota, leading to Tongaat Hulett having to pay redistribution penalties, levies and interest to SASA in the amount of just over R1,7 billion.

Despite courteous requests and reminders for payment from SASA, the BRPs for Tongaat Hulett refused to pay and evoked their powers under section 136(2) and suspended the obligation to pay the redistribution penalties and levies in terms of the SI Agreement.

It is on this basis that Tongaat Hulett and the BRPs approached the High Court to seek an order inter alia declaring that they were empowered to suspend, for the duration of the business rescue proceedings, any obligation of Tongaat Hulett which arose under the SI Agreement.

The power to suspend ex lege obligations

In interpreting the provisions and having regard to the ordinary meaning of the words used and the ordinary rules of grammar and syntax, the court rejected the BRPs’ reliance on section 136(2) of the Companies Act, stating that the ongoing obligations of Tongaat Hulett towards SASA were simply the costs of doing business, and thus, could not be suspended. In essence, the court held that it is plain that what the legislature regards as an “agreement” for the purposes of the Companies Act, 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. These obligations are private law obligations arising from consensus between contracting parties (i.e. obligations ex contractu). As the SI Agreement constitutes subordinate legislation and its obligations arise as a matter of law (i.e. obligations ex lege), the BRPs had no power to suspend Tongaat Hulett’s obligations towards SASA.

In support of this reasoning, the court drew a comparison to value-added tax (VAT) and stated that, just as the obligation to pay VAT to the South African Revenue Service is not capable of being suspended, neither are the levies due to SASA in terms of the SI Agreement.

Conclusion

While business rescue is geared towards flexibility in the restructuring of a financially distressed business, the judgment in this case demonstrates that there should be a careful and thorough analysis in each case by all stakeholders as to whether or not some obligations are capable of being entirely, partially or conditionally suspended for the duration of the proceedings so as to enable the company to restructure and reorganise its affairs.