ARE YOU OWED MONEY BY A COMPANY UNDER BUSINESS RESCUE? TAKE NOTE OF A RECENT JUDGMENT HANDED DOWN BY THE SCA.

Gary Warne | Legal Services Manager

A recent judgment by the Supreme Court of Appeal (“SCA”) has highlighted the importance of creditors understanding the relevant provisions of the Companies Act before voting on a Business Rescue Plan as same could impact upon their rights to claim any shortfall after the Business Rescue proceedings have been terminated.

BACKGROUND

The Appellant, Mr Van Zyl, was formerly the CEO of Blue Chip Mining and Drilling (Pty) Ltd (“BCM”).

The Respondent, Auto Commodities (Pty) Ltd (“Auto Commodities”), supplied BCM with petroleum products on credit, but required the Appellant to bind himself as surety for the liabilities of BCM, which he did by signing a deed of suretyship.

BCM subsequently experienced financial difficulties and was placed under Business Rescue.

The proposed Business Rescue Plan was adopted and implemented with Auto Commodities receiving 2 (two) dividends totaling nearly R 1,9 million.

The Business Rescue process terminated as a result of the substantial implementation of the Plan.

Auto Commodities then issued summons against the Appellant, as surety, for payment of an amount in excess of R 6 million, being the shortfall in respect of BCM’s original indebtedness.

The court a quo granted judgment in favour of Auto Commodities however the Appellant took the matter on appeal.

THE APPELLANT’S CASE

The issue in dispute was whether the Appellant was liable under the deed of suretyship to pay the amount claimed by Auto Commodities.

The Appellant contended that when BCM’s Business Rescue terminated, section 154(2) of the Companies Act (“the Act”) released BCM from any further indebtedness to Auto Commodities which in turn released him from liability due to the fact that a suretyship is an accessory obligation.

SECTION 154(1) OF THE COMPANIES ACT

Section 154(1) states that ‘if a Business Rescue provides that the debts or part thereof that are owed to the company’s creditors will be discharged once the plan has been implemented, then those creditors who have acceded to the discharge of the whole or part of a debt owing to them will lose their right to enforce the relevant debt or part thereof.’

Section 154(1), unlike section 154(2), does not distinguish between pre- and post commencement debts.

SECTION 154(2) OF THE COMPANIES ACT

Section 154(2) provides that, if a business rescue plan has been approved and implemented, a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of the Business Rescue process, except to the extent provided for in the business rescue plan.

It is therefore clear that section 154(2) focuses solely on pre-commencement debts.

THE SCA’S JUDGMENT

The SCA dismissed the appeal and held that while section 154(1) refers to the discharge of debts, section 154(2) merely places a limit on the ambit of the enforcement of the debt.

Accordingly, in terms of section 154(1) the debt ceases to exist whereas in terms of section 154(2) the pre-commencement debt still exists, however is enforceable only to a limited extent.

The SCA clarified the position by referring to section 3(1) of the Prescription Act (Act 18 of 1943) that an inability to enforce a debt does not necessarily equate to a discharge of such debt.

The court therefore held that if a creditor had not ‘acceded’ to the discharge of the debt that it could enforce payment of the debt against third parties, such as sureties.

It is further worth remembering that in view of the distinction between pre- and post-commencement debts that in terms of section 154(1) the entire debt can be discharged whereas in terms of section 154(2) only the pre-commencement component of the debt may become unenforceable against the entity in Business Rescue.

CONCLUDING REMARKS

Creditors of entities that are under Business Rescue should be careful not to inadvertently vote in favour of, and ultimately accede to, a discharge of pre-commencement debts which may be proposed in the Business Rescue Plan (in terms of section 154(1)) as this could impact upon the enforceability of securities held by them.

By not acceding to a discharge of debts entails that legal action can still be instituted against the surety/ies of an entity that has come out of Business Rescue and where exposure in respect of pre-commencement debts still exists.