A business rescue plan and its effect on suretyships

Suretyship agreements are integral to a creditor wishing to limit its financial exposure to its debtors. This article analyses the effect that the acceptance by a creditor of a business rescue plan of a debtor company has on the enforceability of that creditor’s security, particularly in the form of suretyship agreements concluded in its favour.

There has been extensive debate around the subject, academically and in the courts. At the centre of this debate is s154 of the Companies Act, No 71 of 2008 (new Companies Act).

S154, reads as follows:

  1. A business rescue plan may provide that, if it is implemented in accordance with its terms and conditions, a creditor who has acceded to the discharge of the whole or part of a debt owing to that creditor will lose the right to enforce the relevant debt or part of it.
  2. If a business rescue plan has been approved and implemented in accordance with this Chapter, 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.

The focal point of the debate is whether, by assenting to the business rescue plan, the creditor compromised its security for the original debt. In other words, does s154 mean that, once a business rescue plan is accepted by a creditor, such creditor can only recover from the surety that part of its debt as is recoverable under the business rescue plan?

Acting Justice Rogers (as he then was), in Investec Bank Limited vs Bruyns 2012 (5) SA 430 (WCC) (Bruyns case), stated, in passing and without deciding, that if a business rescue plan was approved, and then implemented in accordance with its terms and conditions, an assenting creditor may, as a result of s154(1), lose the right to enforce the original outstanding debt against any surety.

The commentators in both Henochsberg on the Companies Act and Contemporary Company Law appear to interpret this section similarly. In their opinion the adoption of a business rescue plan could potentially have the effect of discharging and/or extinguishing the debt against the surety.

One of the main underlying practical problems with this interpretation is that it will discourage those creditors with suretyship agreements in place from approving a business rescue plan. The creditor’s dissent not necessarily being as a result of disapproval of the business rescue plan, but instead resulting from a desire not to compromise its underlying suretyship security.

As a possible solution for a creditor wishing to approve a business rescue plan without compromising its security, Rogers AJ alludes to the fact that the underlying terms of the suretyship agreement may be a saving grace to the creditor. Suretyship agreements, in most instances, contain provisions which allow the creditor to compromise with the principal debtor without prejudicing the creditor’s rights against the sureties. These types of provisions are not unusual. Rogers AJ however reaches no conclusion in this regard. Furthermore, historically suretyship agreements do not cover business rescue proceedings as the business rescue process has only recently been introduced into South African Company Law.

In an unreported judgment (Nedbank Limited v New Port Finance Company (Pty) Limited and other) delivered on 3 July 2013, Blignault J gives great credence to the notion alluded to by Rogers AJ, that one needs to look to the terms of the suretyship agreement to analyse the effects of the business rescue provisions in the Companies Act on the obligations under the suretyship agreement. Ultimately, Blignault J held that the adoption of a business rescue plan and the statutory moratorium afforded to the company in business rescue in terms of s133 of the Companies Act do not extend to a surety and do not affect a creditor’s rights to enforce its claim against a surety.

Clarity on this issue was further received in the recent reportable judgment of African Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd (in business rescue) and five others, case number 20947/12 in the North Gauteng High Court Pretoria (African Banking decision).

In that case, Judge Kathree-Setiloane was required to make a finding inter alia whether:

(i)         a binding offer in terms of s153(1)(b)(ii); and

(ii)        the subsequent adoption of a business rescue plan affected a creditor’s rights under                        certain suretyship agreements.

Kathree-Setiloane J, on this aspect of the matter, did not refer to s154 of the New Companies Act. In this instance the creditor had not assented to the business rescue plan. In fact, the creditor, for reasons which are beyond the scope of this article, was not even permitted to vote on the adoption of the business rescue plan.

However, what is important for the purposes of this article is that Kathree-Setiloane J specifically found that “there is no express provision contained in chapter 5 of the Companies Act [the business rescue chapter] which provides that the adoption of a business rescue plan will deprive creditors of the company in the business rescue, of their rights as against sureties for the debts of the company in business rescue“. In so doing Kathree- Setiloane J differs from the obiter dictum view adopted in the Bruyns case. According to Kathree-Setiloane J if the legislature had intended the effects of a business rescue plan to be so drastic it would have made express provision therefor. In the absence of such an express provision, Kathree-Setiloane J was of the view that “[t]here is no basis to suggest that such a provision could be read into the business rescue regime“.

In coming to this decision, Kathree-Setiloane J emphasises that the purpose of business rescue, as specifically provided for in s7(k) of the New Companies Act, is to make provision for the efficient rescue of a financially distressed company in a way that balances the rights and interests of all relevant stakeholders. In Kathree- Setliloane J’s view “the interests of sureties do not fall within the scope of the objective of the business rescue regime“.

This is the first judgment which deals, in its ratio decidendi, with the effect (or lack thereof) of the business rescue plan on the rights of a creditor to pursue its sureties.

It is clear from this judgment that the mere adoption of a business rescue plan does not deprive creditors of their rights to enforce suretyships. There is little doubt that at some point or another this issue will be brought before the highest courts in South Africa.

Until that time, and to safeguard against a decision which opposes that of Kathree-Setiloane J, creditors should make specific provision in their suretyship agreements for instances where compromises with a principal debtor do not automatically release sureties and co-principal debtors. This should specifically include the protection of the creditor’s rights as against the sureties in cases where the principal debtor has gone into business rescue, and a business rescue plan has been approved and/or duly implemented.

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