Busi­ness res­cue threat to cred­i­tors

Sure­ty­ships can ex­ploit res­cue plan loop­hole if prin­ci­pal debt pro­vi­sions are changed by agree­ment

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - GRANT FORD & YANIV KLEIT­MAN

THE busi­ness res­cue pro­vi­sions in Chap­ter 6 of the new Com­pa­nies Act have al­ready spawned some in­ter­est­ing and some­times con­flict­ing de­ci­sions of the High Court. A re­cent judg­ment of the Western Cape High Court, ( Absa Bank v Du Toit and oth­ers on De­cem­ber 13 last year) made some im­por­tant re­marks con­cern­ing the en­force­abil­ity of sure­ty­ships pro­vided by third par­ties for the debts of a com­pany where that com­pany has sub­se­quently adopted a busi­ness res­cue plan.

The re­marks and find­ings pose sig­nif­i­cant po­ten­tial risks to cred­i­tors.

The Absa case dealt with the sta­tus of claims against third party sureties where agree­ments have been con­cluded with the prin­ci­pal debtor, and/or busi­ness res­cue plans ac­ceded to, in­cor­po­rat­ing the “full and fi­nal set­tle­ment” or ex­tin­guish­ment of a claim.

Three sureties had stood guar­an­tee for the debts of The Waves at Wilder­ness De­vel­op­ment, the dis­tressed prin­ci­pal debtor. A busi­ness res­cue plan was duly adopted.

Absa agreed to the busi­ness res­cue plan but at the same time sought to re­serve its rights against the sureties. It later in­sti­tuted pro­ceed­ings against the sureties which re­sulted in the case un­der con­sid­er­a­tion. At sum­mary judg­ment stage the sureties raised the de­fence that be­cause the busi­ness res­cue plan pro­vided for the set­tle­ment or ex­tin­guish­ment of Absa’s claim, and given that a fun­da­men­tal char­ac­ter­is­tic of a sure­ty­ship is that it is ac­ces­sory to the prin­ci­pal debt, Absa was not en­ti­tled to en­force the sure­ty­ships against them. Even though the plan recorded that it was the in­ten­tion of the par­ties that claims against sureties would not be af­fected by the plan this did not help Absa at the end of the day.

The court held that the de­fen­dants had a bona fide de­fence on the face of it and re­fused the ap­pli­ca­tion. These im­por­tant ob­ser­va­tions were made:

The well-es­tab­lished prin­ci­ple is that a claim against a surety “lives or dies” by the prin­ci­pal obli­ga­tion.

It made no dif­fer­ence that the sureties had agreed to be co-prin­ci­pal debtors.

The fact that the busi­ness res­cue plan in ques­tion sought to main­tain claims against sureties did not as­sist the cred­i­tor as the sureties them­selves were not party to the busi­ness res­cue plan.

While pre­vi­ous de­ci­sions held that claims against third party sureties were un­af­fected by a busi­ness res­cue process it is now ap­par­ent that once the prin­ci­pal debt is mod­i­fied or its char­ac­ter al­tered, the ac­ces­sory li­a­bil­ity un­der the sure­ty­ship may also be re­garded as hav­ing been mod­i­fied or al­tered.

Cred­i­tors should be ex­tremely cau­tious with the man­ner in which they deal with and treat claims. So­lu­tions may in­clude ob­tain­ing a “fresh” guar­an­tee from the third party surety or en­sur­ing that the surety be­comes a party to the busi­ness res­cue plan.

The word­ing of busi­ness res­cue plans should also be care­fully scru­ti­nised so as to en­sure that there is no in­ad­ver­tent set­tle­ment or ex­tin­guish­ment of a claim against a surety or guar­an­tor. The pro­vi­sions of Sec­tion 154 of the Com­pa­nies Act (which deals with the en­force­ment of claims that arose prior to busi­ness res­cue) also needs to be re­ferred to and dealt with as this nor­mally pre­vents a cred­i­tor who as­sented to a busi­ness res­cue plan from en­forc­ing a claim other than in terms of that plan.

No doubt the case will en­joy much de­bate and con­sid­er­a­tion. It may also be rel­e­vant for the word­ing of stan­dard sure­ty­ship agree­ments.

Pic­ture: THINKSTOCK

HEAD­ING INTO STORMY WA­TERS The word­ing of busi­ness res­cue plans should also be care­fully scru­ti­nised so as to en­sure that there is no in­ad­ver­tent set­tle­ment or ex­tin­guish­ment of a claim against a surety or guar­an­tor

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