Case brings com­fort to cred­i­tors

Supreme Court of Ap­peal sug­gests their claims against sureties are not af­fected by a busi­ness res­cue plan

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

ONE of the most sig­nif­i­cant judg­ments af­fect­ing the busi­ness res­cue regime to date was handed down late in De­cem­ber 2014. The Supreme Court of Ap­peal de­liv­ered what should be the fi­nal word, un­less a con­sti­tu­tional court chal­lenge is launched, on how courts will treat sureties who had stood and pro­vided se­cu­rity for the debts of a com­pany (prin­ci­pal debtor) that sub­se­quently went into busi­ness res­cue and adopted a busi­ness res­cue plan.

Up un­til this point, the ques­tion had been whether such sure­ty­ships would re­main un­af­fected and en­force­able. The De­cem­ber judg­ment, New Port Fi­nance Com­pany (Pty) Ltd and oth­ers v Mostert and oth­ers, is now set to have far-reach­ing con­se­quences in the bank­ing and fi­nance arena and should pro­vide a

Up un­til this point, the ques­tion had been whether such sure­ty­ships would re­main un­af­fected and en­force­able

The plans pro­vided for the re­struc­tur­ing of the bor­rower com­pa­nies’ debts.

An ar­gu­ment was raised on be­half of the sureties that be­cause the busi­ness res­cue plan al­legedly had the ef­fect of al­ter­ing or com­pro­mis­ing the un­der­ly­ing prin­ci­pal debt, the lenders could not pur­sue the sureties or en­force their claims against them un­til the busi­ness res­cue process had run its course. In this re­gard, re­liance was placed on the re­cent West­ern Cape High Court case of Tun­ing Fork (Pty) Ltd t/a Bal­anced Au­dio v Gre­eff and an­other, where it was held that the adop­tion of a busi­ness res­cue plan must have, as a point of de­par­ture, a very spe­cific clause in the deed of sure­ty­ship or busi­ness res­cue plan it­self pre­serv­ing the lender’s right to pur­sue the surety for the full orig­i­nal amount of the debt, fail­ing which the lender’s claim may be com­pro­mised.

The Supreme Court of Ap­peal in New Port, how­ever, adopted a more cred­i­tor-friendly in­ter­pre­ta­tion of the busi­ness res­cue pro­vi­sions. In the first place, the deeds of sure­ty­ship in this case con­tained the stan­dard clauses which deal with the even­tu­al­ity of the prin­ci­pal debtor com­pro­mis­ing or oth­er­wise re­ar­rang­ing its debts gen­er­ally with its cred­i­tors. The court held that th­ese clauses un­doubt­edly bring busi­ness res­cue within their ambit and cater for such even­tu­al­ity, such that the adop­tion of a busi­ness res­cue plan would not prej­u­dice the lender’s (full) claims against the sureties on a joint and sev­eral ba­sis.

This in it­self is a big de­ci­sion in favour of cred­i­tors, and the court’s stance on this as­pect should give com­fort to the many cred­i­tors in SA who have that stan­dard word­ing, or sim­i­lar word­ing along those lines, as terms in their deeds of sure­ty­ship. How­ever, the court went even fur­ther and sug­gested (but with­out de­cid­ing) that even in the ab­sence of such word­ing, the cred­i­tor’s rights against sureties are not nec­es­sar­ily af­fected by the adop­tion of a busi­ness res­cue plan.

The find­ing in New Port con­firms that cred­i­tors’ claims against sureties are not af­fected by a busi­ness res­cue plan en­tered into with a prin­ci­pal debtor un­less spe­cific word­ing to that ef­fect is con­tained in the plan it­self.

The lender was, to some ex­tent, as­sisted by the fact that in­de­pen­dent judg­ments had been ob­tained against the sureties in New Port.

The New Port judg­ment nonethe­less rep­re­sents one of the most im­por­tant and far-reach­ing de­ci­sions to date un­der the new busi­ness res­cue regime, a regime which is be­ing tested and in­ter­preted on a regular ba­sis by the High Court.

It is still rec­om­mended that deeds of sure­ty­ship con­tain ex­press clauses fully pre­serv­ing the cred­i­tor’s rights in in­stances where the bor­rower com­pany gen­er­ally com­pro­mises its debts (such as busi­ness res­cue), as the New Port judg­ment at the very least so­lid­i­fies that such a clause will pre­serve the cred­i­tor’s rights to pur­sue the surety for the full debt.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.