INTRODUCTION
A recent Stats SA report states that 140 companies underwent liquidation in South Africa in July 2023. Generating revenue in a tough economic climate is a challenge for most South African businesses, but factor in loadshedding and high inflation rates, as well as the continued post-pandemic recovery; it is little wonder that business rescue and insolvency rates have soared in recent months.
Often, the uncertainty accompanying the process is exacerbated by the added pressure of creditors and outstanding debts.
This brief snapshot of different insolvency-related topics highlights trending issues that our experts have observed and follow closely as they may have an impact on the insolvency realm within Africa.
- Sureties and Guarantors: A gap in the law of guarantees: Caitlin Turok
- Why South Africa should emulate Italy's adoption of the new Italian Insolvency Code: Michael Pappas
- The shifting definition of security in the cryptocurrency era and the impact of the Insolvency Act: Ayesha Khan
SURETIES AND GUARANTORS: A GAP IN THE LAW OF GUARANTEES
In many ways, sureties and guarantors live in similar legal worlds as both secure the obligations of a principal debtor to a third-party collector, where both rely on that debtor's default to trigger the collateral provider's payment obligation to the creditor. But does this mean that they both imply a right of recourse against the principal debtor? The answer to this question has significant implications for financial institutions.
A Western Cape High Court Judge considered this question recently in what may turn out to be a landmark case in the law of guarantee. And until the matter is finalised, it remains to speculate on this unexpected gap in South African law and why it came to be.
First, some context. It is trite law that a surety who secures the obligations of a principal debtor to the latter's creditor has if the surety is obliged to pay the creditor, a right of recourse for his or her loss against the debtor. This right arises from one of two underlying legal mechanisms: mandate or negotiorum gestio. In the case of mandate, the debtor has knowingly mandated the surety to pay the creditor in a given scenario, thereby promising to make good the surety's payment should that scenario arise. In the case of negotiorum gestio, the surety acts in good faith, albeit without the debtor's knowledge or consent, by paying their debt to the creditor, and for that, the surety is entitled to compensation.
But the question arises: Does a guarantor who pays the debt of a principal debtor to the latter's creditor also enjoy this right of recourse? Surprisingly, existing law offers no answer.
Until some decades ago, South African law did not distinguish between suretyship and guarantee.
A passage from a judgment of the Appellate Division back in 1939 said: "The word (guarantee) is usually and more properly employed by a surety who promises to saddle himself with an obligation if the principal obligor defaults." [Our emphasis]
But in recent times, the concepts dovetailed, with a surety's obligation becoming accessory to the principal debtor's duty while the guarantor took on an independent, primary obligation to the creditor. The surety promises the creditor that the debtor will pay, and should they not do so, they will step into the debtor's shoes and pay the creditor directly. On the other hand, the guarantor simply promises to pay an amount of money in a particular scenario, which may just be the debtor's payment default.
The question arises: why should this distinction mean that a surety can claim back their payment from the debtor while the guarantor is not able to? The underlying mechanisms justifying the recourse – mandate or negotiorum gestio – don't obviously lend themselves to a suretyship nor a guarantee. Why should a surety have the right to claim back the money from the debtor but not a guarantor?
One argument is that there's no legal basis for a guarantor to claim such a right. Perhaps the guarantor takes on their own obligation, which has nothing to do with the debtor except rely on the latter's non-payment as a trigger event. In this case, why should the guarantor be able to turn to the debtor for compensation for the guarantor's payment of their own independent obligation?
The resolution to this issue isn't apparent, but the implications are significant. What will it mean for financial institutions that regularly guarantee the obligations of others if they can't rely on a right of recourse against the principal debtor in the event of default? We look forward to finding out how this story ends.
WHY SOUTH AFRICA SHOULD EMULATE ITALY'S ADOPTION OF THE NEW ITALIAN INSOLVENCY CODE
The new Italian Insolvency Code came into effect on 15 July 2022, effectively changing the status quo by attempting to resolve the financial distress of companies and minimise damage through restructuring outstanding debt. The code makes restructuring frameworks the first measure to help debtors restructure their debt to prevent further insolvency and liquidation. More importantly, it is a break from the status quo in insolvency law whereby maximising a creditor's return is of the utmost importance. Instead, preserving the company as a going concern becomes a protected value. However, this must be harmonised with creditors' rights.
A code such as this would be a welcome addition to South African insolvency law, especially as our economy and local businesses are still trying to recover from the harmful effects of COVID-19 and the various lockdowns. It is also better for both creditors and the company itself to be able to find peaceful solutions to the financial distress rather than cutting ties and the company going into liquidation. This will benefit debtors and creditors without abandoning the interests of shareholders and other stakeholders.
The essential remedies available under the Italian Code are:
A negotiated settlement
This comprises a voluntary settlement that an entrepreneur can apply for when facing financial distress that could lead to insolvency. Once the confidential settlement has been filed, the Chamber of Commerce then appoints an independent expert to support negotiations between the company and the creditors.
An agreement in execution of a certified recovery plan
This provides that the business's recovery plan must be in writing and dated. The simplest form is to give the reasons for the financial distress and the possible appropriate measures that could be used to restructure the company, which could:
- rebalance the business's assets,
- rein in the company's expenses,
- remove technological or market obstacles, or
- restore the profitability of the company's business.
The plan must be supported by a report certifying the company data and the plan's suitability to allow for the reorganisation of the company's debt exposure and ensure the rebalancing of the company's financial situation.
A debt restructuring agreement
This type of agreement is reached between a debtor company and creditors, representing a minimum of 60% of the company's total indebtedness. This contractual remedy aims to restructure the debtor company's liabilities. Thus, as a result, there are no binding effects on creditors not part of this group (the non-adherent creditors), who will be repaid on contractual or by-law terms. If the creditors have approved the agreement, there is a possibility for the debtor to be granted a moratorium of up to 120 days.
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