Tongaat Hulett’s business rescue stalled amid legal challenges

Tongaat Hulett appears to be inching its way towards liquidation as the (currently suspended) JSE-listed sugar producer and property developer’s business rescue process increasingly becomes bogged down by legal challenges.

This follows the High Court in Durban last week hearing three urgent applications and ordering:

• The adjournment of the meeting to consider and vote on Tongaat’s amended business rescue plans from 14 December 2023 to no later than 11 January 2024.
• The unamended business rescue plans published on 29 November 2023 shall not be voted on.
• Postponing the three urgent applications indefinitely.
• The applications launched against Tongaat and its business rescue practitioners (BRPs) by RCL Foods Sugar & Milling and the South African Sugar Association (Sasa) were for interdicts to stop the Tongaat creditors meeting from taking place. This meeting was meant to consider and vote on the business plans of short-listed bidders RGS Group Holdings Limited and Robert Gumede’s Vision Group, pending the determination of Part B of their applications to declare these business plans unlawful.

RGS is seeking an order that the BRPs must convene the creditors meeting on Thursday to vote on its amended plan.

These two business rescue plans will now be voted on in January 2024.

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Judge Rashid Vahed on 4 December 2023 dismissed an application by Tongaat’s BRPs to declare that they were empowered to suspend any obligation by Tongaat, including redistribution payments and levies arising from the Sugar Industry Agreement for the duration of its business rescue proceedings.

Tongaat was placed in business rescue on 27 October 2022 and owes about R1.1 billion in statutory levy payments.

Judge Vahed said Tongaat’s ongoing obligations to Sasa “are simply the costs of doing business”.

“They cannot be suspended and are not subject to the moratorium. This is a consideration which the practitioners ought to take into account when determining whether the business is capable of rescue or whether a better return will result in liquidation,” he said.

Interdicts

The BRPs have given notice to appeal this judgment and planned to continue with a meeting of creditors on 14 December 2023 to consider and vote on Tongaat’s amended business rescue plans but were prevented from doing so by High Court interdicts.

Analyst and investor David Woollam said Tongaat’s business rescue has turned into a disaster and described Judge Vahed’s judgment as “a bombshell” because it categorically ruled that the BRPs could not suspend the Sasa payments in terms of the Companies Act.

Woollam said this throws the whole business rescue up in the air and there will now be a fight between the banks and Sasa over any proceeds from a potential buyer.

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He said the High Court ruling has led to a big scramble with a lot of complexity.

The banks claim they have perfected security, one of the buyers is offering to buy the lender’s claims, another is wanting to buy the holding company or the assets, and now liquidation is a real possibility, warned Woollam.

He believes that if the judgment in favour of Sasa is confirmed on appeal, Sasa will become a preferred creditor, which means the banks will have to trigger liquidation immediately and this may leave Sasa with nothing anyway.

‘Asset strip’ of Tongaat

Woollam said that if the BRPs win and they go ahead and sell Tongaat to the highest bidder, it might just result in an “asset strip” of Tongaat.

“Either way, it doesn’t seem good for Sasa, the growers and the community that relies on the sugar industry,” he said.

Woollam added that he has not heard any credible arguments as to the economic benefit of keeping the Tongaat group whole, particularly related to its Mozambique business.

This indicates to him that there are other political forces at play who have imposed unreasonable restrictions on the BRPs, he said.

“There is a credible international buyer [Lusitania] who wants to buy Tongaat’s Mozambican operations for R4 billion. That is more money than the preferred bidder was prepared to pay for the whole group.

“I’ve spoken to them at length, and they don’t want any of the Zimbabwe or South African assets because they are a company focused on agri processing in African and South American ex-Portuguese speaking countries,” he said.

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Woollam blames the BRPs for the current situation.

He said he told the BRPs from the very beginning they were on the wrong path in terms of selling the whole group, but they kept on telling him their hands are tied because of the Industrial Development Corporation’s (IDC) insistence the combined operations of Tongaat must be sold as a single entity.

He believes the BRP’s hands are not tied in terms of the Companies Act, and it is legally questionable whether the IDC was entitled to place that imposition on the BRPs or that they had to accept it.

Woollam claimed the BRPs took the easy route because it was convenient and now seem to have lost control over the BRP process and are now backpedalling.

Shareholder activist Chris Logan said all the Tongaat court actions and rulings have made the business rescue process extremely complicated.

He said this level of complexity and legal conflict is a natural outcome of trying to sell the three Tongaat operations – South Africa, Mozambique and Zimbabwe – as a combined entity rather than individually.

“Not only has the enforced selling of the combined operations led to this huge complexity, but it has also led to a huge loss of value as many high calibre interested parties cannot bid due to international sanctions on Zimbabwe or concern about South Africa,” he said.

Logan added that there were bidders for Tongaat’s Mozambique’s operations and if the BRPs received R3.5 billion for this asset, it would allow them to reduce Tongaat’s debt and create some breathing space to optimally sell the Zimbabwean operations and then focus on the problematic and socio-economically important SA Sugar operations, which have incurred operating losses of over R2 billion over the last five years.

‘Illogical and sub-optimal course’

He said the extraordinary stance adopted by the BRPs of selling Tongaat’s assets as a single unit means they are following an illogical and sub-optimal course.

“What could have been an event where you bring in world class partners and a lot of foreign capital, has been turned into a legal showdown of epic proportions.”

“It’s not good for South Africa Inc to run such a flawed process, which shuts out high calibre interested parties and results in sub-optimal value being generated,” he said.

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Gerhard Albertyn, a consultant to BRP Metis Strategic Advisors, said in an affidavit in response to RCL’s urgent application that the IDC previously agreed to extend Tongaat’s post commencement finance (PCF) to the end of February 2024, provided a vote was taken on a business rescue plan by no later than 15 January 2024.

However, he said that following RCL and Sasa’s urgent applications, the IDC is no longer willing to agree to such an extension and consequently indicated it will now not permit any further drawdowns against the PCF facility until a business plan has been adopted.

“If Tongaat Hulett Limited’s [THL] PCF dries up and/or is not extended, the consequences for the business rescue will be catastrophic,” said Albertyn.

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“THL will have to be liquidated, to the obvious prejudice of its creditors, shareholders, employees and the sugar industry at large. The socio-economic impact would also be catastrophic,” he said.

Hundreds of thousands of people are employed in South Africa’s sugar industry, with about 15 small towns reliant on Tongaat for their income and viability.

Albertyn added that if Tongaat were to be liquidated, the sugar industry may be unable to supply the domestic demand for sugar, at least in the short term, which would require the industry to import sugar at massive cost.

This article was republished from Moneyweb. Read the original here