court's power to cancel
On 26 November 2010 we submitted to the Portfolio Committee on Trade and Industry comments to the then proposed amendment to section 136 of the Companies Act, No. 71 of 2008 (the "New Companies Act") as contained in the July 19, 2010 draft Companies Act Amendment Bill (the "Amendment Bill"). The comments were formulated and submitted on behalf of our client, the South African Securities Lending Association ("SASLA"), whose members have an interest in the treatment of "Master Agreements" (as defined in section 35B of the Insolvency Act, 1936) following the commencement of business rescue proceedings in respect of a party to a master agreement. "Master agreements" generally include Global Master Securities Lending Agreements, as published by the International Securities Lending Association ("GMSLAs") (in respective of securities loans), Global Master Repurchase Agreements (in respect of repurchases) and ISDA Master Agreements (in respect of derivatives). Under section 35B of the Insolvency Act, obligations under Master Agreements are terminated, valued and the values netted, resulting in a single payment from one party to the other. A liquidator does not have discretion to terminate a Master Agreement in the same manner as other types of agreements.
Section 136 of the New Companies Act deals with a business rescue practitioner's power to suspend or request a court to cancel agreements to which the distressed company is a party. While the draft Amendment Bill's version was a slight improvement over the original section 136, the SASLA's concern with the proposed amendment was twofold: (1) the amendment would have allowed a business rescue practitioner to request a court to cancel Master Agreements in certain circumstances, and (2) a grammatical error seemed to limit the protection that was afforded to Master Agreements to circumstances in which the distressed company had already been subject to and emerged from insolvency proceedings.
On 10 March 2011 the Portfolio Committee on Trade and Industry released changes to the Amendment Bill, including changes to section 136. Our recommendations were generally accepted such that SASLA's concerns have been remedied.
Users of Master Agreements should nevertheless consider the extent to which the commencement of business rescue proceedings will be captured by the events of default in their Master Agreements. In addition, the business rescue provisions in the New Company Act have an important impact on the ability of a counterparty to realize security during business rescue proceedings.
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