Sugar levy payment could sink Tongaat Hulett rescue

The original article can be found here.

Court told failure would be catastrophic for industry, including its workers and 23 000 sugar cane farmers.

The business rescue practitioners of sugar producer Tongaat Hulett say in court papers that being forced to pay sugar levies could undermine its business rescue process and such a failure would be “catastrophic” for the whole industry including its employees and 23 000 sugar farmers.

Tongaat, which owes at least R10.2bn to creditors, has filed lengthy papers asking the Durban high court to rule that it does not have to pay R1.4bn in outstanding levies to the SA Sugar Association.

Tongaat Hulett, which produces about a quarter of the country’s sugar has been in business rescue since October.

This is a process that prevents it from facing court action and paying creditors what they are owed for a time, to allow breathing room for practitioners to devise a plan to save the company from liquidation.

Prospect of being saved

Its business rescue practitioners say in court papers they believe Tongaat has the prospect of being saved, but being forced to pay the statutory levies subverts the purpose of business rescue.

They warn that Tongaat’s inability to be rescued would be calamitous to the SA sugar industry and would have serious ramifications for the economy of KwaZulu-Natal and nationally.

Tongaat, in business rescue, has not paid the sugar levy with farmers and other millers including food producer RCL and Illovo having had to foot the bill for the outstanding R1.4bn.

The entire sugar industry, which is the backbone and a large employer in many parts of rural KwaZulu-Natal and Mpumalanga has thus been affected by Tongaat’s non-payment.

Sugar levies are paid to the Sugar Association of SA by all farmers and millers as part of the Sugar Industry Agreement, a legally binding contract. They are then redistributed throughout a complex industry that produces more domestically than it can sell, having to export the excess at a loss.

Fair distribution of profit

The levy sustains the farmers and millers who export at a loss and ensures a regulated fair distribution of profit in a revenue sharing arrangement.

Sugar farmers who have footed R1bn of Tongaat’s outstanding levy say they earned drastically less this season as a result with the SA Canegrowers Association recently warning the extra costs may put small-scale farmers out of business.

Being in business rescue means that Tongaat is protected from legal action and from paying its creditors immediately, but the SA Sugar Association has sent Tongaat a letter of demand while RCL hauled it to the Sugar Industry Appeals Tribunal over its non-payment.

The association, the cane growers and RCL, which owns Selati sugar, says the levy should not be suspended in business rescue because it is a statutory payment, owed to a government body.

Companies still pay income tax, for example, during business rescue.

But Tongaat says that in business rescue all creditors are eventually paid some of what they are owed, and if it has to pay government levies in full first then the state is given unfair preference over other creditors.

“It is irrational and arbitrary to permit creditors to claim immediate payment of a debt owing to them merely because those creditors are organs of state.”

In the court papers, Tongaat indicated that if the Companies Act does not protect it from these payments then certain parts of the act should be found to be unconstitutional and irrational.

It argues if it cannot suspend statutory payments, then the Companies Act is rendered incapable of achieving the very object of business rescue it hopes to achieve.

Tongaat has cited all 23 000 sugar farmers, most of whom are small scale, as respondents in the case along with parties such as the SA Sugar Association, the SA Canegrowers Association, RCL, Illovo, Gledhow Sugar mills and the minister of trade, industry and competition.

It has asked the court to permanently stop RCL’s complaint against it at the tribunal and order RCL to pay its costs in that matter.

The sugar industry has faced many challenges in recent years, including drought, sugar dumping in 2017, the 2022 KwaZulu-Natal floods that swamped millers such as Gledhow, and the KwaZulu-Natal riots.

The industry has sold less sugar since the government introduced a sugar levy for health reasons in 2018. This also resulted in large drink manufacturers switching to sweetener to avoid the tax.

When alleged fraud by Tongaat’s previous executives was uncovered, a R12bn hole was found in its accounts.