Nastascha Harduth, director in the dispute sector at corporate and commercial law firm, Cliffe Dekker Hofmeyr (CDH), provides commentary on the US Supreme Court decision on Purdue Pharma's bankruptcy plan and its implications under South African law:
Between 1999 and 2019, approximately 247,000 people in the United States died from prescription-opioid overdoses.
Respondent Purdue Pharma, owned by the Sackler family, marketed OxyContin, an opioid pain reliever. In 2019, Purdue filed for Chapter 11 bankruptcy in the United States – a process that can be likened to business-rescue proceedings under Chapter 6 of the South African Companies Act 71 of 2008 (Companies Act).
During the bankruptcy process, the Sacklers proposed returning $4.3bn to Purdue’s estate in exchange for a judicial order releasing them from all opioid-related claims. The Bankruptcy Court approved this, but the District Court vacated the decision.
The Second Circuit revived the Bankruptcy Court’s order, but the Supreme Court held, despite nearly all the claimants voting in favour of Purdue's bankruptcy plan to accept the money in exchange for dropping potential claims against the Sacklers, that Bankruptcy Courts cannot discharge claims against third parties without the claimants’ consent.
The issue centred on whether the Bankruptcy Code allows non-consensual third-party releases as part of a Chapter 11 reorganisation plan. This decision has significant implications for future bankruptcy cases involving third-party releases.
But what is the position under South African law?
In reality the answer is not all too dissimilar from the position as found by the US Supreme Court.
Creditors who have a debt that is owed to them, as a result of a cause of action that arose prior to the commencement of a financially distressed company's business rescue proceedings, will have to agree to the discharge of their claims in order to extinguish these claims, failing which these claims may become unenforceable as against the company but still entirely enforceable against third parties.
Jonathan Lipson 28 Jun 2024
In the case of Van Zyl v Auto Commodities (Pty) Ltd [2021], the South African Supreme Court of Appeal held that where a provision contemplating a discharge of debt is contained in the business-rescue plan and a creditor "accedes" to such discharge by voting in favour of a plan, the debt will cease to exist and the creditor who has acceded to the proposal will not only lose the right to enforce the debt owed to them by the company in business rescue, but the debt itself will be discharged and third parties (such as sureties) will be released.
However, if a creditor does not "accede" to the discharge by either abstaining or voting against the business-rescue plan, implementation of the plan does no more than render the debt unenforceable, to some extent, against the company (as principal debtor), but leaves the obligations of others to those creditors untouched.
