ENERGY CONTRACTS DURING INSOLVENCY PROCEEDINGS

1. INTRODUCTION

Energy contracts are frequently long-term and commercially significant agreements governing the generation, purchase, transmission, distribution, financing or supply of electricity, gas, petroleum and renewable energy. Examples include Power Purchase Agreements (PPAs), fuel-supply agreements, electricity-supply contracts, wheeling agreements, Engineering, Procurement and Construction (EPC) contracts, operation and maintenance agreements and energy-trading contracts.

When one party becomes insolvent, enters liquidation or is placed in business rescue, an important legal question arises: Does insolvency automatically terminate the energy contract?

Under South African law, the general answer is no. Insolvency ordinarily does not automatically terminate an executory or incomplete contract. Instead, insolvency law regulates whether the liquidator or business rescue practitioner must, may, or may decline to continue contractual performance.

2. EXECUTORY ENERGY CONTRACTS AND LIQUIDATION

An executory contract is a contract under which material obligations remain outstanding on both sides. A 20-year PPA, for example, is executory because the generator must continue producing electricity while the purchaser must continue paying for electricity delivered.

The Supreme Court of Appeal explained the governing principle in Ellerine Brothers (Pty) Ltd v McCarthy Ltd 2014 (4) SA 22 (SCA). The Court held that liquidation does not itself terminate an incomplete contract. The liquidator effectively steps into the position of the insolvent company, while the contractual rights and obligations continue to exist.

However, because liquidation creates a concursus creditorum, the counterparty cannot ordinarily compel the liquidator to specifically perform the contract where the liquidator elects not to continue it. The counterparty may instead have a claim for contractual damages against the insolvent estate.

Applied to energy law, if an insolvent renewable-energy generator is bound under a PPA, the liquidator must determine whether continuing electricity generation and performance of the PPA benefits the general body of creditors.

3. LIQUIDATOR'S ELECTION

A liquidator therefore has an important commercial decision to make regarding continuing contracts.

If performance of an energy contract generates revenue greater than its operating costs, continuation may preserve value for creditors. Conversely, if the contract requires electricity to be supplied at an uneconomic tariff or exposes the estate to substantial continuing losses, the liquidator may decide not to perform.

In Smith and Another v Parton NO 1980 (3) SA 724 (D), subsequently approved in later authority, the court explained that insolvency does not alter the contract itself; the main insolvency consequence is that the trustee cannot necessarily be compelled to perform it. This principle was reaffirmed in Ellerine Brothers.

The SCA again reaffirmed this approach in Pick n Pay Retailers (Pty) Ltd v Da Silva NO and Others [2025] ZASCA 97, confirming that an executory contract generally survives insolvency and that the liquidator assumes the insolvent's contractual position subject to insolvency-law limitations.

4. PRE-INSOLVENCY BREACH AND TERMINATION RIGHTS

Insolvency does not necessarily destroy contractual rights that had already accrued before liquidation.

In Ellerine Brothers v McCarthy, the SCA recognised that a contractual counterparty could validly exercise an accrued right of cancellation notwithstanding the commencement of liquidation proceedings.

This principle is highly important for energy contracts.

Example: An independent power producer repeatedly fails to deliver contracted electricity before liquidation. If the purchaser has already acquired a contractual right to terminate because of that breach, liquidation will not necessarily prevent the purchaser from exercising that right.

Thus, insolvency protection must be distinguished from previously accrued contractual remedies.

5. ENERGY CONTRACTS DURING BUSINESS RESCUE

Business rescue creates a different regime under the Companies Act 71 of 2008.

Section 136(2) allows a business rescue practitioner, subject to statutory exceptions, to entirely, partially or conditionally suspend obligations of the company arising under agreements existing when business rescue commenced. The practitioner may also apply urgently to court for cancellation of qualifying obligations on terms that are just and reasonable. A counterparty affected by suspension or cancellation may claim damages under s 136(3).

In Murray NO v FirstRand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA), the SCA emphasised that business rescue does not automatically cancel pre-existing contracts; rather, the legislation gives the practitioner specific statutory powers concerning contractual obligations.

For an energy company, therefore, a practitioner might seek temporary relief from burdensome contractual obligations while preserving strategically important PPAs, supply contracts or infrastructure arrangements necessary for rehabilitation.

6. PRACTICAL EFFECT ON ENERGY PROJECTS

Insolvency may affect an entire network of interconnected energy contracts. Failure of an IPP could affect its PPA, EPC agreement, O&M contract, project-finance documents, grid-connection agreement, fuel-supply contract and land lease simultaneously.

Financiers and counterparties therefore commonly negotiate provisions dealing with:

insolvency events of default;

termination rights;

lender step-in rights;

assignment and substitution;

direct agreements;

security over project assets;

cure periods; and

continuity of essential energy operations.

Such provisions are especially significant in project-financed renewable-energy developments because premature termination of one major agreement can threaten the economic viability of the entire project.

7. CONCLUSION

The central principle is that insolvency does not ordinarily extinguish an energy contract automatically. In liquidation, executory contracts generally survive, but the liquidator may decline continued performance where continuation would prejudice the collective interests of creditors. In business rescue, the practitioner receives statutory powers under s 136 of the Companies Act to suspend certain contractual obligations or seek their cancellation.

Cases such as Ellerine Brothers v McCarthy, Smith v Parton, Murray NO v FirstRand Bank and Pick n Pay Retailers v Da Silva NO demonstrate that South African insolvency law attempts to reconcile two competing objectives: respect for existing contractual rights and protection of the collective body of creditors. In the energy sector, this balance is particularly important because contractual failure may affect not merely two commercial parties but financing structures, electricity generation, grid stability and continuity of energy supply.