In terms of Section 153 (1)(b)(ii) of the Companies Act, a creditor who votes against the adoption of a business rescue plan runs the risk of having their claim purchased by another party at a value of what the creditor would have received on liquidation of the company. In the terms of the bankruptcy laws of the United States of America this procedure is referred to as a "cram down" which is imposed on creditors in business rescue situations.
How this procedure is to operate in South African law is contentious with a number of conflicting decisions coming out of the various provincial divisions of the High Court. The uncertainty has beenresolved with the May 2015 decision of the Supreme Court of Appeal (the "SCA") in the case of African Banking Corporation of Botswana v Kariba Furniture Manufacturers & others.
The court found that a ‘binding offer’, in terms of s153(1) (b)(ii) of the Companies Act 71 of 2008, made to a creditor who opposes the adoption of a business rescue plan is not automatically binding on the offeree and a creditor may not unilaterally be deprived of their voting rights.
The facts of the case were:
Kariba Furniture Manufacturers (Pty) Ltd (“Kariba”) ceased trading in 2005 and owed money to the African Banking Corporation of Botswana (“the Bank”). The Bank’s debt was secured by suretyships executed by Kariba’s shareholders, Mr and Mrs Nchite and a notarial bond. Kariba could not pay its debt and the shareholders resolved in 2012 to place it in voluntarily business rescue in terms of s 129 of the Act. Subsequently, at a meeting held in terms of s 152 of the Act, the Bank voted against the proposed business rescue plan. The business rescue practitioner then invoked the provisions of s 153(1)(a) of the Act and Nchites’ attorney indicated that his clients wished to make a “binding offer” on behalf of the shareholders to purchase the Bank’s “voting interest” in terms of s 153(1)(b)(ii) of the Act. The practitioner then ruled it was not open to the Bank to respond to the offer as it was binding on the Bank and that the Bank’s “voting interest” was thus to be transferred to the shareholders immediately. He then proceeded to amend the plan to reflect the Bank as holding zero percent “voting interest” and the shareholders holding 95 percent. A vote was then taken on the business rescue plan, which was then carried, and the Bank was left high and dry having been deprived of its claim for a paltry sum.
Judge Kathree-Setiloane of the Gauteng High Court, hearing the case, found that a binding offer in terms of Section 153 is not an option or an agreement in the contractual sense, but rather a set of statutory rights and obligations from which neither party could resile. She referred to similar bankruptcy provisions in the United States and concluded that once the offer was made, it was binding on both the offeror and the offeree and could be implemented immediately; even at a time when payment of the purchase price had not yet been determined or paid. The potential effect of this on creditors was enormous.
A month later, in the Kwa-Zulu Natal High Court, in the case of DH Brothers Industries (Pty) Ltd v Gribnitz NO, Judge Gorven disagreed with the conclusions drawn by Judge Kathree-Setiloane and found that:
“The word ‘offer’ is qualified by the word ‘binding’…the qualification of the offer is binding solely on the offeror, in that once he has made the offer, he is bound by it.”
Judge Gorven stated that if the legislature's intention was to bind the offeree to the offeror, the provision would have said so expressly and a creditor could not be unilaterally deprived of its claim and voting rights without its consent and acceptance of the offer.
Weighing up the two approaches, the Supreme Court of Appeal has preferred Judge Gorven’s interpretation and found the term “binding offer” to be:
“...Predominantly similar in nature to the common law offer, save that it may not be withdrawn by the offeror until the offeree responds thereto.”
Under common law, offers made by offerors to offerees to be binding must meet the following criteria:
- The identity of the offeror must be known;
- The terms of the offer must be clear and unambiguous so that the offeree can understand and accept the terms;
- The purchase price must be certain or ascertainable;
- The offeree must accept the offer.
On the facts of the case the SCA held that there had been no valid sale of the Bank's rights to the shareholders and accordingly, the resolutions taken subsequent to the transfer of the Bank’s voting interests, including the adoption of the rescue plan, were null and void as the criteria of a valid offer were never present in the first instance.
What this means in practical terms is that attempts by shareholders or other interested parties to manipulate the vote in a business rescue situation by "buying" claims of opposing creditors has just got a whole lot harder.