Section 153(1)(b)(Ii) Of The Companies Act Clarified By The Supreme Court of Appeal

Since the inception of the new Companies Act, No 71 of 2008 (“the Act”), there has been countless decisions regarding business rescue proceedings. South African courts have also more recently considered section 153(1)(b)(ii) (“the section”) of the Act which introduces and deals with the concept of a “binding offer”.

According to this section any affected person, or combination of affected persons, may make a binding offer to purchase the voting interests of one or more persons who opposed adoption of the business rescue plan [of a practitioner], at a value independently and expertly determined, on the request of the practitioner, to be a fair and reasonable estimate of the return to that person, or those persons, if the company were to be liquidated, where a business rescue plan has been rejected as contemplated in section 152(3)(a) or (c)(ii)(bb) and the practitioner does not take any action contemplated in section 153(1)(a).

This section therefore allows an affected person to make an offer to purchase, at liquidation value, the voting interests of those persons who opposed the adoption of the practitioner’s business rescue plan.

The Supreme Court of Appeal (“the SCA”) has recently crystallised the manner in which this section must be interpreted, in its recent decision of the case African Banking Corporation of Botswana v Kariba Furniture Manufacturers & Others.

The court a quo (the court of first instance) initially held that the legislature intended to ensure the ‘co-operation’ of opposing creditors in business rescue proceedings. The court a quo therefore found that the ‘binding offer’ envisaged in the section “did not anticipate an ‘option’ or an ‘agreement’ in the contractual sense, but was rather ‘a set of statutory rights and obligations’, from which neither party could resile”, and that the offer was automatically binding on both the offeror and the offeree once made.

The court a quo also found, with regards to voting interest, that dissenting creditors (the bank in this instance), whose voting interest was transferred in terms of a binding offer, would suffer no prejudice as the liquidation value of the transferred voting interest would be determined by an independent expert and would be paid prior to implementation of the revised business rescue plan.

However, the bank contended on appeal that it could not be bound by an offer which it had not been allowed to respond to. It also contended that the offer was improper in that it lacked clarity as to the identity of the offeror, what the amount and terms of payment thereof were and whether there were any conditions attached thereto. The company, the business rescue practitioner and the shareholder on the other hand, maintained that the finding by the court a quo was correct.

The SCA dismissed the judgment by the court a quo, holding that a binding offer in terms of the section is binding only on the offeror, and not on the offeree. It further held that “the terms of an offer must cover the minimum requirements of the proposed contract. A mere regurgitation of the provisions of the section i.e. that the offer was or would be to purchase the voting interest at a value to be independently determined, could not constitute a proper binding offer”.

The SCA also emphasised that the bank was entitled to know who exactly was making the offer and what the details thereof were, and that any failure to divulge such information could not have constituted a proper offer.

This recent judgment is unfortunate in light of section 7(k) of the Act, which provides that the purpose of business rescue proceedings is to rehabilitate companies in financial distress in a manner that balances the rights and interests of all relevant stakeholders although one can empathise with the bank in the circumstances of this case.

The view that a binding offer in terms of the section is in fact not binding on the offeree, even though such offeree will not be prejudiced if the provisions of this section is properly implemented, diminishes the likelihood of achieving the ultimate purpose of business rescue proceedings. That notwithstanding, at least this decision has brought significant clarity to the interpretation of the section.