The Supreme Court of Appeals on 20 May 2015 settled the differing views of our High Court on the interpretation of this term.
The case in question is African Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd & Others (228/2014) [2015] ZASCA 69 (20 May 2015).
This case dealt with two earlier conflicting decisions on the interpretation of the term “binding offer” as it appears in Section 153(1)(b)(ii) of our Companies Act 71 of 2008. These two decisions are of the Honourable Kathree-Setiloane J. which sat as the court a first instance in this appeal (in a reported judgment of Africa Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd 2013 (6) SA 471 (GNP) and of the Honourable Gorven J. in DH Brothers Industries (Pty) Ltd v Gribnitz NO 2014 (1) SA 103 (KZP).
A SUMMARY OF THE FACTS OF THIS CASE:
In this matter a company known as Kariba Furniture Manufacturers (Pty) Ltd (“Kariba”) ceased trading in 2005. It 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. After legal proceedings including an arbitration, it was found that Kariba owed the Bank BWP14,966,809.20. Kariba could not pay the debt. Mr and Mrs Nchite resolved in 2012 (approximately seven years after Kariba ceased trading) that Kariba be voluntarily placed in business rescue in terms of Section 129 of the Companies Act.
In due course at a meeting held in terms of Section 152 of the Companies Act, the Bank for a number of valid commercial reasons voted against the proposed business rescue plan. The business rescue practitioner then invoked the provisions of Section 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 Section 153(1)(b)(ii) of the Act.
The practitioner then ruled it was not open to the Bank to respond to the offer, that the offer was binding on the Bank and that the Bank’s “voting interest” had 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 ninety-five percent.
A vote was then taken on the business rescue plan and the vote was carried. The Bank then applied to the North Gauteng Division of the High Court contending that it could not be bound by the offer. It complained, inter alia, that the offer was improper in that it lacked clarity as to the identity of the offeror, (i.e whether it was both Mr and Mrs Nchite or only one of them) what the amount in terms of payment thereof were and whether there was any conditions attached to it. As stated above, Kathree-Setiloane J. heard the matter and dismissed the Bank’s application with costs. The Bank appealed to the Supreme Court of Appeals.
THE CONFLICT IN DECISIONS:
The decision of the Court a quo:
The Honourable Kathree-Setiloane J. found that this term, “the binding offer” 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 once made was automatically binding on both the offeror and the offeree. According to her this interpretation was consistent with the intention of the legislature to ensure “co-operation” by opposing creditors in business rescue proceedings. She further found that this interpretation did not prejudice the creditor whose “voting interest” was being transferred to the offeror as the value of the transferred “voting interest” would be determined by an independent expert which would be paid prior to implementation of the revised business rescue plan.
The conflicting judgment:
Gorven J. disagreed. The important part of his judgment was quoted by the Supreme Court of Appeals as follows:
“[The legislature] would have introduced a deeming provision of acceptance on the part of the offeree and (would) have stated that the offer, once made, gave rise to binding obligations between the parties.
… The only actor mentioned is the offeror. The only action described is to “make a binding offer” not to create a set of statutory rights and obligations. More importantly, [“offer”] has a specific, settled legal meaning – as the Legislature must be presumed to have known. In order to give rise to obligations on the part of both parties, an offer requires acceptance. The plain meaning falls well short of the binding offer creating any obligations on the part of the opposing creditor. It is also important that the offer is to “purchase”. This, likewise, relates to an established legal concept. It is aimed at concluding a contract of purchase and sale. It is not aimed at creating statutory rights and obligations. The words “offer” and “purchase” when used together must mean that a contract is envisaged and, for such a contract to be concluded, there must be an acceptance or agreement. It is nowhere provided that no such acceptance is necessary and that, without it, a contract of purchase and sale has come into existence.”
THE FINDING OF THE SCA:
The SCA preferred the Gorven J. interpretation. It found that the term “binding offer” is "predominantly similar in nature to the common law offer, save that it may not be withdrawn by the offeror until the offeree responds thereto”. At common law offers made by offerors to offerees must comply with certain requirements such as:
the identity of the offeror must be established or known;
the terms of the offer must be clear and unambiguous such that the offeror understands it, and can accept it.
Such offer unless expressed to the contrary, or if expressed to lapse if not accepted by a particular date, becomes a binding contract on its acceptance.
Applying these principles the Supreme Court of Appeals concluded that:
“… there is no indication, in the language used in the provision, that the word “offer” had assumed a different meaning from the accepted one. Section 153(6) provides that:
“A holder of a voting interest, or a person acquiring that interest in terms of a binding offer, may apply to a court to review, re-appraise and re-value a determination by an independent expert in terms of subsection (1)(b)(ii).
The legislature has made express provision for two categories of persons: those who are holders of voting interests and those in the process of acquiring a voting interest. This suggests that although a binding offer may have been made (during consideration of the rescue plan), finalisation of the aspects relating thereto, including transfer of the voting interest, is not necessarily immediate. This is consistent with the established meaning of an offer. The interpretation accorded by the court a quo immediately divests interested holders of their interest once the binding offer is made; this is untenable.” [my underlining]
The Supreme Court of Appeals accordingly concluded that the interpretation of “binding offer” as advocated by the respondents, ( i.e applying the Kathree-Setiloane J. approach) … “cannot be said to lead to sensible, business like results and cannot be supported.” It followed then in its opinion that there was never a “binding offer” made. Consequently the resolutions taken subsequent to the transfer of the Bank’s “voting interest”, including the adoption of the rescue plan are null and void.
In interpreting the term “binding offer” the courts relied on the oft quoted judgment of Natal Joint Municipal Pension Board v Endumeni Municipality 2012(4) SA 593 (SCA) (– at paragraph 18 of that Judgment).
SOME INTERESTING ASPECTS ARISING OUT OF THIS JUDGMENT:
Does the creditor acquire the “voting interest” only, or the creditor’s claim, or both?
The term “voting interest” is defined in Section 128(J). It means:
“an interest as recognised, appraised and valued in terms of Section 145(4) to (6)”
Section 145(4) to (6) provides that secured and unsecured creditors have “a voting interest equal to the value of the amount owed to that creditor by the company” and a concurrent creditor for a subordinated claim in a liquidation has a voting interest as independently and expertly appraised and valued at the request of the practitioner, equal to the amount, if any that the creditor will reasonably expect to receive in such a liquidation of the company.
Section 153(b)(ii) provides for an affected person or a combination of affected persons to make a “binding offer” to purchase “the voting interest”. Does the term “voting interest” equate to the purchase of the creditor’s claim? If it does, then the creditor loses its claim and thus the right to receive a dividend (if any) pursuant to the business rescue plan. If it does not, then clearly all that is acquired in terms of Section 153(b)(ii) is the creditor’s vote, not the creditor’s claim and not the right to receive a dividend pursuant to that claim.
Furthermore, if one is merely acquiring a “voting interest” as defined and not the claim, then the creditor in question would receive a double benefit, i.e its dividend pursuant to the claim and a payment of a sum “to be a fair and reasonable estimate of the return to that person …. if the company were to be liquidated”.
Business rescue is based on the premise that a creditor receives a dividend which is higher than the dividend it will receive on liquidation. This much is both expressed in the definition of “business rescue”, i.e where it is stated that if it is not possible for the company to be rescued, the creditor in question gets a better return than it would receive if the company was placed in immediate liquidation. It is also implied in Chapter 6 in that, creditors would not vote in favour of the plan if they would receive a dividend equal to a liquidation dividend, alternatively, less than what they would expect on the liquidation of the company.
Unfortunately the SCA did not deal with any of the above.
Further of interest is the Judgment of Leach JA. Although he concurred with Her Ladyship Dambuza AJJA, he added additional reasons for setting aside the Kathree-Setiloane J. Judgment. Firstly he commented that the provisions of the Companies Act relating to business rescue and Section 153 in particular “were shoddily drafted and have given rise to considerable uncertainty”. He proceeded to criticise:
the procedure envisaged in Section 153(1)(b)(ii) and whether an offeree has a period of time (which time period he referred to as “a spatium deliberandi”) in which to consider the offer and whether to accept or reject it;
the effect of an offer being rejected;
whether an offer may be conditional and if so, what conditions are permissible;
whether an offer excludes the making of a counter offer or any other offer as being made by any other affected persons and if not, how offers are to be ranked.
He in addition referred to an interesting article in the annual survey of 2013 which dealt with the Judgment in DH Brothers (i.e the Gribnitz Judgment). He quotes from the annual survey as follows:
“The court held that the business rescue practitioner would not be able to proceed with the implementation of the business rescue plan before finalisation of the payment of the binding offer … It is unclear on what grounds the court came to this conclusion. No provision of the Act was cited as authority, nor could we find any provision that bars the implementation of the business rescue plan before such an offer is finalised … Section 154(2) provides that after the approval and implementation of a business rescue plan, any creditor is prohibited from enforcing any debt owing to it immediately before commencement of the business rescue proceedings, unless provided for in the business rescue plan. Implementation of the business rescue plan before finalisation of the binding offer would mean that Section 154(2) becomes operative against the offeree, while he or she is excluded from the voting process and his or her interests are not reflected in the revised business rescue plan. This is a clear indication that the interpretation given to the effect of section 153(1)(b)(ii) in Kariba cannot be correct. Instead, the interpretation in DH Brothers is preferable, namely that the business rescue plan may only be voted on once payment for the voting interests has been received. After adoption of the business rescue plan, the plan must be implemented by the business rescue practitioner (s 140(1)(d)(ii) ….
There are certain other matters that the decision in Kariba did not take into account. On the interpretation given by the court, it is unclear whether the inability of the offeror to pay the offeree after determination of the value of the voting interests, would mean that the business rescue plan had not been validly adopted and would have to be reviewed and reconsidered by the creditors. Nothing in Chapter 6 of the Act suggests that the inability of the offeror to honour its binding offer would have this effect. This would mean that the business rescue practitioner would have to wait for legal processes against the offeror to be finalised before it could implement the business rescue plan. If the appropriate legal process is the liquidation of the offeror, this could postpone the implementation of the business rescue plan for a very long time. Keeping in mind that the business rescue proceedings are supposed to be finalised within three months (see s 132(3)), it seems doubtful whether such a potential obstacle to the finalisation of the business rescue was intended.
Furthermore, if the offeror is unable to pay the offeree, and its estate cannot realise enough to settle the amount owing to the offeree in full, the rights of the offeree are certainly prejudiced by the binding offer provisions in section 153(1)(b)(ii). The judgment assumed that the offeree would receive the full value independently and expertly determined, in which case the binding offer is not prejudicial … However, if the interpretation in Kariba is correct, the offeree’s original debtor, the company, is substituted with the offeror without any need for the offeror to show that he or she is financially able to satisfy the offer … The court seemed to assume that the company will again become the debtor of the offeree if the offeror is unable to satisfy the value determined by the independent expert … but there is nothing in section 153, or in chapter 6 generally, to support this conclusion.”
He agreed with the reasoning in this article and concluded that Kathree-Setiloane J. erred “in concluding that an offer under this section bound both parties”.
He further alluded to the fact that the appeal was to succeed for an additional reason, namely that the offer terms were unclear, thus not capable of constituting an offer and thus not capable of settlement.
WHO PAYS THE PURCHASE PRICE FOR “VOTING INTEREST”?
Leach AJ dealt with who would be responsible for the payment of the purchase price for the voting interest and the consequences of it not being paid. He draws attention to the fact that on the Kathree-Setiloane J. Judgment the company is ultimately responsible for the purchase of the voting interest and not the offeror which is absurd and that the non-payment of such purchase price may delay the winding-up of the estate, as it may lead to the liquidation of the company (if it couldn’t pay or if its plan was not implemented or failed) which is contrary to the intention of the legislature.
CONCLUSION:
Having read this judgment, it is clear that this is not the last word on the subject of the term “binding offer”. There are certainly going to be amendments to various sections in Chapter 6 and we predict a substantial amendment to the wording of Section 153(1)(b)(ii).
