Introduction

The judiciary has since 2013 commented on the myriad of inconsistent and contradictory clauses found within the Companies Act 71 of 2008 (“the Act”). None more so than Section 153 (1)(b)(ii) of the Act, which seems to introduce the concept of a “binding offer”, sending the accepted principles of the law of ‘offer and acceptance’ into a tailspin.

Dr Aneli Loubser in her dissertation, published as “Some Comparative Aspects of Corporate Rescue in SA Company Law”, researched this issue during the discussion and drafting phases of the Act and published it in February 2010. She, inter-alia, states that:

• The word ‘binding’ means to imply that the offer, once made, cannot be retracted or changed, although it is far from clear why this should be the case.
• An explanatory memorandum or report by the drafters to explain the reason behind the condition would, once again, have been of invaluable help.
• This inexplicable condition now raises the fear that the words ‘binding offer’ referred to above do not apply to the offeror only, but in fact also bind the offeree to the offer.
• The right of the offeree to apply to court for a review of the valuation would be explained by this interpretation, as he would otherwise simply refuse the offer.
• It is to be hoped that this is not the intended result of the provision, since the possibilities for abuse and exploitation are endless, but it is almost impossible to say with any certainty what this provision is supposed to achieve.

The Kariba decision

This view was upheld in the North Gauteng High Court on 29 August 2013, Judge Kathree-Setiloane, in the matter of African Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd [2013 (6) SA 471 (GNP)] (the “Kariba decision”), held that the binding offer made in terms of Section 153  (1)(b)(ii) of the Act “is not an “option” or an “agreement” in the contractual sense but is rather “a statutory right and obligation” from which neither party may resile. These are not contractual in nature.”

A month later, on 26 September 2013 in the KwaZulu-Natal High Court, Judge Gorven disagreed with this conclusion in the matter of DH Brothers Industries PTY Ltd v Karl Johannes Gribnitz No. and two others [2014 (1) SA 103 KZP] (“DH Brothers decision”),where he held as follows:-

• “A statutory offer cannot itself be a “statutory right and obligation”, it may give rise to them but this is not what is said…”
• “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.”
• “If legislature envisaged [binding the offeree to the offer], the provision could have said that the affected person could make “an offer, which is binding in the opposing creditor,[but it did not].”
• “The words ‘offer’ and ‘purchased’, when used together, must mean that a contract is envisaged and, for such a contract to be concluded there must be acceptance or agreement. The wording of Section 153(1)(b)(ii) clearly presupposes an ‘offer’ to ‘purchase’ which is a defined legal concept”.
• “Although [the use of the word binding] is not semantically accurate, it is an extremely inelegant use of language and is further an example of poor drafting; the words “binding offer” can only mean that the offeror may not retract the offer until it is accepted or rejected.”
• “[the effect of Section 153(1)of the Act] is consistent with the time-bound nature of business rescue proceedings that an offeror should not be able to make an offer, which has the effect of extending the moratorium brought about by business rescue proceedings, without being obliged to keep open the offer until its acceptance or rejection”.
• “Section 153(6) does not provide adequate protection as averred in the Kariba Case because a calculation of an assured amount is only possible with a finalised liquidation and distribution account after the liquidation.”

A third case study

On 6 February 2014, a further judgment concerning the above issue was handed down by Judge Daffue in the Free State Division of the High Court, in the matter of ABSA Bank v John Frederick Caine No and 2 others held under case number 3818/2013, where the learned Judge concurred with Judge Gorven but elected not to deal with these issues in detail, as it had not been strictly relevant to his determination. He stated that:-

    “…the reference to “binding offer” should be regarded as an offer binding on the offeror and not the offeree who should be entitled to either accept or reject the offer at his will. However it is apparent that there is uncertainty and therefore the legislature is urged to consider the issue afresh and make the necessary amendments. In casu the practitioner believed that a valid binding offer, which also bound the bank, was made.”

Further interpretations

In another recent matter a creditor was faced with this conundrum during a Section 151(1) creditors’ meeting. After the business rescue plan (“the plan”), was presented by the Business Rescue Practitioner (“the practitioner”), the majority of the independent creditors voted against the implementation thereof, for various reasons. The main points of discontent were:-

• the company would be entitled to purchase each creditor’s claim, who voted against the plan, with offers which constituted less than 10% of their actual debt;
• the plan envisioned the release of the members from their suretyship obligations;

The practitioner informed the creditors of their rights as envisioned in Section 145(2) read together with Section 153(1)(b)(ii) of the Act, announcing that the voting interests of those creditors who voted against the plan, may be purchased (for a liquidation value which had been obtained by an independent valuator). He advised further that, in terms of Section 145(2)(b)(ii) read together with Section 153 (1)(b)(ii) of the Act,

    “any creditor may present an offer to acquire the interest of or all the other creditors in the manner as contemplated in section 153”;

Further that in terms of section 153(1)(b)(ii),

    “any affected person, or combination of affected persons, may make a binding offer to purchase the voting interest of one or more persons who opposed the adoption of the business rescue plan, 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”;

One of the members purported to purchase the voting interest of these creditors by placing a one rand coin in front of each creditor who voted against the plan, as a quid-pro-quo for the acquisition thereof. The practitioner had announced that at liquidation the creditors would be liable for a contribution and accordingly the one rand represented a better dividend for the creditors. Notwithstanding the creditors’ immediate unequivocal rejection of the offer, the practitioner announced that the member had acquired from those creditors, their voting interests. A second vote had thereafter been conducted and with the newly acquired voting interest of that member, the plan was adopted.

The practitioner interpreted the term “binding offer” in terms of the Act to mean, “an offer that cannot be rejected once made, and which is binding on the offeree”. This is the view as held in the Kariba decision.

This is unfortunately not an unusual scenario and is increasingly being used by distressed companies in business rescue to write-off large debts.

Conclusion

The confusion over the interpretation has not been helpful to creditors and has opened up scope for abuse of the procedure, as foreshadowed by Dr Loubser. The phrase “binding offer” should be given the interpretation which results in the least diversion from the general principles of the law of contract, relating to offer and purchase, as concluded in the DH Brothers decision. However, if the conclusion in the Kariba decision is correct, then the Act may have inadvertently designed a way for debtor companies to escape their liability through the engagement of business rescue with the sole intention of avoiding repayment liability.

The judiciary has the onus of interpreting the business rescue provisions within the context of section 7(k) of the Act, “to provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the interests of all relevant stakeholders“. In my considered view, only one of these judgements balances the interests of all relevant stakeholders.

This article first appeared in Without Prejudice, August 2014

Written by Mariam Marquard, Associate, Werksmans Attorneys