At a recent Turnaround Management Association workshop in August one of the questions posed was:
In terms of section 153(1)(b)(ii): With regards to a "binding offer", do the basic principles of the law of contract in relation to an offer and acceptance apply? In other words, is the offer subject to acceptance or is it enforced on the person opposing the plan whether they accept the offer or not?
Subsequently there have been two judgments that have dealt with this question extensively and that have thrown up diametrically opposite answers. The question that is now raised is which answer is correct?
Firstly, let's have a look at the section in question, namely section 153(1)(b)(ii) of the Companies Act 71 of 2008:
"If a business rescue plan has been rejected...
(b) If the practitioner does not take any action contemplated in paragraph (a) –
(ii) 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, at a value independently and expertly determined, on the request of the practitioner, to be a fair and reasonable estimate of the return of that person, or those persons, if the company were to be liquidated."
The first judgment was handed down by the Honourable Judge Kathree-Setiloane (Kathree-Setiloane) on 29 August 2013 in the matter of African Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd (in business rescue) and Othersunder case number 20947/2012 in the North Gauteng High Court, Pretoria. The conclusion that Kathree-Setiloane reached is that since the word "binding" appears before the word "offer", it characterises the nature of the offer and creates a vinculum juris or a legal obligation on the part of the offeror in that once made, the offer cannot be withdrawn. She says that it is not an "option" or an "agreement" in the contractual sense but is rather "a set of statutory rights and obligations from which neither party may resile".
Kathree-Setiloane concludes that once the offeror has made an offer to the offeree, it is immediately binding on both of them, meaning that the offeror may not withdraw the offer and the offeree is automatically bound to accept the offer. Further she states that this is not an unfair state of affairs for the offeree since he is "adequately protected" by section 153(6), "since (he) cannot receive less than (he) would receive if the company was to be liquidated".
The second judgment was handed down by the Honourable Judge Gorven (Gorven) on 26 September 2013 in the matter of DH Brothers Industries (Pty) Ltd v Karl Johannes Gribnitz NO and Othersunder case number 3878/2013 in the North Gauteng High Court, Pretoria. Gorven's judgment refers directly to that of Kathree-Setiloane in the Kariba case as discussed above, and states "I am regrettably unable to agree with this interpretation". Gorven starts by stating that a "binding offer" cannot in itself be a set of "statutory rights and obligations", but that the word "binding" simply qualifies the word "offer". He finds that the qualification on the "offer" is brought down only on the head of the offeror in that once he has made the offer he is bound by it and cannot withdraw it. He does not agree with Kathree-Setiloane that the offeree is bound by the offer made and has no option but to accept it. He states that the words used in section 153(1)(b)(ii) clearly presuppose an "offer" to "purchase". When these words are used together as the section has done it is an established legal concept through which a contract is envisaged and for a contract to be concluded there needs to be an acceptance or agreement.
Gorven is of the opinion that the legislature when drafting the section in question, instead of using the word "binding" should have rather used a word like "irrevocable" or "non-retractable", as the word "binding" in this situation is an "extremely inelegant use of language" as it fails to depict the true intention of the legislature.
In response to Kathree-Setiloane's statement that the offeree is "adequately protected" by section 153(6), Gorven states that she is incorrect because at the time when the independent expert valuation is performed, not one person, whether independent or not, will be able to accurately calculate an assured amount that the offeree would receive on liquidation. He says that at most this will be an estimate, as for example it may be impossible at such time to determine if there are any impeachable dispositions which have taken place or if a director is liable to the company in terms of section 77.
Gorven's conclusion is thus that a "binding offer" is an offer that cannot be withdrawn by the offeror but that is open to acceptance or rejection by the offeree. He states that if the offer is accepted it amounts to an agreement of purchase and sale, and further that the offeree only need accept or reject the offer once it has been expertly determined. Due to the fact that the voting interests only pass to the offeror on payment of the determined sum, the independent expert is required to make a determination within the five days as allowed by section 153(4) so that the voting by the offeror can occur at the adjourned meeting.
A point on which both Judges seem to agree is that the offer, once made, is immediately binding on the offeror in that he may not withdraw such offer after he has made it. Gorven gives a very good reason as to why this is so, namely that since section 153(4) requires that the business rescue practitioner adjourn the meeting after a binding offer has been made, this adjournment is compulsory and as such if the offeror could simply withdraw his offer before the meeting resumes, this section would be wide open to abuse. The offeror could simply delay the business rescue proceedings by making a "binding offer" at every meeting and thereafter just before the adjourned meeting, withdraw his offer. After this one point of agreement the two judgments head off in different directions with different reasoning.
A point, which Kathree-Setiloane avoided dealing with directly and which Gorven simply stated he will "leave for another court" to determine, is that of whether by purchasing the offeree's voting interests in terms of a binding offer, the offeror also acquires the offeree's underlying claim to which the voting interests attach. Let's consider this point:
- On reading section 145(4)(a), which states "... a secured or unsecured creditor has a voting interest equal to the value of the amount owed to that creditor by the company", the legislature implicitly draws a distinction between the underlying claim which the creditor has against the company and the voting interest which the creditor acquires as a result of having such a claim. The value of the voting interest is determined by the value of the claim, but other than this connection, the two are clearly distinguishable concepts and severable from each other.
- Upon a simple reading of section 153(1)(b)(ii) it is noticeable that a "binding offer" consists of an offer to purchase "the voting interests" of an affected person, it does not refer to the underlying claim. If the legislature had intended for the underlying claim to be sold as part of the "binding offer" it would have stated so explicitly or would have worded the section so as to read "an offer to purchase the claim of one or more persons". If the section had been written in this way, the offeree's voting interests would then be transferred together with the claim due to offerees receiving their value directly from the claim in terms of section 145(4)(a).
- Further by way of an example, the legislature could have never intended in a situation where the value of the voting interest, as valued by an independent expert, was zero due to there being a probable contribution to the estate on liquidation, that an offeror could simply make payment of an amount of R1 to the offeree through a binding offer and obtain not only the offeree's voting interests but also the offeree's claim in the business rescue valued at R500 000 together with a probable dividend in the business rescue. That would amount to statutory endorsement of private expropriation without compensation – a concept that is anathema to our constitution.
By virtue of these points and my reasoning as to my ultimate proposed answer to the question posed as below, I do not think that the legislature would have intended for the underlying claim to also be transferred to the offeror together with the voting interests he purchases through a "binding offer".
Kathree-Setiloane's judgment goes straight to a simple interpretation of the section, protecting the offeror. On the other hand Gorven's judgment goes into a lot more technical detail. So as to avoid Kathree-Setiloane's conclusion, Gorven interprets the section in a way that is aimed at protecting the offeree.
Maybe the answer to the question posed lies somewhere between the two judgments.
When considering this more levelled playing field, one needs to consider that the word "binding" has been placed in the section for a specific reason and that in accordance with the general rules of interpretation, when one interprets a section of an Act this needs to be done in light of the purpose of the entire Act. Section 7(k) says that one such purpose is to "provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders".
It is my view that while Kathree-Setiloane's judgment may be correct in that a "binding offer" once made becomes immediately binding on both the offeror and offeree, the element of the purpose of the legislation needs to be taken into account in a more detailed fashion as Gorven has done his judgment.
The word "binding" is therefore present in the section not just to dictate that the "offer" made is binding on both the offeror and offeree once it has been made, but also to ensure that the rights and interests of all relevant stakeholders are balanced. It is there to assist affected persons whom are valiantly attempting to have a good business rescue plan approved and who are being consistently blocked in this approval by one or more affected persons who do not agree with the plan, quite possibly for selfish and unjustifiable reasons. The purpose behind the word "binding" and the fact that it causes the offer to be binding on both the offeror and the offeree, stops the offeree from unilaterally being able to cause a good plan to be rejected.
The way in which an affected person is able to unilaterally purchase the offeree's voting interests without the offeree being able to stop this, seemingly upsets the "balance" as is referred to in section 7(k). Similarly, if the offer can be rejected out of hand by a recalcitrant creditor the purpose of section 153(1)(b) is to a large extent undermined.
Two of the ways in which this balance could be restored is through:
- Section 153(6): Despite what either of the judgments state about the protection granted to the offeree by this section, the section itself does not refer to a time period within which either the offeror or offeree can apply to court for the court to review, reappraise or revalue a determination made by an independent expert. In addition, nowhere does the section state or even imply that this review, reappraisal or revalue cannot take place after payment in terms of a "binding offer" has already been made to the offeree. Thus despite the valid point which Gorven made about the valuation only being at most an estimate, Kathree-Setiloane was correct in stating that it does offer protection to the offeree, as in my view the offeree could even utilise section 153(6) long after payment in terms of a binding offer has already been made to him, and if successful obtain payment of a higher amount.
- The offeror not being able to obtain the offeree's underlying claim through their purchasing of the offeree's voting interest: This way the offeree obtains a payment for his voting interest at liquidation value, but will still receive a dividend in the business rescue or subsequent liquidation.
In my view, I think that both Judges have raised various points that ring true but drawing from the reasoning in both judgments, my view is that while a "binding offer" is binding on both the offeror and the offeree, the balance, which is written as a purpose of the Act in section 7(k), is upheld due to the protection provided to the offeree by section 154(6) and due to the fact that the offeree's underlying claim remains theirs. No court has yet reached this conclusion. This is an issue of statutory interpretation and the Supreme Court of Appeal will need to deal with the issue in order for us to have absolute clarity as to the answer.