South Africa: Is An Offeree Really Bound By A "Binding Offer" In Terms Of Section 153(1)(B)(Ii): The Disagreement Of Two Judges

Last Updated: 2 December 2013
Article by Ashton Steenekamp

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and creates a vinculum juris or a legal obligation on the part of the offeror in that once made, the offer cannot be withdrawn.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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions