Business Rescue is a new concept in the South African business landscape and is found in Chapter Six of the Companies Act 71 of 2008. New legislation often requires judicial decision to provide a framework of certainty. Two recent court decisions in Gauteng and KwaZulu-Natal on business rescue have provoked much debate with their conflicting views on the interpretation of business rescue legislation and in particular, the operation of Section 153 (b)(ii) of the Companies Act.

Section 153 provides that during business rescue any affected person may make a binding offer to purchase the voting interests of creditors who oppose the adoption of a business rescue plan at a value, independently determined, being a reasonable estimate of the dividend that would have been paid to the creditors had the company gone into liquidation.

In Gauteng in the case of African Bank Corporation of Botswana Limited v Kariba Furniture Manufacturers (Pty) Ltd and others Judge Kathree–Setiloane held that in terms of Section 153 a party could lawfully acquire the voting interests of another creditor who had voted against the adoption of the business rescue plan. The Judge reasoned that the concept of "binding offer" as envisaged by the Act was not an offer in the contractual sense but rather a set of statutory rights and obligations from which neither party may resile. In other words, the Section permitted the compulsory acquisition of voting rights of objecting creditors. The Judge referred to this process being known in the US Bankruptcy Code as "cramdown" which allows a Court to force the acceptance of a rescue plan on dissenting creditors.

How this would work in practice was recently demonstrated in Stedone Civils (Pty) Ltd, a construction company which went into business rescue in March 2013. Buoyed by the authority of the Botswana case the business rescue practitioner at a meeting of creditors in October 2013 sought to utilise the provisions of Section 153 by seeking through a third party to acquire all of the voting rights of creditors who opposed the adoption of the rescue plan. As the liquidation of Stedone was likely to result in a very small dividend for concurrent creditors the voting rights were acquired for nominal sums with the net result being that through this strategy the rescue practitioner was able to secure the required 75% majority needed for the sanctioning of the plan.  Creditors feeling aggrieved by being dispossessed of their voting rights have now approached the High Court seeking an order setting aside the voting of the rescue plan and declaring the dispossession to be unlawful.  The matter is pending and is due to be argued in November.

In DH Brothers Industries (Pty) Ltd vs Karl Johannes Gribnitz N.O. and Dowmont Snacks (Pty) Limited Judge Trevor Gorven sitting in Pietermaritzburg politely disagreed with the decision in the Bostwana case and held that a binding offer is nothing more than an offer binding on the offeror creating no compulsory obligation on the objecting creditor to accept the offer.

The Judge concluded that the idea of a binding offer must be interpreted in its ordinary grammatical sense and the word binding only qualifies the offer that is being made and does not infer that the offer is binding on the offeree to accept. In other words, a binding offer in terms of Section 153 could not lead to the compulsory acquisition of voting rights without agreement from the dissenting creditor. The Judge concluded that if the intention of the legislature was to create a framework for the compulsory acquisition of voting rights then it would have spelt this out clearly in the legislation. The Judge observed that the remedy if creditors object to a rescue plan unreasonably would be for the rescue practitioner to apply to Court to set aside the vote as being "inappropriate" as provided in Section 153(10(a)(ii). The Judge also concluded that if a binding offer is accepted by a creditor then the entitlement to vote thereon could only arise when the voting interests had been valued, transferred and payment had taken place. On that basis, the court held in the Dowmont case that the compulsory acquisition of an objecting creditor's voting rights was invalid and any vote relying on such invalidity was to be set aside with the net result that the company should be placed in liquidation. In conclusion the Judge made the observation that business rescue is to provide for the efficient rescue and recovery of financially stressed companies but in a manner that must fairly balance the rights and interests of all stakeholders.  The compulsory expropriation of voting rights of creditors who have elected to vote against a business rescue plan would be unfair and this could not have been the intention of the legislature in drafting the legislation.

Hopefully, the Dowmont Snacks case levels the playing fields for creditors with regard to the exercise of their voting rights. With conflicting judgments in the High Courts of KwaZulu-Natal and Gauteng this issue needs to enjoy the attention of the Supreme Court of Appeal and possibly the Constitutional Court for final clarity.

Andrew Donnelly, Partner & Head of Litigation

Contact: 031 575 7508 and afd@wylie.co.za