by Hans Klopper, Independent Advisory

One of the cornerstones in any restructuring regime is to deal with uncooperative creditors in an effective manner, and to find an equitable mechanism to ensure that a rescue or reorganization plan is successfully implemented while there are objections to the plan. In the United States, under Chapter 11 of their Bankruptcy code a “cram down” allows the Bankruptcy Courts to impose conditions to ensure that all parties have a better return than what they would have had without such modifications.

This was undoubtedly also what the South African legislature had in mind with the provisions of s153 (1) (b) (ii) of the Companies Act 71 of 2008 (‘the Act”) (“the binding offer provisions”).

In the United States,[1] the term “cram down” originates from the notion that the proposed “haircut” or changes to a loan are “crammed down” creditors’ throats. Creditors can thus either renegotiate their position through a Chapter 11 reorganization, or lose everything through a liquidation process under Chapter 7 of the US Bankruptcy code.

In my view, the binding offer provisions under this Act were intended to be a mechanism to “force” a creditor who does not accept the proposals enclosed in a business rescue plan to be forced to participate and to be “crammed down”.

On 20 May 2015 the SCA handed down judgement in the matter of African Bank Corporation of Botswana v Kariba Furniture Manufacturers & Others (228/2014) [2015] ZASCA 69 (20 May 2015) and provided their interpretation on the meaning of the “binding offer provisions”. The conflicting judgements of the court a quo in the Kariba Matter and the DH Brothers Industries (Pty) Limited v Gribnitz NO 2014 (1) SA 417 (GNP) matter, now appear to have been settled. Have we seen the end of this matter?

Upon an initial reading of the latest Kariba judgement one would think that the ability of affected persons to purchase the voting interest of a dissenting creditor would henceforth be difficult, as a binding offer will only result in an enforceable contract once the creditor accepts the offer.

In my view however, it is inconceivable that the legislature intended that a binding offer to a dissenting creditor, at all relevant times, require the acceptance thereof. The reason for my view is to be found in a subsequent section of the Companies Act, more specifically s153 (6) of the Act.

It is provided in s153 (6) that the 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…” This raises the question as to why the legislature provided for this remedy to unlock a potential deadlock. If an offer first had to be accepted before a legally enforceable contract comes into existence, to purchase a voting interest, then it can be asked, why would it be necessary to approach the court if consensus was the order of the day and an agreement had to come into existence on every occasion? Was it not the intention that an unhappy holder of a voting interest who received and was bound by a “binding offer” has the remedy and option to approach a court to “review, re-appraise and re-value a determination by an independent expert”?

It would therefore appear that the door might still be open for affected parties to, in the event of a specific creditor dissenting upon being offered a return better than the immediate liquidation of the company; properly invoke the provisions of the aforesaid section. The first step in this process is to attend a proper independent and expert valuation of the underlying assets forming the subject matter of the proceeds likely to accrue to creditors upon liquidation. Secondly, having the financial means and ability to make an immediate payment in respect of the amount offered to the expert calculation of the liquidation dividend.

What would appear to have gone wrong in the Kariba matter was that the business rescue practitioner, in conjunction with affected persons merely, upon his published business rescue plan being rejected, indicated that the shareholders wished to make a binding offer to purchase the dissenting bank’s voting interest and himself ruled that it was not open for the bank to reject to the offer.

The SCA criticised the practitioner who appeared not to have provided sufficient financial detail to enable a valuation of the liquidation value of the bank’s voting interest to be ascertained, in his business rescue plan. The business rescue practitioner would also appear not to have provided any evidence by an independent valuation of the company’s assets but rather relied on his own valuation. The offer made was not accompanied by the demonstration of immediate funding being available to make payment in respect of the offer. Finally the offer did not present the creditor bank with an opportunity to, in the face of an expertly determined valuation of its voting interest and likely liquidation outcome, consider the offer in a business-like manner.

The Kariba judgement appears to have closed the door on affected persons who are aggrieved by a dissenting creditor’s refusal to accept an offer that forms part of a professionally proposed business rescue plan. However, I believe that in the event of a properly constituted binding offer made, the intention of the legislature and the success of our business rescue regime would be better served by a more lenient interpretation to the concept of a binding offer.

The criticism levelled at the practitioner in Kariba judgement and the successful appeal would appear to relate to an ill-conceived “offer” having been made without any substantiation and being accompanied by the wherewithal and demonstrated ability to make payment of the amount offered.

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This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.