By Dominique Wesso

Unilateral deprivation of rights

If company B goes into business rescue and secured creditor A does not have the largest voting interest, and is thereby unable to direct the business rescue process, a simple reading of s 152(1)(e) and s 152(2) of the Companies Act 71 of 2008 (the Act) would imply that a business rescue plan diminishing the security of the secured creditor can be adopted by a 75% vote of all creditors who voted.

This situation is, however, mitigated by s 154(1) of the Act, but the extent of the mitigation is not clear.

Section 154(1) provides that ‘a business rescue plan may provide that, if it is implemented in accordance with its terms and conditions, a creditor who has acceded to the discharge of the whole or part of a debt owing to that creditor will lose the right to enforce the relevant debt or part of it’ (my empasis).

Prima facie this means that a creditor has to accede to the discharge before such a provision in a business rescue plan will be valid. However, it has been submitted that the ability of an individual creditor not to accede to the business rescue plan is doubted in light of the fact that s 150(2) of the Act provides that a business rescue plan can provide for a discharge of debts and that the body of creditors vote for its implementation and thereby accede to it (see P Delport Henochsberg on the Companies Act 71 of 2008 (Durban: LexisNexis 2014) at 532 (2)).

This issue was considered in the case of DH Brothers Industries (Pty) Ltd v Gribnitz NO and Others 2014 (1) SA 103 (KZP). In the DH Brothers case the business rescue plan made provision for the discharge of 75,75% of the claims of all creditors. If acceded to, this would mean that all creditors, including those with secured claims, would not be able to recover 75,75% of their claims. The applicant alleged that this amounted to a compulsory cession that was unlawful in terms of s 154(1) of the Act. A ‘compulsory cession’ occurs when a creditor is compelled by a business rescue plan to relinquish its right to recover a certain proportion of its claim.

In considering whether a plan of this nature is valid, the court referred to the presumption against any legislative deprivation of rights (DH Brothers at para 67). In terms thereof, there is a presumption that when taking away existing rights the legislature does not intend to change existing law more than is necessary, there is a presumption against any forfeiture of rights and that where such forfeiture is made provision for, the provision must be restrictively interpreted (DH Brothers at para 26).

In light of this, the court held that where a business rescue plan makes provision for the compulsory cession of rights, and where the cedent does not voluntarily accede to the cession, such a business rescue plan will not be valid (DH Brothers at para 67).

This means that where a business rescue plan makes provision for the discharge of a creditor’s claim, whether the creditor holds a large or a small percentage of the voting interest, the business rescue plan will be invalid as a result of the provision and, therefore, unenforceable against those creditors who opposed the business rescue plan.

If the finding in the DH Brothers case is accepted as being correct, a secured creditor cannot be deprived of his or her claim by virtue of a majority adoption of a plan that makes provision for the entire or partial discharge of his or her claim unless he or she acceded to such a discharge.

The ‘binding offer’ – s 153(1)(b)(ii) of the Act

Section 153(1)(b)(ii) of the Act provides that where there is a failure to adopt a business rescue plan, an affected person(s) can make a ‘binding offer’ to purchase the voting interest of any person(s) who opposed the adoption of the business rescue plan. The value of the voting interest will be the value that the person(s) could reasonably have expected to obtain at liquidation as determined by an independent expert.

In the case of African Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd and Others 2013 (6) SA 471 (GNP) (Kariba) the court considered the nature of this ‘binding offer’.

The court explained that in order to determine the meaning of ‘binding offer’ it is necessary to consider the term within the statutory context that it appears (Kariba at para 23). Section 5(1) of the Act provides that the Act must be interpreted in a manner that gives effect to its purpose as set out in s 7 of the Act. Section 7(k) provides that one purpose of the Act 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’. Chapter 6 of the Act, in which s 153(1)(b)(ii) occurs, creates a framework within which this purpose can be given effect to.

The court held that while a normal contractual offer is made freely and can be withdrawn at any time, an offer made in terms of s 153(1)(b)(ii) creates a legal obligation that is binding on the offeror and the offeree and cannot be withdrawn at the insistence of either party. The court held that this interpretation of ‘binding offer’ accords with the purpose of the Act and the provisions in Chapter 6 in that it facilitates the adoption of a business rescue plan (Kariba at para 29).

The court goes further and explains that the offeree still enjoys the protection of the Act after it has been bound by the offer. The offeree is protected by s 152(1)(b)(ii) which provides that the offeree cannot receive less than it would have for its claim at liquidation (Kariba at para 32). Furthermore, the business rescue plan cannot be implemented until the offeror has paid the offeree for its claim; however, it can be adopted prior to payment. If the offeror has failed to make payment then the business rescue plan will not be capable of implementation and the offeree will not be barred from enforcing its rights (Kariba at para 34).

This discussion is relevant to the position of a secured creditor, because in some cases, the claim for which the offer is made would be subject to security in favour of the secured creditor. Prima facie, if a ‘binding offer’ is made for a secured claim then the secured creditor will lose its rights to call up and enforce said security.

The constitutionality of the effect of a s 152(1)(b)(ii) was also considered in the Kariba case.

The applicant in the Kariba case contended that the ‘binding offer’ constituted an unlawful deprivation of his property.

The court in the Kariba case accepted the finding in First National Bank of SA Ltd t/a WesBank v Commissioner, South African Revenue Service and Another; First National Bank of SA Ltd t/a WesBank v Minister of Finance 2002 (4) SA 768 (CC) (FNB) that a claim for payment and the right to exercise a vote at a statutory meeting convened for the purposes of voting on a business rescue plan constitutes property in terms of s 25(1) of the Constitution.

Section 25(1) of the Constitution provides that no one may be deprived of his or her property except in terms of a law of general application, and no law may permit the arbitrary deprivation of property.

The court in the Kariba case further referred to the FNB case, in which it was held that a law arbitrarily deprives a person of his or her property where sufficient reasons are not given for the deprivation and where there is not a rational relationship between the purpose of the deprivation and the manner in which the deprivation is employed (FNB at para 100).

The court in the Kariba matter held that, in light of the finding in the FNB case, the deprivation of a creditor’s rights in terms of s 152(1)(b)(ii) does not amount to an unconstitutional deprivation of property. The provision amounts to a law of general application and serves a compelling and legitimate governmental purpose being the revitalisation and rescue of a viable company – which accords with the purpose of the Act. The deprivation is also not arbitrary since s 152(1)(b)(ii) makes provision for adequate compensation determined by an independent expert – taking into consideration whether the creditor is secured, preferent or concurrent (Kariba at para 46).

If the finding in the Kariba matter is accepted as being correct, one can conclude that a secured creditor will be deprived of its secured claim when a binding offer is made and that this deprivation will be lawful. The court in the Kariba matter recognised the fact that the term ‘property’ in the Constitution is not specifically defined, but also highlighted the fact that the Constitutional Court had in a number of cases found that personal rights as well as incorporeal rights fall within the ambit of ‘property’ as provided for in s 25 of the Constitution (Kariba at para 44).

In light of the finding in the Kariba case, the secured claim of a secured creditor – be it secured by way of a personal or a real right – will be subject to the ‘binding offer’ provided for in s 152(1)(b)(ii) of the Act.

The nature of a ‘binding offer’ was again considered in the case of DH Brothers. The court in DH Brothers held that Kariba was wrong in its interpretation of the term ‘binding offer’ for a number of reasons.

Firstly, the Act does not refer to a set of rights and obligations. The court in DH Brothers explained that if the legislature had intended to create a set of statutory rights and obligations, it would have done so expressly in the provision. If this was the legislature’s intention it would have included a deeming provision in terms of which the offeree would be deemed to have accepted the offer once made by the offeror (DH Brothers at para 40).

The court went on to say that the term ‘binding offer’ could not have the meaning ascribed to it by the court in the Kariba matter because the provision itself speaks only of the offeror and not the offeree. Furthermore, the ordinary meaning of the word ‘offer’ implies that it emanates from one party only and requires acceptance to give rise to legal obligations. The term ‘offer’ has a specific and settled legal meaning which the court presumes the legislature was aware of (DH Brothers at para 41).

Although the word ‘offer’ is qualified by the word ‘binding’, the court is of the opinion that this does not create a legal obligation on both the offeror and offeree, rather it places an obligation on the offeror only (DH Brothers para 42). This is justified on the basis that the offer has to be binding on the offeror to avoid the situation where an offer can be tabled and retracted at every meeting of creditors with the aim of unduly delaying the business rescue proceedings – this interpretation accords with the time-bound nature of the business rescue procedure (DH Brothers at para 43).

Secondly, the court in the DH Brothers matter held that the interpretation of the term ‘binding offer’ in the Kariba case is not correct because it contradicts certain provisions of the Act (DH Brothers at para 46).

Thirdly, the purposive approach followed by the court in the Kariba matter does not justify interpreting the provisions of Chapter 6 of the Act in such a way that it leads to an acceptance of a business rescue plan at all costs (DH Brothers at para 54).

On this issue, the court in DH Brothers concludes by making the following statement at para 60:

‘[I]t is my view that the “binding offer” of s 153(1)(b)(ii) is an offer which cannot be withdrawn by the offeror. It is open to acceptance or rejection by the opposing creditors to whom it is made. If accepted, it gives rise to an agreement of purchase and sale. … The acceptance or rejection need only take place once the value has been finally determined. … The voting interests are transferred on payment of the determined sum. Once this has taken place, the voting interests are settled and the vote on the plan can take place.’

If the decision in the DH Brothers case is correct then the position of the secured creditor, whether large or small in respect of voting interest, is protected since it cannot be deprived of its secured right simply by means of a ‘binding offer’. A secured creditor has to accede to the discharge in order for it to be valid.

This interpretation of s 153(1)(b)(ii) accords more readily with the law relating to offer and acceptance than does the interpretation in the Kariba matter. If the legislature intended for the provision to veer so significantly from the existing law, as suggested in the Kariba matter, it would have done so more clearly.

Dominique Wesso BA (Politics Philosophy Economics) LLB (Stellenbosch University) is a candidate attorney at Cliffe Dekker Hofmeyr in Johannesburg.

This article was first published in De Rebus in 2014 (Sept) DR 34.