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Business Rescue Provisions of the Companies Act Clarified

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Securities and Mergers & Acquisitions Bulletin

On 20 May 2015, the Supreme Court of Appeal (in the matter of African Banking Corporation of Botswana v Kariba Furniture Manufacturers & Others) clarified one of the biggest uncertainties arising out of the business rescue provisions of the Companies Act. The Court has now clarified the meaning of the term “binding offer” in a manner which not only brings clarity to the business rescue regime in general, but also will provide greater comfort to banks and other creditors.

The Act provides that where a business rescue plan has been rejected by the creditors of the company in business rescue, an affected person or a combination of affected persons (for example another creditor, or a shareholder or employee of the company) may make a “binding offer” to purchase the votes of the creditors voting against the rescue plan. The effect of this acquisition of voting rights by the purchaser is that the actual claims of the creditor against the company in business rescue is also acquired by the purchaser, at a value independently and expertly determined, based on an estimate of the return to that person if the company were to be liquidated.

The Court from which the appeal was launched found that the “binding offer” is an offer which, once made, binds both the offeror and the relevant creditor. The Court placed heavy reliance on an interpretation of the Chapter 11 bankruptcy legislation of the United States of America. The Court referred to the so-called “cramdown” process whereby creditors in the US are forced to involuntarily accept a rescue plan. This finding was in contrast to the common meaning of an offer in South African law, which is an invitation to consent to the creation of obligations between two or more parties, and where only acceptance of that invitation will result in an agreement. The finding further had serious constitutional implications to creditors in that their claims could effectively be expropriated by the offeror.

The Kariba matter was appealed, and the SCA on appeal overturned the decision of the lower Court. The SCA examined the bankruptcy legislation of the United States of America and made some distinctions between that process and business rescue. The Court found that the term “binding offer” means that it is an offer which is made by the offeror which cannot thereafter be withdrawn by the offeror. That offer must still however be accepted by the relevant creditor in order to create a valid agreement between the parties, and the creditor may therefore reject the offer. The Court stated that it is highly unlikely that the legislature would have intended the unusual meaning given to the term “binding offer” by the lower Court , and if that was the intention, this would have been stated clearly and not using a word which “connotes an expectation of a response”.

The judgment is to be welcomed as it accords with accepted legal principles and secures the rights of creditors to deal with their claims as they like.


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