COMMERCIAL LAW: Buying of votes during business rescue

One of the more controversial provisions of the very flawed business rescue provisions of the Companies Act 71 of 2008 relates to the ability of an affected person to make a “binding offer” to buy the vote of another affected person who voted against the adoption of a business rescue plan. This provision is controversial for two reasons. Firstly, the “purchase price” for buying the vote is not based on the affected person’s claim under business rescue, but the dividend that such a person could be expected to receive in liquidation. This means that unsecured creditors or shareholders can have their votes bought from them for almost no value, despite having substantial claims against the company in business rescue. Once such votes have been bought, the purchaser can exercise the votes to approve a plan that favours that creditor, which can severely disadvantage the party whose vote was bought, as they have no say in the final business rescue plan.

The second, even more controversial issue is that the “seller” may not have a choice as to whether they want to entertain the “purchaser’s” offer – in other words, they may be forced to sell their vote for next to no value. This patently unreasonable state of affairs has come about as a result of a decision by the Pretoria High Court in the matter of African Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd, where it was held that the “binding offer” mentioned in the Act is not only binding on the offeror, but also on the offeree. The applicant argued, amongst other things, that an offer which the seller is forced to accept and for little or no value would effectively amount to expropriation of property without compensation. Unfortunately the court was not convinced by this very valid concern and held that the binding offer provision was inserted into the Act for a legitimate government purpose (to allow for the efficient rescue and recovery of distressed companies) and that there is compensation, being the liquidation dividend. This is cold comfort for the creditor with a claim in the hundreds of thousands of Rands who will have his claim bought for one Rand and then loses any right to claim against the company.

A more enlightened view has been proffered by the KwaZulu-Natal High Court in the matter of DH Brothers Industries (Pty) Ltd v Gribnitz NO and Others, wherein the Kariba judgment was criticised as “rest[ing] on unstable foundations.” The court essentially re-iterated the accepted legal principle that an offer is a unilateral action – it requires acceptance by the other party before it becomes a binding agreement. The court cautioned that one should not read too much into the legislature’s use of the word “binding” in relation to the offer and that this was used in the context of the offer only – it cannot be applied to the offeree. The court’s interpretation was that the offer is “binding” in the sense that the offeror could not retract it once it was made.

Unfortunately there has to date been no reported case law by the Supreme Court of Appeal or the Constitutional Court on this vexing issue and it is likely that divisions of the High Court in other provinces may give even further conflicting interpretations of the binding offer concept in times to come. One can hope that good sense will prevail and that the Kariba interpretation will be overturned in due course.

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