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The art of law - the last-ditch method of salvaging a business rescue plan in the face of opposition

A business plan that is not unanimously approved can be salvaged where those in favour buy out the voting interests of those who are opposed

The decision of the KwaZulu-Natal High Court in DH Brothers Industries (Pty) Ltd v Gribnitz NO [2013] ZAKZPHC 56, in which judgment was handed down on 21 October 2013, throws useful light on procedural aspects of the business rescue regime provided for in the Companies Act 71 of 2008, the consequences of a failure to comply with the procedural requirements, and the statutory mechanism whereby those who are in favour of a particular business plan can buy out the voting interests of those who are opposed to the plan.

The key aspect of the business rescue regime (as laid down in section 129(1)) is the need to establish, firstly, that the company in question is financially distressed (as defined in section 128) and, secondly, that there appears to be a reasonable prospect of rescuing the company (a requirement for which no criteria are laid down in the Act).

Many of the judicial decisions to date have focussed on these two aspects. However, as the decision in DH Brothers illustrates, the purely procedural aspects of the business rescue provisions of the Act are of critical importance. Failure to adhere to those steps can be fatal to an application to place the company in the statutory business rescue regime.

The court observed (at para [27]) that -

'Business rescue proceedings are geared at providing a window of opportunity to restore an ailing company to financial health and functionality. ... In the context of business rescue proceedings, the Act requires a number of formal steps to be taken.'

The resolution to commence business rescue must be passed by 'the board'

Section 129(1) provides that the board of a company may resolve to voluntarily begin business rescue proceedings and place the company under supervision. In this particular case, the company had two directors and the resolution in question stated that it had been passed by 'the director'.

It is implicit that the Act requires, not necessarily a unanimous decision by the directors, but a resolution passed by at least a majority of the directors.

The court held that, despite the assertion by the practitioner in this case that both of the directors had signed the resolution, 'the plain wording of the document ... styles it as a resolution passed by the sole director'.

Gorven J accordingly held (at para [16]) that the business practitioner had failed to establish that a resolution, complying with section 129(1) of the Act, had been passed and said that this 'is effectively the end of the matter and the applicant has made out a case for the resolution to be set aside'.

In other words, the lack of a board resolution, passed by the required majority, was fatal to the application for business rescue, which consequently fell to be dismissed on this ground alone.

However, Gorven J went on to say that, in case he was wrong on this point, he would deal with the other grounds that had been put forward by the applicant.

A court can place a company under business rescue if it is just and equitable to do so

The further ground for setting aside the resolution to commence business rescue was that the court was empowered to do so in circumstances where this was just and equitable, as envisaged in section 130(5)(a)(ii).

The court held that it was anomalous that this was a ground available only to the court, and not to the applicant, since the applicant was confined to three other grounds provided for in section 130(1)(a).

This, said the court (at para [18]), was 'a drafting error' in the Act and (in terms of the rules of statutory interpretation recently laid down in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) at para 18) the court could proceed to give the provision a 'sensible meaning' which, in the present case, said Gorven J, meant construing the just and equitable provision as being an additional ground on which the court could base its decision.

Failure to publish the business plan within the stipulated time period

Gorven J held (at para [28]) that the failure to publish the business plan in question within the given period, or a duly extended period, resulted in the termination of the business rescue proceedings.

Creditors were thus allowed to enforce their rights against the company as soon as that period had elapsed. This, said Gorven J, made for certainty and ensured that creditors' rights were affected as little as possible, and he went on to say it was clear that -

'the stated need for strict adherence to time limits and the need for certainty has as a necessary corollary that the time to publish a plan cannot be extended after it has elapsed'.

Gorven J held (at para [32]) that

'on a conspectus of the structure of business rescue proceedings ... a meeting must be convened and a vote taken in order for it to be said that a majority of creditors 'allowed' an extension of time. This was not done. No extension was therefore allowed by creditors as envisaged in s 150(5)(b). This means that the business rescue proceedings came to an end after the 25 day period elapsed. . If this is not the case, this application can and should bring [the proceedings] to an end by setting aside the resolution on the just and equitable ground'.

Gorven J held that, in terms of section 152(1), a formal vote is required for any adjournment of the meeting and that, failing an adjournment for revision of the business plan, the practitioner is obliged to call a vote for preliminary approval of the plan.

In the present case, said Gorven J, the practitioner did neither of these things - he simply announced that, because the applicant had launched the present application, the meeting would be adjourned.

Gorven J pointed out that section 152(3)(a) provides that, if a proposed business rescue plan is not approved on a preliminary basis, the plan is rejected and may be considered further only in terms of s 153 and, since section 153 was not invoked at the meeting in question, the proposed business rescue plan was consequently to be treated as rejected.

An offer to purchase the voting rights of those persons who opposed the business plan

The most important aspect of this judgment is its explanation of the process for the buying-out of those persons who are opposed to the business plan that has been put forward by the practitioner.

An important way in which a controversial business plan, that is supported by some interested persons and opposed by others, can be kept alive, is that any affected person or group of affected persons can (as provided for in section 153(b)(ii)) make an offer (at an independently determined value) to buy out the voting interests of those who are opposed to the business plan.

However, the Act is less than clear on important aspects of the buying-out process, and the judgment usefully clarifies the uncertainties in this regard.

Section 153(1)(b) provides for an affected person to make what the Act calls a binding offer to purchase the voting interests of those who are opposed to the proposed business plan.

In the present case, the respondents argued (see the judgment at para [36]) that, once such an offer is made, it is binding on both offeror and offeree, that the offeree cannot reject the offer, and that the voting interests are acquired by the offeror merely by making the offer, subject only to the power of the court in terms of section 153(6) to review, re-appraise and revalue the expertly determined value.

Some support for this interpretation was to be found in the decision in African Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd [2013] ZAGPPHC 258.

In the present case, Gorven J said that he disagreed with this interpretation.

The Act, he said (at para [41]), envisaged a contract of purchase and sale, requiring acceptance or agreement, and the expression binding offer could have been better expressed as an irrevocable offer that the offeror (see para [47] and [60]) was obliged to keep open until acceptance or rejection by the opposing creditor. The transfer of the voting interests (see para [54]) then passes, at earliest, after the value has been determined.

Gorven J pointed out (at para [54]) that section 153(6) does not specify a time within which a court must be approached to review the expertly-determined value, and he said (at para [55]) that the probable conclusion was that voting interests pass only on payment of the purchase price.

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