The meaning of ‘binding offer’ in the Kariba case: Did creditors need to be protected from an alien cramdown?

• Jurisdiction: South Africa
• Pages: 72-89
• Date: 16 August 2019
• Citation: (2017) 3(1) JCCL&P 72
• Author: Richard S Bradstreet
• Published date: 16 August 2019

72

THE MEANING OF ‘BINDING

OFFER’ IN THE KARIBA CASE:

DID CREDITORS NEED TO BE

PROTECTED FROM AN ALIEN CRAM-

DOWN?*

RICHARD S BRADSTREET

Senior Lecturer, Department of Commercial Law,

University of Cape Town

I INTRODUCTION

Liquidations are in principle destructive in that they result in the

‘death’ of a corporation, thus destroying the entity that generates

value that is passed on to not only its owners (the shareholders), but

also those it employs and often the wider society. It is therefore not

surprising that there has been a shift away from a model of insolvency

that is creditor-centred, where liquidation is used as a means to

extract whatever value remains of a corporate entity for the benefit

of its creditors, to one which favours corporate reorganisation with a

view to salvaging viable businesses where possible. This is not to say

that liquidations do not play an important role in dealing with failed

businesses and distributing the residual value (see, generally, Anneli

Loubser ‘Tilting at windmills? The quest for an effective corporate

rescue procedure in South African law’ (2013) 25(4) SA Mercantile

Law Journal 437). In a South African context, in view of the purposes

of the Companies Act 71 of 2008 (the Act) providing expressly for

the advancement of social welfare, the interests of creditors cannot

be elevated to the exclusion of more vulnerable stakeholders whose

interests ought also be considered.

The World Bank has noted that an effective insolvency regime

should aim to, inter alia, ‘[m]aximize the value of a firm’s assets

by providing an option to reorganize’ and ‘strike a careful balance

between liquidation and reorganization’ (see The World Bank

Principles and Guidelines for Effective Insolvency and Creditor Rights

* Some of the ideas expressed in this paper were presented at a seminar at Delaware

Law School (Widener University) during October 2016. I would like to thank

Prof Larry Hamermesh, the members of faculty, as well as Chief Judge Brendon

L Shannon, and Judges Mary F Walrath and Kevin Gross for their generous

engagement.

(2017) 3(1) JCCL&P 72

© Juta and Company (Pty) Ltd

73

THE MEANING OF ‘BINDING OFFER’ IN THE KARIBA CASE

Systems (April 2001) Principle 12). It is submitted that, in striking

the balance between liquidation and reorganisation, it would be

necessary in certain cases to curb a creditor’s power when the exercise

of such power would cause the destruction of value. In the context

of a business rescue plan proposed to creditors, it may be argued

therefore that a creditor ought not to be allowed to unreasonably

object to the adoption of the plan when there is a reasonable prospect

of the plan’s successful implementation, if this would result in a net

destruction of value and an unfair benefit to the recalcitrant creditor,

having regard for all interests at stake. Legislative mechanisms to

bind creditors thus become of great importance to effectively and

equitably strike this balance.

The Supreme Court of Appeal, in deciding the case of African

Banking Corporation of Botswana v Kariba Furniture Manufacturers and

Others 2015 (5) SA 192 (SCA), was confronted with the question of

interpreting the words ‘binding offer’ in s 153(1)(b)(ii) of the Act.

Difficult to begin with in view of fact that the meaning of the phrase

in this context is unknown to South African law, the question was

not made easier by the factual context of the case and the general

uncertainty surrounding the drafting of the business rescue provisions

of the Act.

Leach JA, in a separate judgment supported by three of the other

four judges of appeal, was critical of the Act generally, calling

many of its provisions ‘shoddily drafted’ and having ‘given rise to

considerable uncertainty’ (para 43). In the same place, in relation to

the business rescue provisions specifically, he cited Loubser’s criticism

of the apparent carelessness of the drafters and her warning that the

‘unclear, confusing and sometimes alarming provisions regulating

business rescue proceedings … will certainly not assist in making

the procedure more acceptable or successful.’ (Anneli Loubser ‘The

business rescue proceedings in the Companies Act of 2008: Concerns

and questions (part 2)’ (2010) TSAR 689 at 700–1).

The business rescue practitioner in the case was also severely

criticised: he was said to have shown ‘a distinct lack of objectivity

and [to have] supported a business rescue plan without making a

proper assessment of its prospects of success’, where such prospects

amounted to ‘at best a forlorn hope, unsupported by any objective

facts, that the company might arise from the dead’ (per Leach JA in

paras 55–56).

The case gave rise to a number of important issues relating not

only to the interpretation of the Act (and in particular the meaning

of ‘binding offer’ as well as the ‘reasonable prospect’ of rescue that

must be ascertained by the practitioner), but also to the office of

the practitioner (standards of conduct applicable to persons holding

© Juta and Company (Pty) Ltd