Hope

There is always a glimmer of hope when a company enters into the business rescue process, and it is difficult for some to acknowledge when that hope fades with a rejected business rescue plan.

Fight

In 2020 the Alan Louis Trust (trust) fought to stay the conversion from business rescue to liquidation of the Company, which had been placed under business rescue supervision in February 2013. This notwithstanding that the business rescue practitioners (BRPs) of the Company, supported by other creditors, contended that the ship was not capable of being saved from liquidation.

In February 2020 (seven years after the commencement of business rescue) the BRPs presented a business rescue plan for a vote to the creditors of the company in terms of section 151 of the Companies Act 71 of 2008 (Act). The plan was subsequently rejected.

Options after a plan is rejected

Section 153 contains potential avenues which can be explored to save the company rescue once a business rescue plan has been rejected.

The court summarises the “saving” options available once a plan is rejected, as follows:

1. The BRPs may, either:

(i)  seek approval, from the holders of voting interests, to prepare a revised plan; or

(ii) apply to the court for an order setting aside the result of the vote on the grounds that it was inappropriate,

(subsection 153(1)(a)).

2. If the BRPs fail to take the above actions, or decide not to exercise these options, an affected party is then presented with three alternatives:

(i)  seek a vote of approval to prepare and publish a revised business rescue plan;

(ii) apply to set aside the result of the vote as inappropriate; and

(iii) offer to acquire, by means of a “binding offer”, the voting interests of any persons who opposed the adoption of the plan,

(subsection 153(1)(b)).

3. Upon the presentation of a binding offer (as referred to in 2 above) the BRPs must adjourn the meeting for no more than five business days to afford the BRPs an opportunity to make any necessary revisions to the plan to reflect “the results of the offer”, and set a date for the resumption of the meeting, at which the provisions of section 152 would apply afresh (subsection 153(4)).

Section 152 is of course the section that deals with presenting and considering the business rescue plan in the first instance, and provides that a rejected plan could only be considered further as per the terms of section 153.

The trust’s offers

When the creditors rejected the plan in February 2020 the trust:

• exercised its right to make a binding offer; and
• attempted to reserve its rights to apply to court to have the vote rejecting the plan set aside as inappropriate.

The BRPs adjourned the meeting to allow the trust’s offers to be assessed in terms of subsection 153(1)(b)(ii) of the Act.

If the trust’s binding offers had been accepted it would have meant that the realm around the voting rights would have changed, with the trust now holding those voting rights for those claims which they had purchased.

This did not happen though. At the rejourned meeting the trust’s binding offers were ultimately rejected by all the creditors. The BPRs consequently declared:

• the meeting closed; and
• the intention to apply for the conversion of the rescue to a liquidation.

Before the High Court

In response to this, the trust brought an urgent application in the Western Cape Division of the High Court, Cape Town for an order setting aside as irregular the decision of the practitioner to close the reconvened meeting and to not apply the provisions of section 152 afresh – i.e. starting the entire presentation and rejection of the plan from scratch.

The case therefore revolved around the proper interpretation of section 153(4) – whether it meant that the section 152 process started anew even in circumstances where the binding offers were rejected.

In trying to stay the sinking of this ship, the trust argued that section 153(4) spoke only to submission of a binding offer, not to the acceptance or rejection of such offer.

Avoiding absurdities

The court confirmed that in terms of the literal translation of section 153(4), the trust was correct and that on such an interpretation the BPRs were in fact obliged to refer the plan back to the section 152 process, notwithstanding that:

• the binding offer had been rejected; and
• consequently, there was no change in the voting rights.

The BRPs submitted that on a proper construction, a fresh application of section 152 and 153 can only arise where the binding offer is accepted, resulting in an alteration of the voting rights, which would then necessitate a second round of voting on a revised plan in terms of section 152 of the Act.

The SCA once again confirmed that sometimes it was necessary to deviate from literal translation to avoid absurdities in process, and again reiterated what it had said in African Banking Corporation of Botswana v Kariba Furniture Manufacturers and Others [2015] (5) SA 192 (SCA):

“I do not believe it is unfair to comment that many of the provisions of the Act relating to business rescue, and s 153 in particular, were shoddily drafted and have given rise to considerable uncertainty. Questions which immediately spring to mind in regard to the procedure envisaged by s 153(1)(b)(ii), and to which no answers are clearly expressed in the Act, include (this list is not intended to be all-embracing) . . . the effect of an offer being rejected. . .”

In this case the trust conceded that a further vote on a rejected plan, when the status of the voting rights had not changed,would make no sense.

Nonetheless, the trust argued that BRP being obliged, in terms of subsection 153(4), to refer the plan back to the section 152 process it would give the trust a further opportunity, after the rejection of its binding offer, to apply for the setting aside as inappropriate of the original vote under section 153(1)(b). In a nutshell – it would give them a second bite at the cherry.

The court however agreed with the BPRs and found that it could not have been the intention that the mere making of an offer triggered the section 153(4) steps. To interpret the section otherwise would be nonsensical and absurd. The court therefore dismissed the appeal. 

The lesson, as has been in so many cases before this, is to be careful when applying a literal meaning to legislative interpretation, especially in terms of Chapter 6 of the Act (its business rescue provisions). Sometimes, like the Titanic, a sinking ship is not capable of being saved.