Business rescue process of SOEs: parliamentary oversight and legislation

Meeting report

Business rescue process of SOEs

Adv Frank Jenkins, Senior Parliamentary Legal Advisor, explained that oversight was not an option but a constitutional duty that Parliament must perform. Even if a state-owned enterprise (SOE) was under business rescue, this did not suspend the obligation of the Committee of the National Assembly or the National Council of Provinces (NCOP) from performing oversight. He illustrated this by looking at a variety of laws that support this. These included:

• Section 55(2) of the Constitution imposes a duty on the National Assembly to provide mechanisms to hold the national executive accountable.
• Rule 227 of the National Assembly Rules prescribes the role of portfolio committees, such as this Committee, in the performance of this oversight function. Rule 227(1)(b) provides, amongst others, as follows: “A portfolio committee must maintain oversight of – (i) the exercise within its portfolio of national executive authority, including the implementation of legislation."

On business rescue proceedings, he explained in broad terms what business rescue was. Parliament’s legal department could not advise on the recommendation and shortcomings of business rescue. However, the legal aspects and the success rate of business rescue in the country could be looked at. The Committee could look at a business rescue plan as a benchmark on whether the rescue practitioners were sticking to the plan during proceedings.

On liquidation and how it worked regarding SOEs, he explained the concept of reckless trading and the solvency and liquidity test which assesses whether a company is solvent and may continue trading. Legislation such as the Insolvency Act and the Companies Act was there for liquidation. However, these legislations did not come into play when it came to SOEs due to the issue of bonds maturing.

On the legislative framework for public-public partnerships (PPPs), he touched on the principles for cooperative governance in Section 41 of the Constitution. These principles require all spheres of government and all organs of state within each sphere to cooperate with one another in mutual trust and good faith by fostering friendly relations; assisting and supporting one another; and coordinating their actions and legislation with one another. He was unaware of whether there was something restricting government departments and organs of state from cooperating with each other.

Discussion

Mr N Dlamini (ANC) commented on the business rescue part of the presentation. He said that business rescue was a positive thing, especially from a labour point of view, as it sought to prevent companies from going under and people from losing their jobs. It looked at how an entity could be turned around and made functional. However, the country’s SOEs should not reach a point where they need rescuing. A presentation that would take the Committee through how these entities found themselves in these situations was needed. This would help the Committee know exactly what the problem was when it looked for alternatives and solutions for these situations.

Eskom was the best-run entity, but look at the state it was in now. There was a need to reach a point where SOEs did not need bailouts. There was a grey area in public-private partnerships. If one looked at Transnet, part of its mandate was to help with government’s imperative, which included economic transformation and job creation. To what extent did Transnet get black businesses involved in their core operations? This did not include how much they spent on black businesses such as cleaning companies. This breakdown was needed so that the Committee knew how money was spent in an entity should the entity need business rescue.

Mr G Cachalia (DA) asked whether the Committee was able to request interim financial statements from SOEs in business rescue. Could the Committee have sight of non-approved financial statements still awaiting government capitalisation? With that caveat that they were waiting for capitalisation, having sight of these interim financial statements would help the Committee, which could look at the statements carefully, even in a closed meeting. He commented on the prevention of reckless trading. The Committee needed to question this more robustly as there had been a number of SOEs in the past who had been trading recklessly but had been allowed to do so until something happened. The Committee needed to be more robust about that.

Mr S Gumede (ANC) said it had become clear that one needed an honest board and executive when business rescue was obtained. It looked like a process that could not be delayed the moment one saw in their analysis that a business was moving toward needing business rescue. Who decided on the appointment of business rescue practitioners? Was it the court or the entity that provided the practitioners? Legislation specified that a credible person with in-depth knowledge of the field was needed. One would not want to take someone with no relevant skills or credibility. He was not sure at what stage the business rescue process could come to a halt or fail. What happened to the costs incurred and the payments made in full to the business rescue practitioner in such a case? Was there a possibility that a business rescue process could fail in the hands of a business rescue practitioner? What was the duration of a business rescue process? Could the process be abused or manipulated, seeing that the board members were the ones who did the analysis? The board members know everything. Sly directors might do something that was to their own benefit.

He was happy about the fact that the Committee could conduct oversight over the business rescue process and the business rescue practitioner. The business rescue practitioner would assume the responsibility that was done by the entity. The Committee was free to meet that person and talk to them. What happens to a company's assets if the company was already liquidated? Could the company still go into business rescue? Could the public-private partnership be better explained? A public-public partnership looked like an alternative to a private-public partnership, because that involved money. However, going public-public would depend on how long the partnership would stay before the other organisation in the partnership collapsed.

Mr F Essack (DA) said that Adv Jenkins had made strong remarks about a committee needing to have strong oversight responsibility. Just a few weeks ago, this very Committee deliberated over South African Airway’s (SAA's) financial statements, which were around four years old. How did the Committee exercise concrete oversight over these SOEs when they were presented with financial statements that were four years old, and the circumstances had changed so drastically? Could the Committee not have interim financial statements on a 12-month turnaround basis to exercise effective oversight and comment on the true state of current affairs?

Ms J Mkhwanazi (ANC) stated that she was fairly covered by the Committee Members, especially on public participation and the role of politicians in the process.

Ms J Tshabalala (ANC) found this briefing quite important, as the Committee had wanted to understand the business rescue practitioner issue for some time. Point 11 of the presentation spoke about a business rescue practitioner being a person, or two or more persons jointly appointed, to oversee a company during a business rescue process. Who appointed this person or these persons? Was it the same business going into business rescue that made the appointments? Was there a register where the business rescue practitioners were sourced, or could anybody be sourced externally?

Point 14 of the presentation highlighted the fact that as of 31 December 2021, private companies made up 69% of companies that were placed in business rescue proceedings since the rescue inception. Billions had been lost to business rescue practitioners, who never saved anything. The Committee did not even see part of their mandate to give it a plan. They needed to get accountability. They needed to find it in legislation which empowered Parliament to have an accountability method on how funds were used and allocated. An article pointed out that some business rescue practitioners had appointed consultants. This turned the process into a business within a business. She had problems with the lack of accountability in how funds were used in this process. There were so many gaps. How could one harmonise that and get value for money? They try to get the private sector on board, but hardly see any public-public partnerships. In the current legislation, was there something binding the Committee could recommend to an entity? Sections 40 and 41 of the Constitution, and fostering friendly relationships were good gestures, but the Committee needed something binding on the entities.

The Chairperson pointed out that the presentation stated nothing stopped the entities from working together and assisting each other. However, why was there no legislation that obligated the entities to work together for the public good? Entities such as Denel could have been rescued if legislation compelled public entities to buy from other public entities. SAA could have also been rescued if officials who commuted between Cape Town and other cities were compelled to use SAA. What made it difficult for these entities to be obligated to seek procurement among each other, even though the Public Finance Management Act (PFMA) dealt with this? He was happy that it was emphasised that oversight was not an option or a choice, but was part of the Committee’s legal responsibility. Considering the practical experience during the SAA business rescue processes, where it had been difficult for the Committee to do its own oversight work due to the fact that the rescue practitioners were not accountable to the Committee, but only to the court, how could they reconcile the Committee’s legislative responsibility on the one hand and the business rescue practitioners not accounting to the Committee on the other?

Legal adviser's response

Adv Jenkins addressed the question as to whether the Committee could do something before SOEs got into business rescue procedures, and said this spoke to in-year reporting. Government departments must submit monthly expenditure reports in terms of the PFMA. Committees should ideally use these reports to do month to month monitoring of the reports as they get published. There was in-year, quarterly, and mid-year reporting to National Treasury, which was shared with Parliament. There was monthly reporting about what the Auditor General did.

On whether Parliament could request non-approved interim financial statements, he replied that he did not see any constitutional limitations on what Parliament could or could not approve, other than that it must be in line with Parliament’s oversight responsibility. When Parliament requested interim statements, he could not see a reason why an SOE could refuse to provide this. An SOE could say that it was not directly accountable to Parliament, but Parliament could nonetheless still request it. The Constitution obligated Parliament to conduct oversight over SOEs. Parliament could request interim financial statements pursuant to this constitutional obligation. There was possible pushback should Parliament try to do this, as it was very rare that someone who had done something wrong would come forward and hand over the murder weapon or where they buried the body. Very seldom would a Markus Jooste come forward and admit to their fraud. They would rather rely on the presumption of innocence, and not share anything.

Sharing the financial statements should not be a problem if someone is not conducting fraudulent activities with the statements. This should probably be considered in a closed meeting, because bondholders might get nervous and bonds might get expensive, leading to the government getting affected. The Constitution gave Parliament the power to subpoena documents if those documents were not handed over voluntarily. One could bring the SOEs under the provisions of the PFMA, if the PFMA was changed. One of the challenges was that the PFMA did not require SOEs to report in-year to Parliament. One could look at making legislation tighter to have better accountability from SOEs. This would not create new rights for Parliament, but would strengthen its existing rights to require SOEs to hand over interim statements.

On who decides on the appointment of business rescue practitioners, he referred to section 129(3) of the Companies Act, which provides that a company that wants to be under rescue procedures must appoint a business rescue practitioner. This person must satisfy the requirements of section 138 of the Companies Act, which requires the person to be a qualified practitioner, a member of good standing of a legal, accounting, or business management profession which was accredited by the Companies and Intellectual Property Commission (CIPC) and had been licensed by the Commission, and would not be disqualified from acting as a director. The person may be removed by a creditor, employees, a recognised trade union, or the shareholders of the company. It sounded like the Committee might have had issues with a business rescue practitioner who might have indicated that they did not account to the Committee. Though nothing in the legislation stated that the rescue practitioner was accountable to the Committee, the Act did say that a rescue practitioner was accountable to the creditors.

The business rescue plan itself must be in line with what the Companies Act requires. There was a whole issue that dealt with what must be in a business rescue plan. That plan must be submitted to a meeting with the creditors. The accountability was to all affected persons, but the Constitution makes a practitioner responsible to Parliament too, where SOEs were concerned. Even where companies with public functions were involved, Parliament must have oversight over all organs of state. It was strange that a business rescuer’s vision of their role in a business rescue process of an SOE would be so narrow. That practitioner should read the National Development Plan and see where SOEs fit in the public sector.

The cost of the business rescue practitioner was set out in section 143 of the Companies Act. There was a tariff that was prescribed. The rescue practitioner was entitled to that money. There could be objections against paying the amount to the practitioner should the rescue process fail through a court application.

On the Committee’s role in the oversight of business rescue proceedings, he replied this would be for the Committee to ask their shareholder whether they had agreed or not agreed, or considered the payment of the rescue practitioner. He pointed out that when an entity was bailed out, it was very important for the government to see whether it was providing equity as a shareholder, or whether it was becoming a creditor by giving a certain amount of money to a company to make it a going concern. It was very valuable that government became a creditor, as creditors had more rights in a business rescue process.

On how long the business rescue process takes, he replied that section 132(3) of the Companies Act states that the process should take about three months to do the preliminary work.

He did not see a reason why the Committee could not request a progress report from a business rescue practitioner. It was not in the Companies Act, but legislation requiring such a report could be put in there. The Companies Act applies to companies, non-governmental organisations, non-profit companies, and SOEs. If the challenge of the Committee was that it could not get to a point where business rescue practitioners could not come to Parliament to give progress updates without being summoned. In that case, one could look into putting this into legislation, but one would have to make it specific to companies performing public functions, or those that could be classified as an SOE.

On liquidation and business rescue procedures, he replied that as he understood it, if a creditor had instituted liquidation procedures, nothing prevented a board from making an application or from having a meeting and taking a vote and placing the SOE under business rescue proceedings. In that case, the liquidation proceedings would cease. If the business rescue proceedings failed, then the liquidation proceedings would continue.

On the oversight of SOEs and old financial statements, he agreed with Mr Essack that very little could be done with old financial statements. One could look at the former board and conclude that it did not do its job, but the Committee used public resources at every meeting it had, so one must decide how to use those resources efficiently. It was more efficient to deal with a new board and what was happening now. Old statements had little value. Proper accounting was needed. Parliament needed up-to-date information to deal with SOEs. Not reporting on time, and Parliament not getting financial statements, was an anomaly. Something needed to change. There must be accountability. Parliament could make a committee bill or a full-on enquiry based on the NDP to deal with non-reporting.

Replying to the issues raised by Ms Tshabalala, he said that the specifics on why he was making this briefing to the Committee had not been shared with him. He had dealt with most of the questions earlier. He was not paid to defend the business rescue practitioners, but there were instances where one could not blame the business rescue practitioner and there were instances where one could. This could be apparent only when there was proper reporting. What he could say on oversight over the business rescue practitioners was that their functions were set out in Chapter six of the Companies Act. For their business rescue to be successful, they must have a business rescue plan that creditors or shareholders must approve. If the business rescue failed, the Companies Act required the plan to be redrafted, resubmitted within a certain time, and then reapproved. This applies to all companies and SOEs. The business rescue plan was really for the company to survive the onslaught of creditors demanding their money back. It was perhaps not the best place for a multiparty committee to come in, but one could say that oversight over the process would be appropriate.

He agreed with Ms Tshabalala on public-public cooperation that it was a good gesture, but he was unsure whether more could be done. The legislative structures that were there stood in the way a little bit. South Africa had procurement regulations that were structured in a certain way. They had been changed recently and needed to be relooked at. Those regulations required a state organ or a department to have a procurement process. There were provisions in that legislation that did not oblige one to take the cheapest option. There were new provisions to allow for preference over new manufacturers. It would be interesting to hear why management of SOEs did not use locally produced goods, or goods from other SOEs. One needed to be alive to the economics, and to have procurement systems that preferred a certain points system. One must remember that those things were there, before trying to force public entities to procure from each other. Many countries have tried the example that the Chairperson had given. One could also figure out how to use South Africa's air space to ensure socio-economic development in the country. There were procurement regulations in place that did not prohibit this, but some people might use it to favour other suppliers.

On whether rescue practitioners were accountable to the Committee, he replied that a business rescue practitioner would need to be on the same page. He could only compare it to what was in the Income Tax Act and the revenue laws. Certainly, regulatory boards had access to taxpayers' data. When Parliament wanted to audit a business, it could not request their data as Parliament was not listed to do so. The company would have a legitimate objection, as per the Income Tax Act. This was not the same for the financial statements of SOEs. The answer on the tax issues and the SOEs was the same.

Follow up questions

Mr Gumede said he had asked whether the process could be manipulated or abused.

Ms Tshabalala said the briefing was important. The Committee had always wanted a joint meeting with the Department of Trade and Industry (DTI). Who was then responsible for legislation relevant to business rescue? Was it the DTI? To tighten legislation in this area, perhaps a recommendation that the Committee needed to take forward was for the legal adviser to go back again so that the Committee could see how best to handle this grey area. Accountability was an issue. Her issue was with the public funds that fund the rescue practitioners. The same entity appointed the practitioners, but then the department itself told the Committee that the business rescue practitioners did not account to them. That was where she had picked up an issue. The Committee did not have a way to account for the money that had been allocated.

In 2021, the Committee had an issue with Mr Siviwe Dongwana, who had avoided accounting to the Committee on SAA during rescue proceedings. However, this changed after an engagement on SA Express. This had changed at a late stage. There was a need to get value for money from work done by business practitioners and how they were appointed. The remuneration of and expenses incurred by business rescue practitioners according to the tariffs amount to R2 000 per hour, and a maximum of R25 000 per day. That was how much was paid. The SAA business rescue practitioners that did not want to come and account were paid over R36 million. Even Parliament did not understand exactly how this money was used.

The business rescue process was meant to protect the company assets against creditors and preserve the value of the company and its assets. The process was also meant to allow employees to continue to be employed. She begged to differ as to whether any of this had been achieved. The Committee needed to ensure that it continued discussing this process until it understood it and got the accountability that it really needed. They still needed to go another mile with this issue, because it impacted the Committee and they needed to protect SOEs who find themselves in the business rescue process. Was there a database to see where these business practitioners were sourced so that the Committee could assess how much the practitioners were roving around state entities, and how much they were actually assisting? Serious money was being lost.

The Chairperson had follow-up questions on the public-public partnership matter. He said that the Competition Commission deemed it anti-competitive behaviour for SOEs to show preference for each other. They were apparently not comfortable with that. National Treasury also frowned on SOEs showing preference to other SOEs. Were politicians able to start engaging around changing that attitude from National Treasury and the Competition Commission, or was it only the courts that could change this? They would never move as long as SOEs were not legislatively compelled to help each other improve their financial muscle. He was of the belief that perhaps the PFMA did not intend to help these entities out of corruption, because the involvement of private enterprises was where these bureaucrats were corrupted. They received kickbacks that they could not receive in public-public partnerships.

Legal adviser's response

Adv Jenkins said that as the business rescue process stood right now, it could be manipulated. Additional checks, such as reporting to Parliament, could be built into the process.

On the issue of Parliament reporting, he replied -- with the utmost respect to the Committee -- that Parliament was not necessarily the best place to make decisions. However, it was a transparent forum for the consideration of national issues. It was probably one of the only constitutionally mandated transparent forums in the country. The business rescue process could be manipulated. One might have a person who was part of the company which was part of the process. How could this be stopped? The people affected by the process had the ability to stop this and the right to change the business rescue practitioner or object to the funds paid to the practitioner. The Committee needed to deal with the shareholder or the creditor. The shareholder or the creditor needed to account for what they had done in their capacity. It was understandable that some big entities could not be fixed in three months and needed more time. The fees needed to be looked at. The oversight was not directly over the fees, but over the shareholder or the creditor. Did the creditor speak up over the fees? The fees were not just focused on one person. It was bigger than that.

He replied to Ms Tshabalala’s that the DTI was in charge of the Companies Act. A meeting could be set up with the DTI to see whether the Act should be amended to deal with the grey areas.

On the Competition Commission and National Treasury frowning on SOEs procuring exclusively from each other, he replied that these were discussions that must be had. If the result of SOEs working together resulted in collusion, then competition was being minimised and this went against the philosophy of business in the country. The Competition Commission wanted to see cooperation without price fixing and the exclusion of other market players. The only way to deal with possible manipulation was for the process to be dealt with openly, with the public and the media having the information available.

The Chairperson thanked Adv Jenkins for his briefing, and released him from the meeting.

Committee matters

The Committee's minutes of October 26 and November 2 were considered and adopted.

Mr Disang Mocumi, Committee Secretary, said that the programme had had to be reshuffled because most of the companies that the Committee intended to invite were yet to table their financial reports for this financial year. A revised programme would be sent to the Members.

The meeting was adjourned.