There is allegedly prima facie evidence of reckless and/or grossly negligent conduct by the board of Group Five prior to it going into business rescue, which needs to be investigated and interrogated.
This is one of the contentions made by Lockstock Investments director Paul Sundelson, a Group Five shareholder, in a founding affidavit on behalf of 48 other shareholders who have launched a Johannesburg High Court application against the construction group and its business rescue practitioners (BRPs) Peter van den Steen and Dave Lake of Metis Strategic Advisors.
Sundelson has also questioned the conduct of Group Five’s board regarding the payment of about R8.5 million in fees and expenses to non-executive directors, about R23.5 million in salaries and bonuses to executive directors and about R42 million in salaries and bonuses to members of the executive committee in the group’s 2017 financial year – when the company was in “profound financial and operational distress”.
Largesse despite losses and turmoil
“In light of the losses being sustained by the Third Respondent [Group Five], and the turmoil within the Third Respondent, one would have expected a prudent board of directors to impose austerity measures and act in a conservative manner,” he said.
“It is unthinkable that, having suffered a profound loss for the 2017 financial year, the management of the Third Respondent believed it prudent to reward themselves for the poor results by paying themselves exorbitant salaries and bonuses amounting to tens of millions of rand.”
Group Five reported a headline loss per share of 829 cents in the year to June 2017.
Sundelson is the first applicant in the case in which the consortium of shareholders is seeking to have various board and shareholder resolutions passed prior to Group Five going into business rescue declared null and void and set aside for alleged lack of compliance with the Companies Act, and to convert the business rescue to a liquidation.
The consortium of shareholders collectively paid more than R15 million to purchase shares in Group Five.
In terms of Group Five’s approved business rescue plan, its shareholders aren’t anticipated to get any return.
David Swartz, managing director of SWVG Inc Attorneys which is representing the consortium, said on Tuesday that a date has not yet been set for the case to be heard.
Liquidation application will interfere with business rescue …
The BRPs said on Monday that Werksmans Attorneys will be opposing the high court application on behalf of the BRPs and the company, “given the orders that the shareholders seek and the impact that this will have on the business rescue proceedings of the company, which is currently being implemented in terms of the approved business rescue plan.”
The listed construction and engineering group was placed in business rescue and its shares suspended on the JSE in March 2019. Group Five’s listing is to be removed from the JSE on Friday.
Sundelson said the BRPs have refused to investigate the conduct of the board of Group Five, claiming that such an investigation would be beyond their mandate.
“The BRPs are not going to investigate the conduct of the board, as they are involved in the business at the behest of the board,” said Sundelson.
“For this reason it is imperative that the business rescue be converted into a winding-up in terms of the provisions of Section132(2)(a)(ii) of the Companies Act in order to ascertain whether any liability should be attributed to the board.”
Sundelson said that if the specific resolutions mentioned are declared null and void, it will follow that a guarantee executed by Group Five in favour of a lending consortium comprising Standard Bank, Absa, FirstRand, HSBC and Boundary Terraces No 14, must be declared null and void and also be set aside.
The consortium is seeking, among other resolutions, the setting aside of a board resolution passed by Group Five’s board on May 2, 2018, in terms of Section 74 of the Companies Act, authorising G5 Construction to conclude an agreement with the lending consortium in terms of which the consortium made a R650 million facility available to G5 Construction, with Group Five standing as guarantor for payment of this facility.
Sundelson said this board resolution did not comply with Section 45(5) of the Companies Act.
He added that given the profound and increasing losses being suffered by Group Five, it’s simply not possible that its directors could have believed the group would pass the solvency and liquidity test set out in Section 4 of the Companies Act.
Sundelson said G5 Construction’s default on its payment obligation to the lending consortium resulted in the consortium calling up the guarantee, which was “ultimately the catalyst” to Group Five being placed into business rescue.
Following the termination of the Kpone power plant project in Ghana in November 2017, the payment of $106.5 million (then about R1.5 billion) was demanded by Cenpower Generation Company from the financial guarantee providers.
The banks paid the full value of bank guarantees in issue of $106.5 million to Cenpower, which resulted in Group Five becoming indebted to these financial guarantee providers.
Shareholders being told ‘sit supine’
Sundelson said the shareholders “are now being told that we would see no return on our investment, and we should simply sit supine and allow the BRPs to strip off the Third Respondent’s viable assets in order to benefit the lending consortium.”
He said that once the guarantee is set aside, Group Five will no longer be financially indebted to the lending consortium for an amount exceeding R1 billion.
The BRPs said on Monday that in responding to the challenge to the guarantee, they and Werksmans Attorneys sought the advice of senior counsel regarding the validity of the special resolution and the board resolution in terms of which the guarantee was authorised and issued.
“Senior counsel was of the opinion that the special resolution and the board resolution complied both in substance and form with the provisions of the Companies Act.
“Accordingly, the BRPs maintain that the guarantee issued in terms of the special resolution and board resolution is not void and not capable of being set aside,” they said.
Group’s entire foundation has ‘disappeared’
Sundelson added that irrespective of whether the guarantee is set aside, it appears that Group Five will still have to be wound up because “the entire substratum” of the group, comprising its shareholding in G5 Construction and Everite, has disappeared.
The consortium therefore seeks an order converting Group Five’s business rescue into liquidation, he said.
Sundelson said Group Five’s business rescue is simply a controlled winding down of its business, adding that the BRPs have “misrepresented to the affected persons that such a controlled winding down of the business will result in a better dividend to creditors/affected persons than a winding up of the business”.
“This is factually incorrect and legally untenable,” he said.
“The interested shareholders verily believe that the erstwhile directors of the Third Respondent [Group Five] acted in a reckless, alternatively grossly negligent, alternatively fraudulent manner … in misrepresenting the financial distress of the Third Respondent to the public and to shareholders, in causing the Third Respondent to guarantee a R650 million facility in circumstances where it was patently clear that the Third Respondent was factually and commercially insolvent and in paying themselves significant bonuses whilst the Third Respondent was financially distressed,” he said.
Sundelson said this conduct ultimately caused Group Five’s business to fail and precipitated the business rescue process.
He said the interested shareholders wish to interrogate the directors of Group Five in order to investigate the nature and extent of their wrongful conduct and the extent of their liability to Group Five for such conduct.
However, Sundelson said the controlled winding down of Group Five is denuding shareholders of the interrogatory rights that are afforded to them in terms of the Companies Act 61 of 1973 together with the Insolvency Act 24 of 1936.