The share price of embattled construction group Group Five dropped by 10% by noon on Friday after judge Willem van der Linde earlier the same morning dismissed its urgent application to stop its client CemPower from calling on up retention and performance bonds to the value of about R900 million in relation to its Kpone power project in Ghana.
Group Five’s shares traded at 90c by late afternoon. The share has lost 92.24% of its value since January this year.
The litigation stems from a dispute between Group Five and CemPower about delays in the completion of the independent power project.
Group Five is blaming the delay on CemPower’s failure to supply natural gas, one of the three fuels the group says it needed to test the power station in order to complete the project. It further alleges that CemPower supplied contaminated light crude oil, one of the other fuels used in the testing and that this led to further delays.
Group Five, therefore, argues that it is entitled to a time extension.
It further alleges that CemPower knows this and is acting in bad faith by calling on the bonds. Group Five, in fact, alleged that CemPower was acting fraudulently in this regard.
CemPower, on the other hand, argued that the failure to supply natural gas was irrelevant with regard to the delay. Group Five was in fact relieved of its obligation to execute the tests with natural gas and could just have proceeded with the other two fuels.
It disputes that it is to blame for the contaminated fuel.
The court found that the relationship between the owner of the project, in this case, CemPower, and the banks that provided the guarantees is unrelated and unaffected by the relationship between the owner and the contractor (Group Five).
The banks must pay since the underlying dispute is, barring fraud, none of their business.
He said: “The very point about such bonds is that they should serve as immediate unclouded cash despite the underlying real dispute between an owner and a contractor as to the respective legal entitlements of the parties.”
He said: “The underlying dispute is required to be resolved in the manner provided for in the contract between them, and its determination may even come to a conclusion wholly different from that which the owner asserted to the bank.”
The contract provides that the underlying dispute about the extension of time should be settled by arbitration. Group Five’s legal representative attorney Martin van der Schyf, a partner at Tiefenthaler Attorneys Inc. told Moneyweb after the ruling that that is exactly what his client intends to pursue.
He said in arbitration Group Five would pursue a fair determination of its entitlement to an extension of time since the owner CemPower is the judge and jury in the current process. He added that CemPower failed to grant a single day’s extension on a project which has been delayed by a year and saw a change in the law, as well as the absence of natural gas, which it was obliged to provide.
HSBC Bank and Standard Chartered Bank were listed as second and third respondents in the matter. They did not present arguments and indicated that they would abide by the ruling.
Group Five published a Sens announcement shortly after 14:00 on Friday. Among other things it said: “The judgment allows the client to proceed with its request for payment of the Group’s maximum liability in terms of delay damages, to the amount of $62,7 million. In preparation of this potential judgement the Group had already previously engaged with its financial partners and lenders who had, and continue to, confirm their support in managing this liquidity event. This includes lenders agreeing to abide by the creditors’ standstill agreement, established when the Group entered into its Senior Bridging Facilities Agreement. The standstill agreement imposes limitations on the standstill creditors to take enforcement action against Group Five. Further terms and conditions of this support, including the terms of repayment of any debt, are being finalised with the lenders.
“As disclosed in Group Five’s year-end results release, the Group maintains a rigorous liquidity model which includes cash flow forecasts covering a period of 12 months from reporting date. These forecasts were reviewed by independent international advisors as part of both an Independent Business Review and an Independent Contracts Review, undertaken to review and evaluate the Group’s larger and potentially riskier construction contracts. The outcomes of these reviews were incorporated into the Group’s forecasts. These liquidity plans also considered and included the impact of any potential delay-damages payment demand by the Kpone client on bank guarantees in issue for the contract prior to an independent determination of any possible actual penalties due being made.”