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Latest Steinhoff court action could improve payout to shareholders

Challenges the extremely favourable position enjoyed by its financial creditors.
At stake is billions of euros of bonds ring-fenced for the financial creditors. Image: Shutterstock

Another day in court and another grenade lobbed into Steinhoff’s carefully structured plan to carve up the group’s limited cash and near-cash resources among seemingly unlimited creditor claims.

The latest court action, which overlaps the unexpected liquidation application brought by the former Tekkie Town owners, challenges the extremely favourable, and so far unchallenged, position enjoyed by Steinhoff’s financial creditors.

At stake is billions of euros of bonds ringfenced for the financial creditors. A reduction in this payment could free up tens of billions of rands of funds, which could be used to improve the proposed payout to shareholders.

The latest court action, brought by Trevo Capital and Hamilton BV, was adjourned last week by the Western Cape High Court and is scheduled to resume on Monday.

The two applicants are hoping to upend the carefully structured €9 billion agreement between Steinhoff and its financial creditors that took almost two years and millions of euros of fees to finalise in late 2019.

Read:

Solvency and liquidity test ‘not done’

Trevo and Hamilton, who are acting on behalf of thousands of Steinhoff shareholders, contend the necessary test for solvency and liquidity was not undertaken by the Steinhoff board before it signed off on guarantees for the benefit of the financial creditors both before the fraud at Steinhoff was revealed and then again as part of the debt restructuring in 2019.

The 2019 restructuring provides for the financial creditors to be paid 100c in the euro and receive 10% compounded per annum interest until full repayment is made.

After the December 2017 revelations of accounting irregularities and the consequent collapse of the Steinhoff share price the holders of hundreds of millions of bonds, due to mature in 2021 and 2022, called up a guarantee that Steinhoff had provided in 2014.

During 2018 and much of 2019 Steinhoff stitched together a new agreement with financial creditors who had bought up the bonds from various institutions that had rushed to sell them, at heavily discounted prices, in the aftermath of the December 2017 revelations.

Trevo contends that both the original 2014 bond guarantee and the 2019 guarantee are void because the Steinhoff board could not have satisfied Section 45(2) of the Companies Act before providing what was essentially financial assistance to an associate.

“Section 45(3) of the Act provides that the board may not authorize financial assistance contemplated by Section 45(2) of the Companies Act unless inter alia the board is satisfied that immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test set out in Section 4 of the Companies Act,” say the applicants in court papers.

False statements

The court papers go on to claim that the SIHPL (Steinhoff International) board could not have satisfied itself, if it was acting reasonably, that SIHPL would satisfy the solvency and liquidity test immediately after guaranteeing German-based subsidiary Steinhoff Financial Holding GMBH (SFHG) in 2014.

That guarantee was provided on the basis of SIHPL’s 2013 annual financial statements, which have subsequently been proved to be false. At the time the Steinhoff board was led by CEO Markus Jooste and CFO Ben la Grange who, it has subsequently emerged, knew the statements were false and that the Section 45 inquiry could not be satisfied.

In addition, Trevo claims, SIHPL has not demonstrated that it complied with Section 45(3) when the board authorised new guarantees as part of the restructure in 2019.

In response Steinhoff argues that the 2019 restructure and guarantee was merely a rollover of existing debt and not additional debt.

The adjournment to Monday was requested by Steinhoff so that it could submit as evidence the Company Voluntary Arrangement agreed with the financial creditors in 2019.

‘No right’ and ‘no legal merit’ says Steinhoff

Steinhoff also contends that neither Trevo nor Hamilton have the right to make any claims; that Trevo is not a shareholder and that, even so, on the basis of last year’s decision in the Anthea De Bruyn class action case, shareholders’ claims against Steinhoff have “no legal merit”.

Read: Court blow for Steinhoff shareholders (Jun 2020)

Much of Hamilton’s court papers involve a rebuttal of the use as precedent of the De Bruyn ruling made by Judge Unterhalter.

That judgment dismissed the claim by De Bruyn, who was acting against the Steinhoff directors on behalf of a group of Steinhoff shareholders. Unterhalter ruled that the shareholders had no cause of action and that only the affected company could hold their directors liable for losses that the company suffered.

The Steinhoff board has used the De Bruyn ruling to discourage legal claims by shareholders. Evidently neither Hamilton nor Trevo were discouraged.

Hamilton says its claim is fundamentally different from that of the De Bruyn class action because it (Hamilton) “expressly alleges that the Steinhoff companies were guilty of fraudulent misstatements whereas the De Bruyn action was based on allegations of negligence …”

This distinction, claims Hamilton, is critical to the “wrongfulness test” that must be considered by a court.

“Unterhalter J’s judgment is simply precedent for the fact that a claim as (poorly) pleaded as in De Bruyn would fail to satisfy the wrongfulness test insofar as it is founded in negligence,” argues Hamilton.

Essentially a fraud-based claim is much more persuasive than negligence.

Damages quantified this time

Another critical legal difference is that De Bruyn did not quantify the damages being claimed against the Steinhoff directors while Hamilton has quantified the damages it is claiming against Steinhoff.

Hamilton also contends the losses suffered by the shareholders (on whose behalf it is acting) are not the same as those suffered by the company.

While the Western Cape High Court’s Judge Bozalek has an enormous amount of complex legal argument and, given the company voluntary agreement (CVA) related adjournment, an equally complex financial agreement, to consider, one thing has been made clear by the Hamilton case – the exceptionally favourable position enjoyed by the financial creditors who signed up to the CVA in 2019.

‘Exceptionally favourable’ in a nutshell

Most of these creditors bought their Steinhoff bonds for a few cents in the euro back in late December 2017; they are now in line to be paid out 100c in the euro and, in addition, are getting a hefty 10% compounded interest per annum until repayment is made.

By contrast the market purchase creditors – the shareholders who bought their shares in the market – are in line to get less than 3% of their losses. The contract creditors, such as Christo Wiese and GT Ferreira, are due to get around 29%.

Not only do the financial creditors enjoy a considerably stronger financial position – including payment of any related legal fees – but, remarkably, they were given the right to appoint two nominees to the Steinhoff board.

They now comprise 50% of the four-person ‘Litigation Working Group’ that is directing Steinhoff’s restructuring efforts. Those efforts include the company’s response to litigation.

All in all, while the Steinhoff operations appear to be doing encouragingly well, for months, possibly years to come, the real interest in this global retail group will continue to be the mesmerising legal claims by the thousands of parties who suffered major losses as a result of the financial irregularities that came to light in 2017. Legal history in the making.

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The creditors always stand first in the queue and the ordinary shareholders last in the queue. That is part of the risk you take when you invest in ordinary shares. Live with it!

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