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Eskom board called on to prove utility not trading recklessly

The Institute for Accountability in Southern Africa has written to Eskom chairperson Jabu Mabuza requesting a detailed written explanation as to why the current board believes the State-owned utility can be rescued from its current financial distress, cautioning that Eskom may currently be trading “recklessly” in terms of the legislation governing companies in South Africa.

Campaigning as Accountability Now, the institute asserts that Eskom is both insolvent and illiquid, making it unlikely that it will be able to meet operational costs and long-term debt obligations.

Therefore, by continuing to trade, Eskom could be in breach of Section 22 of the Companies Act, which states that a company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose; or trade under insolvent circumstances.

In a statement, Accountability Now director advocate Paul Hoffman argued that Eskom was “undoubtedly” financially distressed, as defined in Section 128(1)(f) of the Act and was, or was about to become, both insolvent and illiquid.

However, the Eskom board had, to date, failed to pass a resolution placing Eskom under voluntary business rescue, nor had it delivered written notice, as required by Section 129(7) of the Act, setting out why the utility was reasonably unlikely to be able to pay its debts as they became due.

“If the board of Eskom is of the opinion that, despite the evident financial distress, there is a reasonable prospect that Eskom can be rescued, Accountability Now requests a detailed written explanation of the basis upon which the board reasonably holds such a belief,” Hoffman said in a statement, adding that it was “unacceptable” for Eskom to continue to trade in the current circumstances.

Hoffman’s letter comes after the Public Investment Corporation (PIC) announced in early February that it had advanced R5-billion to the cash-strapped utility in the form of bridging finance to fund the company’s operations during February. The one-month loan was advanced on behalf of the Government Employees Pension Fund and was fully backed by a government guarantee.

The facility was approved amid an outcry by public sector trade unions and after Eskom approached the PIC indicating that it was experiencing “enormous liquidity constraints, which were threatening the company’s going concern status”. Earlier, Eskom acting CEO Phakamani Hadebe revealed that Eskom required R20-billion to meet debt obligations that would arise before the end of February.

Eskom did not immediately respond to Accountability Now’s statement.

However, in a separate opinion piece, written by Werksmans Attorneys director and head of the business rescue and insolvency practice Dr Eric Levenstein, it was argued that it was time for business rescue to be considered as an instrument for alleviating continued financial distress at State-owned enterprises (SOEs).

Levenstein added that such an approach could also ensure that potential personal liability of directors could be avoided.

“Many SOEs are financially distressed and if so, their boards are obligated to consider the definition of financial distress and further conduct a factual enquiry to determine whether or not the company is factually insolvent or commercially insolvent.”

Those SOEs that found themselves in a precarious financial position and where they might be unable to meet financial obligations, might well be candidates for business rescue, Levenstein added.

“In terms of Section 218, any person (including directors) who contravene any provision of the Act, is liable to any other person for any loss or damage suffered by that person as a result of that contravention. Therefore, a failure to send out a Section 129(7) notice or filing for business rescue when a company, such as an insolvent SOE, continues to trade and take credit from suppliers, could result in individual directors being sued for damages in due course.”

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