Former Eskom chief nuclear officer appointed chair of Necsa

Written by Ciaran Ryan. Posted in Journalism

British-born David Nicholls is highly respected in the industry. From Moneyweb.

Nicholls’s departure from Eskom at the end of 2018 was reportedly due to the utility’s desire to cut its wage bill. Image: Supplied

Nicholls’s departure from Eskom at the end of 2018 was reportedly due to the utility’s desire to cut its wage bill. Image: Supplied

Minerals and Energy Minister Gwede Mantashe’s appointment on Friday of former Eskom chief nuclear officer David Nicholls as chair of the troubled Nuclear Energy Corporation (Necsa) was a surprise move.

It followed the resignation of the previous board a week ago, leaving the organisation rudderless, though Ayanda Myoli continues as acting CEO. A week ago the remaining four members of the Necsa board who hadn’t already jumped ship (there were 10 board members in 2018), sent a letter to the minister berating him for his lack of support. The four directors who resigned were Dr Pulane Kingston, Dr Pulane Molokwane, Matlhodi Ngwenya and Bishen Singh.

Mantashe fired back on Twitter: “We must reinstate Necsa into a functional state. We can’t allow dysfunctional governance. We must appreciate that correcting governance is painful.”

Turmoil

Necsa has been in turmoil since late 2018 when former energy minister Jeff Radebe sacked the previous board, including Dr Kelvin Kemm (chair), CEO Phumzile Tshelane and finance director Pam Bosman, on dubious grounds of “defiance”. In August last year the Pretoria High Court overturned Radebe’s suspension of Kemm and Bosman, but made no ruling on Tshelane’s status as a disciplinary process was still ongoing.

Read: Axed Necsa board blames resistance of ‘privatisation by stealth’ for dismissal

Moneyweb is in possession of an invoice from MNS attorneys, Necsa’s legal advisor, for R1.7 million related to Tshelane’s disciplinary hearings. This may explain why Necsa’s legal battles with former staffers seem to have no resolution, says a company insider.

Hopefully, Nicholls can bring some sorely needed stability to the company and resolve the mess initiated by Radebe.

Nicholls is highly respected in the industry and regarded as a non-nonsense leader who gets things done. As chief nuclear officer at Eskom he was responsible for the new build programme at Koeberg power station in recent years – and was always fair and diligent in his dealings, says an industry insider who asked not to be named.

While at the utility he revitalised the Pebble Bed Modular Reactor (PBMR), an area in which South Africa was a world leader.

Nicholls was one of nine executives let go as part of a programme to cut Eskom’s wage bill, according to a 2018 Eyewitness News report.

He had worked his way up through the ranks at Eskom, working in its nuclear engineering department in the early 1980s before being appointed as technical support manager at Koeberg in the early 1990s. He headed up the PBMR project before it was put on the back burner during former president Jacob Zuma’s tenure. He was later appointed chief nuclear officer at Eskom, and has experience managing Koeberg, which is the lowest cost provider of electricity to the grid.

New board

Others appointed to the Necsa board are Dr Namane Magau, James Maboa, Senamile Masango, Joseph Shai, Letlhogonolo Noge-Tungamirai and Dr Gregory Davids.

Maboa is reportedly well respected by the largest trade union at Necsa, the National Education, Health and Allied Workers’ Union (Nehawu), and some on social media endorsed Masango as a progressive nuclear scientist. Davids has a background in human resources.

Zolani Masoleng, branch chair of Nehawu at Necsa, said the union welcomed the appointment of the new board.

“This is a very important step in restoring governance and stability in the organisation. It gives all of us another chance to turn Necsa around from the destructive path under the previous board, and place it once more in the path of growth and sustainability.

“We are making a clarion call to the board to lead by example in inculcating a culture of good corporate governance and to at all times place the interests of Necsa above those of their own. None of them should individually or collectively act in a manner that dishonours the organisation.

“As the majority union we will work with the board to make Necsa a prosperous organisation. We wish them all the best.”

Read: Nuclear energy company’s not-so-secret plan to beat the courts

There is lingering uncertainty over the fate of the board members sacked by Radebe – Kemm, Tshelane and Bosman – all of whom remain in legal dispute with Necsa.

In August last year the Pretoria High Court ordered the reinstatement of Kemm as chairman and Bosman as head of audit and risk. The effect of the judgment was to dissolve the replacement board, according to legal experts.

Read: Court issues damning judgment against former energy minister Jeff Radebe

In October last year the Portfolio Committee on Mineral Resources and Energy chimed in, saying there was no board at Necsa. It told management and labour to work out their differences in the interests of the company.

The replacement board’s letter of resignation claimed Necsa had been technically insolvent since 2014 and had been making losses since 2014 – a claim that Kemm refutes: “In the last year that I was chairman, before being removed by Radebe, we made a R300 million profit. This resignation letter is a load of nonsense that attempts to shift blame to my board. It is also an insult to the Auditor-General which gave us a clean audit report as well as to the Institute of Directors which gave us an award for our outstanding governance.”

Read: Necsa and Auditor-General poles apart on 2018 financial report

Kemm continued: “It is such a pity what has happened to Necsa. We had a stable, profitable company under my board and then Jeff Radebe was appointed minister and started to give us operational instructions, which we objected to.

“Political interference in the running of a state-owned company just does not work. I wish Mr Nicholls all the best in his task ahead’.”

Necsa has been dipping into funds ring-fenced for rehabilitation of the nuclear reactor. Kemm says under his chairmanship, Nedbank demanded collateral of R100 million from the ring-fenced funds for a loan of R60 million to tide it over a cash flow shortage. The R60 million was repaid and the collateral released.

Last week’s resignation letter to Mantashe appears to suggest the company has had to find as much as R554 million from loans, overdrafts and borrowing from emergency funds to meet its liabilities.

It may be time to liberate auditors from the accounting profession

Written by Ciaran Ryan. Posted in Journalism

New report says auditors need to go beyond scepticism and become suspicious of clients. From Moneyweb.

Shareholders still want to know how the watchdogs failed to pick up the signs of accounting fakery at the likes of Tongaat and Steinhoff. Image: Shutterstock
Shareholders still want to know how the watchdogs failed to pick up the signs of accounting fakery at the likes of Tongaat and Steinhoff. Image: Shutterstock

A report by former head of the London Stock Exchange Sir Donald Brydon published in December says it’s time to split audit from accounting and establish it as an independent profession with its own standards and qualifications.

The new, improved audit should be a profession separate from accounting with its own governing principles, qualifications and standards. “At present it is an extension of the accounting profession, whose ethics and (arguably) mindset it largely adopts,” says the report.

It would embrace non-financial disciplines such as cybersecurity and environmental behaviour and provide more informative reports to different interest groups. Gone are the days of executives being responsible only to shareholders, as economist Milton Friedman suggested. Auditors need to go beyond scepticism and become suspicious, says Brydon.

There is unspoken acknowledgement in Brydon’s report that the audit profession is failing as a public watchdog.

Shareholders want to know how the watchdogs failed to pick up the signs of accounting fakery at Tongaat and Steinhoff, to name just two fairly recent examples.

Read: The winners in the Steinhoff mess

Part of the problem is the nature of the audit itself: it is expected to provide a reasonable level of assurance that the financial statements are fundamentally true and fair based on a tiny sample of transactions. That said, audit teams are expected to identify areas of high risk and focus on these. New technologies are fast emerging which allows a far higher level of sampling and, aided by blockchain technology, we may soon be able to verify all transactions in real-time.

Read: Take published financial statements with a bucket of salt

Many of these problems of the external audit could be improved by strengthening internal audit teams. But here again, there are difficulties: overbearing CEOs often surround themselves with weak internal auditors who can be bullied. Audit committees are supposed to buffer against executive bullying but this too is no guarantee of independence.

The profession has long been dogged by suspicions of corporate capture.

No matter how robust the audit standards, there is a perception that audit independence has been compromised by the accounting business model: the Big Four firms undercharge clients for audit services in the expectation of picking up higher-paying work elsewhere. As Richard Brooks points out in The Bean Counters: The Triumph of the Accountants and How They Broke Capitalism, every crisis is an opportunity for the Big Four accounting firms, whose profit and revenue growth barely skipped a beat during the 2008/9 financial crisis.

Read: How the accountants mangled capitalism

Various solutions have been proposed:

  • Breaking up the Big Four to separate consulting from audit (which would raise the cost of auditing);
  • Mandatory audit firm rotations; and
  • Establishing an independent body to appoint and reimburse auditors, rather than allow companies to select their own auditors.

Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says the entire concept of the audit needs to be reformulated. “There should also be different audits for different users of information. As things stand, the audit is designed to satisfy all users of the information but it is severely lacking in the kind of detail different users require.

“For example, if the company wants to take out a loan with a bank, it should provide an audit that specifically addresses the kind of information that the bank requires.”

Rotation

The Independent Regulatory Board for Auditors (Irba) has introduced mandatory 10-year audit firm rotations (MAFR) as one method of maintaining audit independence. CEO Bernard Agulhas says as of September 2019, 21% of companies on the JSE had rotated auditors – with 41% of those companies citing the early adoption of MAFR as the reason for rotation. All listed companies have until 2023 to comply with mandatory audit rotation.

Read: Audit rotation hits KPMG, benefits rivals

The Big Four accounting and audit firms – EY, PwC, Deloitte and KPMG – account for the vast majority of audits of the 40 largest JSE companies and 100% of FTSE 100 firms.

“The cost of MAFR will always be insignificant when compared to the cost to investors and pensioners when there is an audit failure, resulting in billions of rands lost, as illustrated by recent failures,” says Agulhas.

“The lead time allowed for the introduction of MAFR of five years has allowed companies and audit firms to plan for this process and for firms offering other prohibited services to cool off in compliance with the Companies Act in order to be eligible to take on audits where they previously did not audit.”

Joint audits

Irba is also in favour of ‘joint audits’ to allow smaller firms an opportunity gain experience and break the Big Four stranglehold. That, however, is easier said than done.

The overwhelming dominance of the Big Four as a repository of skills and know-how may take a generation to overturn.

There have been several radical suggestions in recent years to strengthen the audit: Professor Piet Delport, retired professor of mercantile law at the University of Pretoria, suggests making the audit voluntary, with different stakeholders demanding more focused audits as and when they are needed. Asking audit firms to provide audits that satisfy all users is no longer feasible. If you’re a bank being asked to extend a credit facility to a company, you will want an audit that looks at the company’s realistic ability to repay the loan. Banks are already having to adjust published financial statements to firm up estimates and non-cash transactions – something accounting standards setters have battled with for years.

Auditors not paid enough?

Jodi Joseph, divisional executive at audit and financial software group CaseWare Solutions, says auditors simply aren’t paid enough to provide the kind of audit expected of them. “I think the auditors of the future are going to have to be well versed in data analytics, for the simple reason that technology is going to be a vital part of the audit going forward. The sample sizes are going to have to get bigger. Blockchain will form part of the solution since it can help verify what is a trusted transaction.”

One of the key changes recommended in the Brydon report is to redefine the audit as a means to “establish and maintain deserved confidence in a company, in its directors and in the information for which they have [the] responsibility to report, including the financial statements”.

Read: Audit firms up in arms over Irba’s possible search and seizure powers

Agulhas says Irba supports this redefinition and “in particular has been stressing the importance of aligning the audit function to investor needs”.

He explains: “Projects are underway to look at strengthening the fraud risk identification standard, as well as auditor competencies. It may be that more training and competency is required in the area of identifying fraud, which up until now has not been an auditor’s responsibility.”

Principles instead of rules

Another key recommendation from Brydon is the creation of a corporate auditing profession governed by principles rather than rules – for the simple reason that rules are too rigid and easily side-stepped, while principles (such as ‘Do not lie’) are more difficult to fudge.

Irba recently adopted an updated and strengthened code of ethics that was already principles-based. It is also looking at ways to expand the audit beyond financial reporting to provide assurance in areas such as environmental compliance.

Former Belgian investment banker hauls RMB to court over failed property deal

Written by Ciaran Ryan. Posted in Journalism

The evidence, unless disproven, is compelling. From Moneyweb.

Fred Arijs and his partners say they have spent close to R9m in legal fees fighting the case, and they’re not giving up. Image: Moneyweb

Fred Arijs and his partners say they have spent close to R9m in legal fees fighting the case, and they’re not giving up. Image: Moneyweb

Fred Arijs, a former investment banker and one-time Belgian honorary consul in the Eastern Cape, has accused RMB and several senior bank executives of taking him to the cleaners, in a calculated scheme to defraud him and his business partners in two property deals gone horribly wrong.

In November last year the companies in which Arijs (pronounced Arish) was involved issued summons against RMB and several executives with some startling allegations. According to Arijs’s attorney, the bank this week sequestrated Arijs in the Cape High Court to reclaim sureties of R4.5 million.

What makes the case bizarre is that Arijs and his partners say they have spent close to R9 million in legal fees fighting the case over the years – and they’re not giving up, despite Arijs’s sequestration.

Initial investigations

Arijs is a former investment banker and says once he started investigating how the property deal went wrong, he immediately recognised the outlines of a fraudulent scheme intended to line the pockets of the bank at his expense.

RMB has denied Arijs’s allegations and says it pulled out of the property deal for purely commercial reasons. The bank has not filed its reply to Arijs’s claims. Moneyweb will file a follow-up story once it does.

It is a long and involved case going back several years, with multiple court actions proceeding simultaneously.

The beginning

The story began in 1998 when Arijs retired from European investment bank Ceneca in Belgium and moved to South Africa to pursue property development opportunities.

He teamed up with other Belgian investors and in 1999 launched the Whale Rock residential development, a landmark project in Plettenberg Bay.

Arijs and his partners were less interested in developing their commercial properties than squatting on them until they could be sold for a decent profit, but that all changed in 2007 when they were approached by Dawid Wandrag, then-head of the FirstRand property finance credit committee, who proposed setting up joint venture companies to codevelop two properties, both in Plettenberg Bay.

One was a 59-hectare plot the bank figured would be ideal for a hotel and residential complex; the second a 1.4-hectare piece of prime real estate that RMB, in terms of a feasibility study, proposed turning into a shopping centre, boutique hotel and residential development.

In 2009, two joint venture companies were set up to develop the properties: Shock Proof Investments and Lighthouse.

RMB set up a special purpose vehicle (SPV) called RMB Property Holdco 1 (Holdco) to take up a 50% equity stake in the two developments.

The bank appointed RMB employees as directors of Shock Proof and Lighthouse, as did Arijs and his South African partners, with the bank retaining overall voting control.

By this time Arijs had teamed up with some South African partners. They purchased properties from Whale Rock and injected these into the new deal with RMB, which was to be both funder and equity partner in the new developments.

Agreements signed

The joint venture and shareholder agreements were approved on November 13, 2007 and signed off by Allan Pullinger (then RMB CEO), Willy Robinson, Theunis Bosch, Wandrag, Cindy Veres and other senior executives of the bank.

The bank invested equity of R6.3 million in Lighthouse, and a further R6.6 million in Shock Proof, to be supplemented with a loan of R4 million on a successful record of decision from the environmental authorities. Papers before the court show the bank committed to providing any and all funding required for the completion of the developments. RMB’s feasibility studies green-lighted the two projects.

At no time were either of the two JV companies in default on the loan agreements.

Arijs and his partners were servicing their share of the interest on the loans but, astonishingly, 50% shareholder RMB Property Holdco 1 was not – putting it in breach of the JV agreements.

This is admitted by Wandrag in a 2011 email to his colleagues wherein he laments the fact that the bank had not kept to its side of the agreement and recommends refunding Arijs’s contributions for professional fees so the project could avoid any further delays.

Arijs uncovers evidence of an unlawful preference share scheme

What was not known to Arijs and his partners at the time, they claim, is that RMB had converted its equity claims in Shock Proof and Lighthouse (along with several other similar property development companies) into preference shares, which it on-sold to investors for a profit.

In banking-speak, this is known as securitisation, where assets such as credit card debts, mortgage loans or preference shares are packaged together and converted into a bond, which can then be sold to investors. In terms of the Banks Act there is nothing wrong with this, provided the bank does not own shares in the securitisation SPV.

Securitisation allows banks to convert otherwise sterile or long-term assets into cash, to boost their balance sheets and continue lending. Banks use ‘bankruptcy-remote’ SPVs to securitise assets, since this insulates them against any contagion that might arise as a result of default.

Bank denies any links with its property development company

Here is the problem: Arijs’s affidavit suggests the bank has a direct share in Holdco (the SPV), which has a direct stake in Shock Proof and Lighthouse, and is therefore in breach of the Banks Act, the shareholders agreements and good corporate governance, since the preference share scheme was kept a secret from Arijs and his partners.

In the process of doing this, Arijs claims the land was fraudulently sold from under him.

That the bank never told him about the preference share scheme would also violate the Companies Act since any disposal of assets must be agreed by the board and 75% of shareholders.

He says he only found out about it through the process of discovery in his various court actions against the bank.

RMB claims it pulled out of the property deal for purely strategic reasons and Arijs initially believed this – until he started tripping up on documents that seem to suggest the bank had no intention of proceeding with the development, even before it started. Shock Proof and Lighthouse were liquidated around 2014 and the two properties sold for about R12 million.

Bear in mind, Arijs is saying RMB was liquidating companies in which it had overall control and was the sole creditor.

Premeditated scheme

Arijs’s affidavit alleges that the bank’s plan all along was to securitise his land (by converting the shareholders’ loans into preference shares), sell these shares for a profit, liquidate the JV development companies, then claim sureties from the minority shareholders (Arijs and his partners) and walk away without a scratch.

In other words, Arijs is claiming that this was an elaborate land theft scheme. He is now claiming about R80 million in damages against the bank.

This forms the basis of his claim of premeditated fraud by RMB – a claim that has been denied by the bank (see below).

In several court cases related to the Shock Proof and Lighthouse matters, RMB’s then-head of credit recovery Jean du Plessis has denied any link between RMB Property Holdco and the bank. If true, then the bank is free and clear as far as the Banks Act is concerned.

Remember, a bank may not own shares in a securitisation scheme since this could expose its own balance sheet to contagion in the event of default.

Contradictory evidence

But in the process of court discovery, Arijs came across a May 2014 email where Du Plessis appears to contradict his earlier testimony to the courts.

Writing to his debt-recovery colleagues, Du Plessis discusses various options for recovering the bank’s roughly R20 million exposure to both Shock Proof and Lighthouse. He proposes accepting an offer from Arijs and partners for R12 million for Shock Proof, adding that this should avoid any liquidations costs as well as any issues “in respect of us being a shareholder, director and creditor”.

That is an admission that the bank not only flouted the Banks Act, but also confirms the existence of a “composite agreement” that it had earlier denied existed, says Arijs’s affidavit.

The email appears to put the bank rather than the SPV (Holdco) at the centre of the scheme. It also looks like perjury, as Du Plessis claimed before various judges that there was no link between the bank and Holdco, and that there was no composite agreement. If there is a composite agreement, argues Arijs, then the sureties the bank is trying to claim are null and void.

No ‘composite agreement’

In previous court filings, the bank sought to demolish Arijs’s claim that there was a composite agreement comprising the Shock Proof and Lighthouse shareholders’ agreements, the JV and loan agreements between Arijs and the bank, and various other oral or tacit agreements. The argument claiming there was a composite agreement was thrown out by Judge Nichols in the Cape High Court in 2016, but this was before Arijs discovered the above-mentioned email and other documents that contradict its earlier claims before the courts.

Claims of oppressive conduct

Arijs also claims this fits the definition of “oppressive conduct” by a shareholder in terms of the Companies Act. He argues in his court papers that the bank contrived the preference share scheme behind the backs of the minority shareholders, which is the kind of conduct Section 163 of the Companies Act seeks to eliminate. One group of dominant shareholders may not act against the interests of others.

There are several other oddities surrounding the case.

Louis Schnetler and Theunis Bosch, at the time employees of FirstRand Bank (RMB’s parent company), purported to act as directors of the companies, though no resolutions or letters of appointment by the bank have yet surfaced. This in itself would be a violation of the Companies Act.

What later emerged in the process of discovery is that Holdco had issued preference shares and ceded the rights to wind up the property assets to its parent company, RMB Investment and Advisory, which owns 92.5% of Holdco (the other 7.5% is owned RMB Co-Investment Trust), establishing a direct line between the bank and the SPV – something the bank has repeatedly denied existed in various court cases. FirstRand Bank and RMB directors were discovered to be trustees of RMB Co-Investment Trust.

That the RMB directors are accused of concealing all of this from Arijs and his business partners suggests they are in violation of their fiduciary responsibilities to act in the best interests of the company, not to mention the multiple violations of the Companies Act, shareholders’ agreement and the Banks Act.

Delays in development

The bank is also accused of deliberately delaying the development of the two Plettenberg Bay properties, by demanding changes in design and contractors. This, argues Arijs, lends credibility to the claim that the project was never intended to get off the ground in the first place. In a September 2011 meeting, Arijs and his partners were rudely informed that the bank had taken a decision two years earlier to withdraw from the property market. Two years earlier means the bank would have decided to exit the property market around 2009, yet this was precisely the time it was green-lighting the Plettenberg Bay developments.

The question then arises, why did the bank not simply sell its 50% share in the two projects and move on? A reasonable person might conclude that the bank is entitled to change its mind and sell its interests in the projects, but it appears RMB was not keen on this either. Arijs approached Investec to sound it out on taking over RMB’s interests and loans in the project.

Investec was reportedly interested until it received an email from RMB’s Schnetler effectively spiking any prospect of selling its interests in the deals.

At this point, it appears RMB resolved to liquidate the property development companies. Arijs alleges that none of this makes any sense unless you understand the bank was trying to hide the existence of an unlawful preference share scheme intended to benefit senior bank executives.

RMB has yet to file its plea affidavit in the latest case. Moneyweb will file a follow-up when it does. RMB has also accused this writer of being exploited by Arijs to advance his “questionable intentions”. This allegation is denied.

Disrespect

The bank also suggests Arijs disrespected the court by failing to turn up at a hearing last year. This should be put in context: Arijs has had no fewer than four sets of lawyers over the years who deserted him at the steps of the court, citing different reasons including conflict of interest.

This is not an uncommon problem facing anyone challenging the banks and appears to have little to do with the merits of the case.

Arijs says RMB may be better positioned to explain why so many of his lawyers have run for the hills whenever a court date looms.

That his case has merit has been confirmed by three sets of lawyers, including senior counsel, who at various times were engaged by Arijs.

RMB responds

“Rand Merchant Bank (a division of FirstRand Bank Limited) is aware of the accusations made against the bank by Fred Arijs relating to property developments in the Plettenberg Bay area. These property developments never progressed for various commercial reasons.

“Mr Arijs is aggrieved about RMB’s decision at the time not to advance senior debt to the developments, after RMB made the decision that the projects were not commercially viable.

“Mr Arijs and RMB are currently engaged in litigation. The trial date was set for 9 May 2019 and Mr Arijs had the opportunity to testify publicly about his allegations but failed to attend Court. He was punished with a punitive cost order by the judge for his disrespect for the judicial system. His senior counsel also resigned a few days before the trial on the basis that Mr Arijs’s case had no merit.”

Arijs replies

Arijs says he did not appear in court because he was dropped by his lawyers just before the case was to be heard.

He adds that the costs order issued was an ordinary costs order (which is normal in cases of non-appearance) and no punitive costs order was issued.

“RMB also conveniently fails to address the latest summons issued,” he says.

Timeline of events

  • 2007: RMB approached Arijs and his partners with a view to codeveloping two properties in Plettenberg Bay. JV and shareholders agreements signed on November 13, 2007.
  • 2009: Two JV companies, Shock Proof Investments and Lighthouse, were set up to develop the properties: 50% was held by Arijs and his partners and 50% (plus one vote) by RMB Property Holdco 1, an SPV set up specifically for these developments. Arijs signed surety for R4.5 million in respect of loans extended by RMB to Shock Proof. Arijs and another partner signed sureties of R6 million each in respect of loans extended to Lighthouse (this claim was later dropped by the bank).
  • 2010-2011: There were delays on the project. FirstRand/RMB fell into in breach of the shareholders’ agreement by failing to service its portion of the loans. Arijs and his partners continued to service their portion of the loans.
  • 2011: FirstRand notified Arijs that it had made a decision to exit property developments two years previously, around the time the projects were launched and agreements signed.
  • 2012: FirstRand/RMB commenced liquidation proceedings against Shock Proof and Lighthouse. The loans were called up and Lighthouse was liquidated on June 21, 2012. FirstRand/RMB claimed R14.6 million and was the only creditor. In January 2012, the bank decided to write off its equity and loan facilities in Lighthouse – total value about R20 million – but decided to pursue recovery of its equity and loans in Shock Proof, so decided to claim R4.5 million limited surety from Arijs.
  • October 2012: The Master of the Cape High Court convened a Section 417/418 inquiry in terms of the Companies Act to, among other things, determine whether any of the directors could be held liable for the demise of the company. Arijs and his partners were keen to interrogate bank officials about how the bank came to its decision to close Lighthouse down. Arijs’s attorney Fred van der Westhuizen was sanctioned by Judge Blignaut for meeting privately, and without the bank’s attorneys present, with the Master of the High Court, as this was deemed prejudicial to the bank. Judge Blignaut set aside the Master’s decision to convene a Section 417/418 inquiry, thereby forcing Arijs to pursue his case through the courts.
  • 2014: Arijs brought an application in the Cape High Court, arguing that the loan agreements could not be separated from the other agreements (the loan, JV and shareholders’ agreements). He attempted to argue that all agreements with the bank should be consolidated and viewed as one, which would render his sureties null and void. Arijs contended that he was signing surety without the bank having disclosed that it had ceded the rights to wind up the companies to another bank entity called RMB Investment and Advisory. The bank denied any link between RMB Property Holdco 1 and the bank (which Arijs later found to be untrue). Arijs lost the court case.
  • 2018: In the process of discovery, Arijs learnt of the existence of a hidden preference share scheme that his lawyers advised was unlawful. He applied to court to amend his pleadings reflecting this new discovery. Judge Nuku in the Cape High Court ruled that the matter was prescribed (out of time) and rejected the application.
  • 2018: Arijs brought an action to compel the bank to supply documents related to the loans, including credit approvals, resolutions authorising the appointment of directors, and documents related to the preference share scheme. The bank supplied the required documents in phases between May and September 2018. Included in this bundle of documents is what appears to be an admission by the bank that it had misled the court about the link between Holdco and the bank (placing it in breach of various agreements).
  • May 2019: Arijs instructed his attorney to amend the Shock Proof pleadings in light of the discovery of alleged perjury. The attorney, Michael Lombard, failed to file papers. The court awarded costs against Arijs to the tune of about R289 000 and then commenced sequestration proceedings against him.
  • January 14, 2020: The Cape High Court sequestrated Arijs. 

Arijs says he has never had an opportunity to argue the merits of his case, despite eight years of trying.

Court confirms reckless lending ruling against Shoprite

Written by Ciaran Ryan. Posted in Journalism

Figures were massaged to influence affordability assessments. From Moneyweb.

Most of those affected by the retail giant’s conduct are financially vulnerable and could not afford to take out additional credit. Image: Waldo Swiegers, Bloomberg

Most of those affected by the retail giant’s conduct are financially vulnerable and could not afford to take out additional credit. Image: Waldo Swiegers, Bloomberg

The Pretoria High Court has upheld a 2017 decision by the National Consumer Tribunal that Shoprite was guilty of reckless lending, by adjusting credit bureau information as well as customers’ future financial commitments to ensure they received credit.

It has been ordered to pay a R1 million fine within 30 days, confirming the earlier decision by the tribunal.

The retail group has also been ordered to appoint a debt counsellor at its own cost to ensure affected customers are not overindebted.

Read: ‘Better half’ could only do so much for Shoprite

In 2014 the National Credit Regulator (NCR) was prompted by newspaper articles to investigate claims of reckless lending by some retailers, and this led it to focus on Shoprite.

The regulator asked Shoprite for a list of all credit agreements with customers between June 2013 and 2014, and then followed this up with a request for evidence of affordability assessments – which is a requirement of the National Credit Act (NCA).

The NCA prohibits credit providers from extending credit without examining the customer’s debt repayment history as well as “existing financial means, prospects and obligations”.

The Act defines the extension of credit to an overindebted customer as reckless lending.

The data supplied by Shoprite appeared to suggest some customers were being granted credit when 80% of their net incomes were already committed to prior debt obligations.

In some instances, customers were being pushed to the point of paying 90% of their net incomes in settlement of debts. Evidence was also presented to the court that some credit was granted without consulting the consumer’s credit history with the credit bureaus.

Shoprite had argued that the regulator didn’t have reasonable grounds, based on objective information, that gave rise to the suspicion that it was granting credit recklessly. It further argued that the data on which the regulator relied was not specific enough to launch an investigation.

Additional credit for the highly indebted

The regulator pointed to several customers whose budgets were already in the red at the end of the month, due to prior debt repayment obligations, yet were given additional credit by the retailer. In other cases, Shoprite disregarded certain monthly expenses and ignored instalments due to existing creditors.

Shoprite contended that the tribunal had erred in failing to take into account various adjustments it had made in its affordability calculations, for the very reason that the affordability assessments were often deemed incomplete and did not reflect the customers’ true financial position.

The High Court found several problems with Shoprite’s adjustments:

  • Customers were unaware of the way the retailer was arranging their financial affairs,
  • Customers were not consulted on whether they were prepared to sacrifice short-term insurance or DStv subscriptions to obtain fresh credit;
  • Shoprite did not have the income and expense information of the credit applicants’ spouses; and
  • The assumption that the spouse would cover the credit repayment in the event of default was “speculative to say the least”.

“The most astonishing aspect of Shoprite’s approach is the fact that many customers still had negative affordability figures after the ‘adjustment’ exercise,” reads the judgment.

“In view of the aforesaid, I agree with the finding of the tribunal that Shoprite extended reckless credit.”

The court also noted that the consumers affected by Shoprite’s conduct are mostly pensioners and individuals with low average income – in other words, financially vulnerable members of society.

Read: Court lays out the path for exiting debt review

Shoprite must now comply with the tribunal’s order by paying the R1 million fine and appointing a debt counsellor, who will be contacting affected consumers.

NCR CEO Nomsa Motshegare welcomed the court’s finding and is appealing to “any consumers who believe they may be a victim of reckless credit granted by Shoprite to lodge a complaint with the NCR”.

Complaints should be emailed to complaints@ncr.org.za.

US politics and American Brexit: 2020’s biggest global risks

Written by Ciaran Ryan. Posted in Journalism

Followed by China’s technological decoupling from the US. From Moneyweb.

Trump could impose retaliatory tariffs against the EU if Brussels goes ahead with the imposition of a Europe-wide digital tax. Image: Marco Bello, Bloomberg

Trump could impose retaliatory tariffs against the EU if Brussels goes ahead with the imposition of a Europe-wide digital tax. Image: Marco Bello, Bloomberg

A week ago it seemed that the world was on the brink of World War III, as Iran launched missiles against US military bases in Iraq in response to the US assassination of its Iran military commander Qassem Soleimani.

Fortunately both sides stood down and the threat of war has receded. This, however, could be the start of US disengagement from much of the Middle East, after the Iraqi parliament voted to request the removal of US forces from its land. Sooner or later the US will pull out of Iraq.

Read: EM assets fall after Soleimani killing   

One can’t help suspecting that US President Donald Trump, in an election year, sees the stock market as a proxy for his economic performance. A war would ruin that, and perhaps his chances of re-election.

Eurasia Group’s recently-released Top Risks 2020 report spells out the big threats facing the world. Top of the list is US politics – in particular the impeachment process against Trump, which will delegitimise the result of the upcoming elections.

Read: Some democrats ask Pelosi to let trial begin: impeachment update

Public opinion polls already cast doubts about the election result, nearly a year before the election due date. A 2019 poll by Ipsos shows that just 53% of the US public believe the presidential election will be fair. A close result is likely to be highly contested, and would perhaps even go to the courts. Any decisions made by Trump thereafter would be viewed as lacking authority. US allies and enemies alike wonder whether the US can lead itself.

“In the midst of a disputed 2020 election, many of those countries will wonder whether the US can govern itself. It’s a period of unusual geopolitical vulnerability to shock and escalation,” says the report.

An ‘American Brexit’ is unfolding as the US disengages from the world, overturning trade treaties and turning to hostile trade relations.

The next biggest risk facing the world is China’s decoupling from US technological reliance.

This all started with the US-China trade war, aggravated by the arrest in Canada just over a year ago of Huawei’s Chief Financial Officer Meng Wanzhou, for alleged violations of US sanctions against Iran. This was seen as an astonishing overreach by the US and Canada, and an interference in the trade relations of China and Iran.

“China will expand efforts to reshape international technology, trade, and financial architecture to better promote its interests in an increasingly bifurcated world,” according to the Eurasia Group report.

Cold war on the tech front

The result of this technology decoupling will be a ‘US-China tech cold war’ with heightened competition in artificial intelligence, quantum computing, 5G networks, supercomputing and semiconductors.

Other countries will find it harder not to get caught in the crossfire of the US-China trade war and souring relations between the two economic giants.

Eurasia Group doubts multinationals will step into a governance gap in the global order to lead in areas such as climate change, poverty relief and trade and investment liberalisation.

Nation states are reasserting themselves, presenting new risks to the capital and assets of corporations. In the European Union, governments are turning to industrial policies to promote domestic firms and act as a counterbalance to China’s statist approach to trade and investment. Governments are moving away from multilateral to bilateral agreements, and new regulatory risks will strain corporate reputations.

India

India, too, is retreating into a nationalist enclave, and recently implemented a system to identify illegal immigrants in the northeast of the country, stripping 1.9 million people of citizenship. The government also passed a law that makes religion, for the first time, a criterion for migrants from neighbouring countries.

Sectarian and religious conflict will grow, with Kashmir a potential flashpoint. Politicians from the area are under arrest and intenet access has been cut, provoking mass protest in many parts of India.

Prime Minister Narendra Modi appears in no mood to back down, and will have to navigate a path through declining economic growth, weaker tax returns and spreading protests.

Europe is also buttressing the trade rampart, by challenging US tech giants on their soft tax arrangements in countries like Ireland.

A more independent Europe poses risks for the US.

Trump is no supporter of the EU and could impose retaliatory tariffs if Brussels goes ahead with the imposition of a Europe-wide digital tax. France has already imposed a 3% tax on sales by multinational companies like Google and Facebook. Internet companies are paying taxes of 8% to 9% in Europe, while more traditional businesses are paying an average of 23%. 

China could face resistance from Europe and the US to its Belt and Road Initiative, a programme to connect Asia with Africa and Europe via land and maritime networks along six corridors.

Climate change politics

The politics of climate change is another risk facing the world, according to Eurasia Group. Countries are falling behind their carbon emission targets in terms of the Paris Accord, and the largest emitter, China, is unwilling to sacrifice economic growth to reduce its impact on global temperatures.

Complicating the picture is the emergence of an anti-elite backlash to climate action, as we have seen in France.

Though the world appears to have stepped back from the brink of a major regional conflict between the US and Iran, this conflict remains a deadly and destabilising threat.

Lethal skirmishes in Iraq between US and Iranian forces are likely. Iran will continue to disrupt tanker traffic in the Gulf. A more dangerous if still limited US-Iran regional conflict is less likely but possible. Iran tensions will put a minimum premium of $5 to $10 into the oil price this year and increase volatility, says the report.

Expect an incendiary year for Latin America

Public discontent in Latin America over corruption and declining public services reduces governments’ ability to impose austerity. Societies are becoming increasingly polarised and even the middle classes are taking to the streets to protest against cuts to public services.

Presidential approval ratings across Latin America are abysmal, with Venezuela’s Nicolás Maduro, at a bone-crushing 13%.

In contrast, Mexico’s Andrés Manuel López Obrador, barely a year in office, enjoys a support rating of 75%. Argentina’s Alberto Fernández was elected by angry voters and is under pressure to increase state intervention, and will try to boost growth by abandoning fiscal and monetary prudence. The same challenges are facing leaders from Chile to Colombia and Ecuador. It’s going to be an incendiary year in Latin America.

Other risks are Turkey’s growing independence from both the US and Europe, which could make life difficult for it in the coming year.

Britain faces the uncertainties of a post-Brexit world. Populist protests are on the rise, a measure of the discontent on the streets.

It’s not going to be an easy year, no matter where you live.

Swarm of court cases engulfs former Gupta mines

Written by Ciaran Ryan. Posted in Journalism

As business rescue of Koornfontein and Optimum appears to be drawing to a close. From Moneyweb.

Two of the remaining key assets in the now defunct Gupta empire – coal mines Koornfontein and Optimum – are the subject of yet more litigation, coming on top of the roughly 50 court cases batted away by the business rescue practitioners (BRPs) over the last two years.

A company called Westdawn is owed R112.5 million by Optimum and is the latest to bring a court action against the mine and the BRPs. It has filed an application in the South Gauteng High Court calling for Optimum Coal Mine to be liquidated on the grounds that it is “factually and commercially insolvent and unable to pay its debts”.

It previously applied to court for the liquidation of Koornfontein for largely similar reasons.

Read: Ghosts of the Guptas still haunt Optimum coal mine

Deposing for Westdawn, insolvency practitioner Chavonnes Cooper of CK Trust says there never was any prospect of rescuing Optimum and that it should have been liquidated some time ago. “What the BRPs have done however is to propose an informal winding up of the company, ostensibl[y] disposing of its assets under the auspices of business rescue.”

Read: Miners survive on charity while battle for Koornfontein mine drags on 

Westdawn, a mining contractor, says it is also a creditor of Koornfontein. It disputes the claims of Eskom and Centaur Investments as being “alleged contractual penalties” which therefore constitute contingency claims that fall under the Conventional Penalties Act. At a creditors’ meeting in December, Centaur and the creditors’ committee challenged Eskom’s voting rights.

The matter will now go to arbitration later this month to decide what weight Eskom should be given in deciding the way forward for the mines.

Three different business rescue plans for Optimum have been published.

The first, published in April 2018, suggested creditors would receive 12c in the rand for their claims. Eskom was claiming R1.6 billion in penalties for the non-delivery of coal to its power stations. While Eskom was paying Koornfontein R430 per ton for its coal, Optimum was getting less than half this. Centaur was not listed as a creditor in the first rescue plan.

Revised plan

The second rescue plan was published in December 2018 and proposed offering Eskom R1.1 billion for all its claims, while Centaur also had claims totalling roughly R1 billion. The BRPs proposed offering it a pre-commencement dividend of 71c in the rand. Both Centaur and Eskom received voting rights equivalent to their claims.

Centaur had previously brought an application before the high court in an attempt to interdict Eskom getting a vote in the Optimum business rescue proceedings. That application was later withdrawn by Centaur “pursuant to a settlement agreement allegedly entered into between the BRP’s, Eskom and Centaur,” says Cooper.

Westdawn had total acknowledged claims of about R320 million in the second plan, but these were inexplicably reduced to R112.5 million in the third plan.

Cooper says Westdawn’s claims were changed unilaterally, nor was it offered a dividend.

‘Sole right’ powers of BRPs

Cooper says the business rescue process does not allow the same checks and balances that exist in liquidation proceedings. Decisions of the master of the court to accept or reject claims in a liquidation can be taken on review in court, whereas in rescue proceedings the BRPs “have the sole right to admit the claim and quantify it”.

“A claim for damages, which we submit is the basis of the claims submitted by both Eskom and Centaur, would not be proved so easily in a liquidation scenario. In fact, it is only upon being empowered to do so by creditors, that a liquidator would be able to settle a claim for damages with a creditor failing which settlement that creditor would be obliged to institute an action in order to obtain an award,” says Cooper’s affidavit.

“The effect of the BRPs’ decision is to place the entire future of Optimum, insofar as it relates to its business rescue proceedings, in the sole discretion of Eskom and Centaur.”

Attorney for the BRPs Bouwer van Niekerk says all the cases, including that brought by Westdawn, are being opposed.

The Lurco case

Then there is the case brought by BEE mining group Lurco late last year to interdict the BRPs from selling Koornfontein to Black Mining Royalties (BRM), on the grounds that its much more generous bid of R500 million – about R200 million more than BRM’s winning bid – was defeated by an “irrational” change to the business rescue plan that required money to be deposited within five days.

This was impossible as Lurco’s funding had to be moved from an overseas bank account, which takes up to six weeks.

Read: Sale of Koornfontein coal mine hits legal snag 

Swiss-based suitor’s hefty ‘rejection fee’

Another case, brought by Amin Al-Zarooni – chairman of Charles King SA – claims the Swiss-based company has a written agreement signed in 2017 to purchase the Gupta holding company Tegeta for R2.9 billion.

It was to secure this right with a down payment of R66.7 million, but was R2.3 million short when payment fell due on October 22, 2017.

The R64.4 million that was deposited was used by the Guptas to pay salaries at various Gupta companies, including Optimum.

The Charles King case was rejected for lack of urgency in 2018, and will now go to arbitration.

Rescue practitioner Louis Klopper says the BRPs are required to execute the mandate of the creditors, and that the sale of Koornfontein will not be delayed by the pending court actions.

And we’re off: the breakout of precious metals, oil and bitcoin

Written by Ciaran Ryan. Posted in Journalism

The smell of war in the Middle East being the latest trigger. From Moneyweb.

Analysts have started revising forecasts for gold in light of the latest geopolitical disturbances in the Middle East. Image: Michaela Handrek-Rehle, Bloomberg
Analysts have started revising forecasts for gold in light of the latest geopolitical disturbances in the Middle East. Image: Michaela Handrek-Rehle, Bloomberg

Iranian missiles rained down on two US military bases in Iraq last night (Tuesday) in revenge for the assassination by the US of Iran’s most senior military commander last week.

Platinum group metals (PGMs), oil and bitcoin surged on the news, with investors diving for cover and steering clear of risk. Iran’s retaliatory response has panicked investors. Much hinges on US President Donald Trump’s likely response. A tit-for-tat exchange of missiles could quickly escalate out of control and, perhaps, be ruinous for Trump’s re-election chances later this year.

Palladium prices broke $2 000 an ounce in the last two days, continuing a trend that began in 2018. It is a primary ingredient in automotive catalysts, and is in short supply as carmakers shift from diesel to petrol-powered vehicles in which palladium is used.

On Tuesday platinum traded at around $970 per ounce, less than half the palladium prices, but is still up more than 10% from this time a year ago, buoyed by strong tailwinds in precious metals. Investing News reports that platinum demand remains restrained due to soft demand from diesel manufacturers.

The gold price, a perennial hedge against turmoil, is nudging towards $1 600 an ounce, and is now at a seven-year high.

It is already higher than many predicted it would be so early in the new year, boosted by massive central bank buying in China and other emerging economies in recent years.

Read: Gold hits highest since 2013 as Goldman backs bullion in crisis

Brent oil came within a whisker of $70 a barrel yesterday on fears that the world’s oil markets will be disrupted by events in the Middle East. Iran has repeatedly threatened to close off the Strait of Hormuz, through which a third of the world’s sea-borne oil passes, should it be attacked by the US.

Read: Oil shippers raise offers for Middle East route on Gulf risk

“The explosive moves witnessed in oil prices over the past few days highlight how sensitive the commodity is to geopolitical shocks,” says Lukman Otunuga, senior research analyst at FXTM. “Given how this development raises fears of more tensions in the Middle East, oil prices are poised to remain volatile in the near term with all eyes now on President Trump’s reaction and any signs of US retaliation.”

CNBC reported that the Dow Jones Industrial Average plunged 400 points overnight.

However, the carnage appears to have stopped there as Trump reported no US casualties from the Iranian missile attack. Trump has repeatedly pointed to his economic record – measured in lofty share prices – as a measure of his economic success as president. This may curb any appetite for a disproportionate military response against Iran.

“In many regards, the US-Iran situation has now surpassed the US-China trade war as the biggest risk to financial markets. This has been reflected in the current volatility,” says Nigel Green, CEO of financial advisory firm deVere Group. “It’s almost impossible to forecast what the market is going to do in the immediate future – and it is much too early to say what happens next and how investor sentiment will affect markets.”

Palladium prices in USD

Source: ShareMagic

The World Platinum Investment Council expects further gains for the metal, driven by increasing investor interest. The relatively subdued performance in 2019 was the result of a supply overhang, though platinum will continue to benefit from the rising value of palladium.

Bitcoin price in USD

Source: TradingView

Bitcoin, too, demonstrated its status as a digital safe haven as it surged $1 000 to break $8 400 in the last few days.

Gold price in USD

Source: ShareMagic

Analysts have started revising forecasts for gold in light of the latest geopolitical disturbances in the Middle East, with some forecasting a target of $2 000 an ounce in the coming years.

Brent crude oil price in USD

Source: ShareMagic

Forgive them their debts

Written by Ciaran Ryan. Posted in Journalism

Economist Michael Hudson’s new book argues that the world’s debt can never be repaid. It will have to be written off. From Moneyweb.

Debt cancellation was common in ancient times, and far more humane than current practices. Image: Shutterstock

Debt cancellation was common in ancient times, and far more humane than current practices. Image: Shutterstock

It may seem a long way off, but the day will come when household debts must be forgiven, for the simple reason that they cannot be repaid.

The most reckless financial experiment in history has been unravelling in front of our eyes over the last decade, as a tsunami of created debt was hosed into the world financial system to save the casino banks from their inevitable demise. The result was a massive transfer of wealth to the financial, insurance and real estate (or FIRE) sector.

In South Africa, finance contributes 23% to GDP (in the US it is 85%). It makes little contribution to the economy as it involves the re-trading of already-existing assets at ever-inflated prices. Precious little of this money is invested in new production.

Remove this distortion from the GDP figures and the world economy has been in depression for the last ten years, argues economist Michael Hudson in his book ‘… and forgive them their debts: Lending, Foreclosure and Redemption From Bronze Age Finance to the Jubilee Year’.

Read: Finance dominates SA economy, and that’s a problem

For a glimpse into the future, look at what is happening on the streets of France or Chile, where demonstrators complain that they are being asked to – wait for it – “tighten their belts” while living from one month-end loan to the next.

In SA, about four out of ten of the roughly 20 million who qualify for credit are in financial distress, meaning they are two or more months in arrears on at least one account. How long before they take to the streets?

Hudson has been banging this drum for the best part of a decade, arguing that in 2008, rather than bail out the big banks, authorities should have given the money to the citizens so they could pay off their debts.

The result, based on historical evidence, would have been a boom of almost unimaginable strength.

Instead they rescued the banks with trillions of dollars in quantitative easing, which went straight into the stock and real estate markets. In other words, straight to the rich.

This can’t, and won’t, last.

The social order is fraying and debt – not climate change – is the real curse of our age.

In his book, Hudson delves into the storied history of debt jubilees (or forgiveness) through history, from Sumer to Babylon, Greece, Sparta and Rome. Judaism took the practice of debt forgiveness and placed it at the centre of Mosaic Law. All this was done in the interests of social peace. The ancient battle between debtors and creditors courses through the Bible and the Quran, from the economic proclamations of Moses to the gospel of Luke, when Jesus announces the coming of the Jubilee year when debts were to be forgiven.

Ancient history makes better sense once you start to view it through the lens of creditors versus debtors.

Wars are always an asset grab clothed in the fineries of impugned rights. Creditors fought the jubilees every inch of the way, waging war where necessary to collect their dues. Roman creditors fought and won a century-long ‘Social War’ that was ultimately catastrophic to the empire, creating a caste system of grotesque inequality.

Livy, Plutarch and other Roman historians saw creditors as a pestilence that destroyed classical antiquity, by using interest-bearing debt to impoverish and disenfranchise the population. The Barbarian invasions of Rome and elsewhere succeeded only when societies were sufficiently weakened from within by debt.

Chronic indebtedness ‘normal, desirable’

Most economists today recoil from any suggestion that debt write-offs are needed. Hudson takes them head on: lacking any historical understanding of debt and the inevitable servitude it imposes, they see chronic indebtedness as normal, even desirable.

However, debt cancellation was far from radical in ancient times, and far more humane than current practices. For example, it was illegal to waive one’s rights to debt forgiveness in ancient Sumeria, Babylon and Israel. Today, banks require borrowers to waive their rights in favour of the courts – and that has put ten million Americans out of their houses since 2008.

There were usually sound, practical reasons for debt forgiveness: it prevented creditors from accumulating too much power at the expense of local sultans, allowed rulers to recruit soldiers or workers from those recently freed from debt peonage, and enabled overindebted farmers to resume payment of taxes.

The idea was to create a fair and equitable society and provide citizens with the basic minimum standard needed to be self-sustaining. Populist leaders in 7th Century Greece paved the way for the economic take-off of Sparta, Corinth and Aegina by cancelling debts and redistributing lands monopolised by their cities’ aristocracies.

It didn’t always go the way of the debt cancellers. There were creditor-sponsored counter-revolutions in the Western Roman Empire and then Byzantium.

The word ‘tyrant’ is today loaded with invective, but only because the original ‘Tyrants’ who sought to liberate Greek populations from debt bondage lost their war against creditors. It turns out the Tyrants were the good guys.

Today’s legal system is based on the Roman philosophy of upholding the sanctity of debt rather than its cancellation.

“Instead of protecting debtors from losing their property and status, the main concern is with saving creditors from loss, as if this is a prerequisite for economic stability,” writes Hudson.

“Moral blame is placed on debtors, as if their arrears are a personal choice rather than stemming from economic strains that compel them to turn to debt simply to survive.”

In pre-Christian Babylon, debts that could not be repaid as a result of misfortune were written off. Hudson points out that most household debt today – as in ancient times – is for consumption, and therefore cannot and will not ever be repaid.

Asset forfeiture

The long game with any debt cult is asset forfeiture. “Concentration of land ownership and polarisation between creditors and debtors is traditionally a formula for economic shrinkage and depopulation,” writes Hudson.

Lending to farmers was used as a lever to privatise land. The Sumerians invented usury (lending at interest) but mitigated its effects through periodic royal edicts forgiving debts, particularly those related to crops and fees owed to public collectors. The meaning of ‘usury’ has changed through the ages to mean lending at excessive interest.

The concept of legal title to land is a relatively modern concept and, once tethered to debt, is the most efficient method of foreclosure and stripping the poor of their customary rights.

The absence of formal property rights in Africa has actually protected the poor from the dispossession and eviction that follows debt peonage.

The modern concept of economic liberty exalts title deeds and the transferability of land as an act of empowerment, yet ten million Americans and an estimated 100 000 South Africans have been stripped of their properties in the last decade or so through foreclosure.

Property ownership

Property ownership is vital to economic prosperity but is under constant attack by the creditor class. Title deeds were one of the principal tools of dispossession used by colonisers in Africa, subverting the traditional system of communal property. The Bafokeng in North West Province had to buy back the land they had occupied for centuries because some ‘smart’ 19th Century property speculators proved by means of a title deed that they were the new owners.

Hudson also challenges the notion that money originated out of primitive barter economies. The origins of money, he suggests, lay in fiscal arrangements with the palaces, where dues had to be settled in silver.

To insist that all debts must be paid ignores thousands of years of contrary practice in the Near East and the economic flowering that followed this humane practice.

Hudson says he wrote the book as the time is now ripe to re-introduce the concept of debt Jubilees into public consciousness. It will allow an instant and orderly economic recovery rather than decades of slow atrophy and social disorder, as banks continue to make claim on debts and interest that can never be repaid.

Read: Review: J is for Junk Economics by Michael Hudson

Komape family wins R1.4 million for emotional shock and grief

Written by Ciaran Ryan. Posted in Journalism

Supreme Court of Appeal overturns Limpopo High Court decision. From Groundup.

Photo of Komape family
From right, James, Rosina and Lucas Komape attended the Supreme Court of Appeal hearing earlier this year. Archive photo: Ciaran Ryan

The Supreme Court of Appeal (SCA) awarded the Komape family R1.4 million for emotional shock and grief after the loss of their five year-old son Michael, who drowned in a Limpopo school pit toilet in 2014.

The award overturns a decision by the Limpopo High Court in 2018, which denied the family’s claim for damages arising from Michael’s drowning. The SCA found it “somewhat startling to say the least” that the Limpopo High Court had dismissed the family’s claim for emotional trauma and shock even though the state had earlier conceded the claim. What remained in dispute was how much the family should receive in compensation.

The matter went to trial in 2017 when the two opposing parties could not agree on a suitable financial settlement. The Komape family was defeated in the Limpopo High Court (other than an order requiring the state to ensure all schools were fitted with secure and hygienic toilets, and R12,000 for future medical expenses for two of the Komape children) and then took the matter on appeal.

The Minister of Basic Education and the Limpopo Department of Education were cited as main respondents in the case. The SCA ordered them to pay the R1.4 million award to the family jointly and severally. The Komape family was represented by public interest law firm SECTION27.

The SCA also ordered the respondents to pay future medical expenses for three of the younger surviving Komape children.

Michael “suffered the most appalling and undignified death when he fell into a pit latrine at his school in Limpopo, and drown in its sludge and filth,” reads the judgment.

The SCA ruled that the Komape family had suffered terrible psychological trauma due to the manner of Michael’s death, and the seemingly unfeeling attitude of the education authorities thereafter. Both Komape parents were diagnosed with post-traumatic stress disorder, and for years had trouble sleeping. Michael’s mother, Rosina Komape, fainted when she saw her son’s arm protruding from the school pit toilet. The younger children were likewise deeply scarred by the death and required counselling.

The Komape family had asked the court for two types of damages: R940,000 in general damages and R2 million in Constitutional damages, and further asked the court to develop common law to adequately compensate victims of this kind of tragedy. The SCA found there was no need for the development of common law to assess the damages occasioned by their feelings of loss and bereavement.

The SCA decided to award R350,000 to each of the Komape parents, R200,000 to each of the two elder Komape children (Lydia and Lucas), and R100,000 each to the three surviving younger children (Onica, Maria and Moses).

The court rejected the claim for additional Constitutional damages on the grounds that this would be unnecessarily punitive as the court had already granted financial damages to the family. The state was ordered to pay the costs of the case.

The Supreme Court rejected an attempt by class action specialist Richard Spoor Inc. to intervene in the case on the grounds that he had an interest in its outcome. Spoor, who is involved in a class action suit against Tiger Brands related to the outbreak of listeriosis in 2017 that resulted in more than 200 deaths from tainted food, asked to be admitted as a friend of the court so that he could advance arguments calculated to assist the court in reaching a decision. The SCA denied his request because he had a partisan interest in the matter, as he could potentially earn substantially more in his listeriosis class action case depending on the outcome of the Komape case.

SECTION27 welcomed the judgment. “SECTION27 hopes that this judgment will bring some semblance of closure for the family and restore their dignity for the manner in which Michael died and the treatment of the family by education authorities in the aftermath of his death,” the organisation said.

Court decision opens the way for consumers to get billions in fees back

Written by Ciaran Ryan. Posted in Journalism

Judgment is damning for credit providers. Class action suit to follow. From Moneyweb.

Debt collection has become a thriving business for many law firms. This judgment could put some of them out of action. Image: Shutterstock
Debt collection has become a thriving business for many law firms. This judgment could put some of them out of action. Image: Shutterstock

The Cape High Court on Friday delivered a damning judgment against credit providers for overcharging on legal fees and interest in contravention of the National Credit Act (NCA) which came into force in 2007.

The case was brought by Stellenbosch University’s Law Clinic and Summit Financial Partners on behalf of several customers of loan providers who ended up owing several times the initial sum borrowed after falling into default.

One of the applicants, Jenina Matthys, borrowed R5 600, repaid R13 000 and still owes R13 300.

Another applicant, Frans Saulus, borrowed R16 000, repaid R1 000 and still owes R37 000.

The majority of the applicants represented by the Law Clinic are poor, over-indebted and sinking deeper into financial distress.

The nearly 50 respondents in the case included credit providers Bayport, Finbond, Full House Retail and numerous law firms involved in debt collection.

Also cited as respondents were the country’s various law societies, which came out swinging on behalf of their members and their right to continue gouging the poor and those in financial distress.

Debt collection has become a thriving business for many law firms, and this judgment could put some of them out of action.

Declaratory order

The Law Clinic asked the Cape High Court for a declaratory order confirming the NCA’s so-called statutory in duplum (‘double’) rule – meaning a borrower may not be charged more than double the amount of the loan outstanding at the time of default – including all costs associated with the collection of the outstanding amount as well as legal fees.

For example, let’s say you borrow R500 and, once finance and other legally allowed costs of credit are added, you are required to repay R700 over a two-year period. You repay R400 of this and then default. The outstanding amount is R300. You can never be charged more than double this amount (R600) even after interest, admin and legal fees have been added, as long as you remain in default.

The Cape High Court has now confirmed this is the intent and the effect of the NCA.

Opt-out class action suit

Senior Law Clinic attorney Stephan van der Merwe says while he would not be surprised if the credit providers appeal the case, an opt-out class action suit is now being planned for early in the New Year to recover what could be billions of rands in overcharged interest and fees.

An opt-out class action suit means you are automatically included in the case (provided you have suffered from the abuses argued in this latest case) unless you specifically opt out.

Read: Landmark court case seeks to stop over-charging by creditors

Should the losers appeal the Cape High Court judgment, it will delay but not derail the class action suit.

“We are planning to institute a class action suit early in the New Year because we want to interrupt prescription [running out of time] on behalf of all borrowers across the country who have been prejudiced by the behaviour of unscrupulous credit providers,” says Van der Merwe.

The Prescription Act sets time limits for the legal claims related to loans. In the case of micro loans, credit card and overdrafts, it is three years. Any claim brought after this time period is generally invalid, unless there are exceptional circumstances.

Judge incensed

Acting Judge Bryan Hack of the Cape High Court was clearly incensed at the behaviour of credit providers who ran up interest as well as legal and admin fees, and loaded these onto the accounts of the borrowers to the point where they were repaying many multiples of the original amount borrowed.

Credit providers exploited what they claimed was loose wording of the NCA to add legal and other fees to the borrower’s outstanding amount.

This explains how Jenina Matthys ended up repaying R13 000 on a loan of R5 600 and was still being hounded for a further R13 300.

Credit providers and their lawyers relied on the previous common law interpretation of in duplum, which allowed them to load additional costs of debt collection onto the account of the borrower.

They tried to claim that once litigation had commenced, the credit agreement was cancelled and they were no longer limited in running up the costs of collection.

They argued that once judgment was issued against a borrower in default, a new “cause of action” had commenced and that legal fees accumulated thereafter were not collection charges as defined by the NCA.

The judge was buying none of this. The NCA was clear enough and there was no need to further develop the existing law.  

“It is contrived to try to distinguish legal fees which are part of collection costs and legal fees which are part of litigation costs … ,” reads the judgment. “It is a continuation of one cause of action and is simply a further procedural step to enforce the claim.”

Choice quotes from the judgment

  • “The crucial purpose of the [NCA] is set out in the long title of the act in the words ‘to promote responsible credit granting’. The respondents have emphasised the obligation on consumers to be responsible and not seek credit when they know they cannot pay or there is a risk that they might not be able to pay. I am of the view that the credit providers are thereby attempting to shield themselves from the responsibility imposed on them by the credit act.”
  • “The question is whether in the seven years since the Sebola judgment [which argued that the credit market must be competitive and sustainable] credit providers have shown the responsibility called for to balance the respective rights and responsibilities of credit providers and consumers. The facts of this case suggest no. The escalation of indebtedness as a result of costs set out (by the applicants) suggest the credit providers are not even paying lip service to the need for fairness and equity.”
  • “I take judicial notice of the notorious fact that consumers are constantly being cajoled and encouraged [to apply] for credit.”

The judgment

The judgment declared that the NCA’s definition of collection costs included all fees, as well as legal costs. The total amount claimed from a defaulting borrower may not exceed double the outstanding amount at the time of default, even after accounting for collection costs.

The losers in the case were ordered to appoint an expert to determine how much the applicants were overcharged and to refund them.

The losers were ordered to pay the costs of the case.

This is another victory for over-indebted consumers, coming just weeks after the Grahamstown High Court ordered banks to bring their cases before magistrates’ courts rather than high courts. This will drastically lower the legal costs for those in financial distress, and will curb the appetite of banks and their highly paid legal teams to litigate rather than seek accommodation with customers.

Read: The days of banks suing you in the high court are over

Another aspect of the judgment that will bring relief to borrowers is that any legal costs associated with collection must be “taxed” (or agreed with the debtor).

“This is an important improvement as it will bring some oversight to creditors’ unilaterally loading debtors’ bills with their costs,” says Van der Merwe.