Results a chink in Eskom armour as it faces Companies Act spear
Directors risk delinquency and liability for any loss or damage if they dissemble or mislead
As Eskom’s beleaguered chief financial officer presents the utility’s annual results at the Franklin Auditorium in Megawatt Park on Wednesday, he may commit a crime that could result in him and his fellow directors facing trial for contraventions of the Companies Act.
What he says, or does not say, may lead to him and the entire Eskom board being declared delinquent directors, which could result in them not being eligible to act as company directors for the rest of their lives.
At the weekend, media reports emerged — as they did in 2015 — that Eskom would not have enough money to honour its obligations as they become due in the next few months. Also as in 2015, Eskom was quick to dismiss the reports. But back then Eskom did require a bailout from the state, and the ertswhile chairman, Ben Ngubane, was reported to have said that with R20bn in the kitty, the utility only had enough liquidity to cover its requirements for three months. With the recent reports of malfeasance, speculation has been rife that Eskom will soon have to go to the Treasury cap in hand again, for another bail-out.
There has been no official confirmation that Eskom is in financial distress, which the Companies Act defines as it appearing to be reasonably unlikely that a company will be able to pay all its debts as they become due within the ensuing six months, or it appearing to be reasonably likely that a company will become insolvent within that period.
Financial distress as contemplated in the Companies Act are grounds for what it terms “affected persons” (shareholders, creditors, registered unions and employees of the company who are not unionised) to force it into business rescue.
Given the importance of Eskom to the economy and its role in society, it is unlikely that the government as the shareholder of Eskom will allow it to go into business rescue. As has been the case with South African Airways, the worst that is likely to happen is that taxpayers will be called on to foot the bill in the form of a bail-out.
Notwithstanding this potential lifeline, Eskom’s directors have a legal duty in terms of section 129(7) of the Companies Act to disclose its true financial status. This section requires of board members that if they have reasonable grounds to believe that a company is financially distressed but the board has in its wisdom decided not to put it into business rescue, they are legally obliged to inform all affected persons of this in writing.
The Companies Act does not prescribe the timing of such notice, but it is accepted that the board should do so as soon as it has reasonable grounds to believe that the company is financially distressed. When the chief financial officer makes his presentation on Wednesday he will, in effect, be reporting to his shareholders — the South African public as represented by public enterprises minister — and all stakeholders including creditors and employees.
Whereas the report he will present will technically be a retrospective one for the financial year that ended earlier in 2017, failure on his part to inform the stakeholders of the current financial position of the company will fly in the face of section 129(7) of the Companies Act.
Some of the consequences of directors’ failure to disclose its financial position as contemplated in section 129(7) are:
In terms of section 214, a director would be guilty of an offence if he was knowingly a party to an act or omission by a company that was calculated to mislead creditors and other stakeholders;
In terms of section 162, a director may be declared delinquent for contravening the Companies Act or for acting in a manner materially inconsistent with his duties as a director. The consequence of an order of delinquency is ineligibility to act as a director of a company for up to a lifetime, as may be determined by the court in line with the misdemeanour’s severity;
Section 218(2) renders any person who contravenes any provision of the Companies Act liable for any loss or damage suffered by anyone as a result. The fact that any person, whether or not a qualifying stakeholder in the company, is allowed to pursue the civil remedy could enable any member of the public — individually or via class action — to lay a civil claim against the directors of Eskom.
Enthusiastic litigators such as the Organisation Undoing Tax Abuse and other civil society organisations could mount a credible class action for the losses the public may have suffered due to the directors’ conduct.
The new directors who have recently joined the Eskom board have their work cut out. It will be of no assistance to them that they have not been there long, as the test for compliance with section 129(7) is applied at a point in time, and there is no better time to make an assessment than when the company publicly reports on its financial health to its stakeholders.
THE CIVIL REMEDY COULD ENABLE ANY MEMBER OF THE PUBLIC TO LAY A CIVIL CLAIM AGAINST THE DIRECTORS