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Eskom unplugged – Paul Hoffman’s Accountability band delivers searing performance

CAPE TOWN — The Eskom accountability chickens are not only coming home to roost – they’re being fried, dirty feathers and all, with a high voltage legal letter whose author has the trip-switch in his hand. Paul Hoffman, SC, Director of Accountability Now, is demanding, in terms of the Companies Act, that Eskom explain to those most affected by its untenable financial position, what it’s rescue plans are – given that its unlikely to pay its staff this month. Eskom is, in legal terms, financially distressed and will probably go insolvent within six months. This means government guarantees will be called in, mauling the economy and Eskom unable to continue as a going concern. There’s no proof that Treasury will bail them out, using billions more taxpayer rands to pay for the venality, greed and mercenary behaviour of some former board members. Hoffman wants a written explanation of the glaring assumption that business rescue is unnecessary – within 10 days. He says they’ve broken the Companies Act which forbids them carrying out business recklessly, with gross negligence with the intent to defraud any person or for any fraudulent purpose. Perhaps that’s why the new squeaky-clean corporate veteran and Eskom Chairman, Jabu Mabuza, has cancelled his trip to Davos. – Chris Bateman

By Paul Hoffman*

Re: SOLVENCY AND LIQUIDITY OF ESKOM SOC LIMITED (“ESKOM”)
Paul Hoffman

1. Customers of ESKOM who have paid advance service deposits for the supply of electricity by Eskom must be regarded as affected persons for the purposes of section 128(1)(a) of the Companies Act. 71 of 2008 (“the Act”).

2. Pursuant to section 157 (1(c) of the Act and in contemplation of a possible class action being launched against Eskom, we address this letter to you on behalf of all affected persons and in the public interest.

3. As a matter of public record, certain members of Eskom’s previous management (board and otherwise) were incompetent, self-serving, corrupt and thus unable (or unwilling) to act in the best interests of ESKOM. Rather, these individuals benefited and enriched those connected to specific political alliances with no regard whatsoever to the broader interests of ESKOM and its consumers while at the same time no doubt enriching themselves.

4. By all accounts, ESKOM is in a precarious financial position such that it may well be unable to meet its financial obligations to employees and otherwise during the course of this month. This being common knowledge from recent press publications. ESKOM has not refuted these assertions.

5. ESKOM may be one of the few companies worldwide that actually asks its customers to use less of its services, yet seeks to charge more.

Read also: Allan Gray points out the real problem at Eskom – a productivity meltdown

6. On any reasonable interpretation, Eskom appears to be reliant on Government guarantees for it to continue as a going concern. That is, ESKOM is unable to sustain its operations from its own resources and is entirely reliant on state guaranteed funding.

7. In short, it would appear that ESKOM is, or is about to become, both insolvent and illiquid.

8. Of course, that ESKOM has become embroiled in ‘state capture’ such that, so it would appear, significant sums have been unlawfully extracted from ESKOM by corrupt opportunists, has not helped ESKOM’s financial position.

9. Additionally, it appears that for some time now ESKOM has not had a professional and independent board. Rather, ESKOM’s board has sought to benefit corrupt opportunists with no regard whatsoever to the interests of ESKOM.

Corruption at Eskom keeps growing and growing. More magic available at jerm.co.za.

10, The corruption issue is, to some extent, now playing out in the portfolio committee hearings.

11. These hearings, while essential, do not mean that ESKOM is likely to recoup corrupt and wasted expenditure now or in the foreseeable future. In the meantime, ESKOM needs to be functional, operative and then solvent and liquid.

12. It appears that ESKOM’s financial position is that absent further state support, it will be unable to continue as a going concern.

13. In the circumstances, we point out that ESKOM is undoubtedly ‘financially distressed” as defined in section 128(1) (f) of the Act.

14. If, as would appear to be common cause, ESKOM is ‘financially distressed’, as defined in section 128 (1)(f) of the Act, then why has the ESKOM board of directors not passed a resolution, as it is permitted to do, to place ESKOM under voluntary business rescue?

Read also: Meet the state capture puppeteers: How Gupta family pulled the strings at Eskom

15. We refer you to section 129(7) of the Act which provides that to the extent that ESKOM is ‘financially distressed’, as clearly appears to be the position and which the board of directors cannot on any reasonable basis deny, then ESKOM (through its board) must deliver written notice to each ‘affected person’ [as defined in section 128(1)(f) of the Act] setting out why:

(i) It appears that ESKOM is reasonably unlikely to be able to pay its debts as they become due;

(ii) It appears likely that ESKOM will become insolvent in the next six months (as an alternative to (i) above); and

(iii) ESKOM has not adopted a resolution to commence voluntary business rescue proceedings.

16. ESKOM has, to the best of our knowledge, not delivered a notice to each ‘affected person’ in terms of section 129(7) of the Act or at all.

17. There is no basis upon which the board of ESKOM can deny its dire solvency and liquidity crisis.

18. Of course, in so far as ESKOM may be placed under business rescue, voluntary by its board or otherwise, it is clear that all guarantees issued on behalf of ESKOM, including those issued by the Government of South Africa, may well and inevitably become immediately callable, despite any business rescue proceedings. The consequences are material, potentially catastrophic, to the economy of South Africa.

19. If, as may be expected, the board of ESKOM is of the opinion that despite the evident financial distress, there is a reasonable prospect that ESKOM can be rescued, then those on behalf of whom we address this letter to you require a detailed written explanation of the basis upon which the board reasonably holds such a belief. That the board of ESKOM may suggest that further State guarantees and / or an equity injection by the State will be provided so as to maintain ESKOM’s operations is, in our view, wholly inadequate; especially absent proof from National Treasury that it will provide additional financial support. When you furnish us with the explanations we require kindly deal with the response of the new Eskom board to the judicial review proceedings in Helen Suzman Foundation and another v Eskom and others which were launched in the Gauteng North High Court last month and to which Eskom does not appear to have any bona fide defence.”

Read also: It’s time to free South Africans of the Eskom monopoly – FMF

20. If ESKOM is destined to remain reliant on State guarantees to ensure its survival, then that, respectfully, confirms the fact that ESKOM is not a sustainable business. All that a State guarantee achieves is to secure that certain, but not all creditors, will be paid. This, respectfully, does not mean that ESKOM is either solvent or liquid so the ‘financial distress’ continues. Rather, it means that a third party, the State (using funds from taxpayers) will ultimately pay some of the creditors of ESKOM.

21. In terms of section 22 of the Act, a company must not ‘…carry on its business recklessly, with gross negligence with the intent to defraud any person or for any fraudulent purpose.” For ESKOM to continue to trade in the present circumstances would, in our opinion, be contrary to section 22 of the Act on any reasonable interpretation. ESKOM is insolvent and illiquid such that its ability to meet operational costs and long term debt obligations appears unlikely. In effect, ESKOM is trading either recklessly or in a grossly negligent manner.

How SA’s top cartoonist Zapiro sees the revolving door of Eskom executives. More magic available at www.zapiro.com.

22. In the circumstances, we require you to explain:

22.1 the basis upon which the board does not believe ESKOM is financially distressed in terms of section 128(h) of the Act;

22.2 why the board has not delivered written notice to all affected person in terms of section 129(7) of the Act;

22.3 the factual basis upon which the board of ESKOM reasonably believes, if it in fact does so believe, that the State or any other funder will provide further financial support to ESKOM, whether by way of loan, equity investment, guarantee or a combination thereof; and

22.4 why the provision of any loan, equity investment or guarantee to ESKOM will result in ESKOM ever becoming solvent and liquid.

23. Your response would be appreciated within 10 (ten) business days from the date hereof. Additionally, we ask that you table this letter at the first meeting of the new Eskom board.

24. Kindly acknowledge receipt of this email which, for obvious reasons is being copied to the Minister of Finance and the Minister of Public Enterprises.

  • Paul Hoffman, Director of Accountability Now. 
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