THE following is analysis of the company position as it sells the idea of scheme of arrangement. It’s a fact that the company is insolvent and surviving by its status of being a strategic enterprise.
But we have the wrong pilot of the plane and the efforts of the new board and government to revive the company will not see the light with this management.
The company is technically insolvent as stated below:
The company’s balance sheet in the last three years has deteriorated from a positive shareholders’ equity of $37.2 million to a negative $ 167.7 million. The balance sheet has been weakening since 2012 when net current liabilities started to exceed current assets.
Shareholders should have taken measures to deal with the deteriorating situation before 2014 when the trend towards insolvency was unfolding.
The re-arranged statement shows that the company is selling its products at a loss; $ 45 million loss against sales of $32 million in 2016; the sales would have to increase almost three fold to over $90 million for the company to make a gross profit. This reflects a pricing problem and production costs which are not market related. The mining costs are more than the selling prices of products.
1.3 Mining Output
Year 2016 2015 2014
Raw Coal (million tons) 969 1 557 1 786
Mining output has been on a decline and there was no significant change even after the company acquired mining equipment for $ 32 million in 2015. The company seems to be dependent on the contractor, Mota Engil.
2.1 The chief cause of the collapse of the company is mismanagement arising from weak corporate governance. This is acknowledged by the company in the scheme of arrangement publication. The proposed scheme of arrangement does not address the chief source of the problems.Advertisement
2.2 The company has been let down by a leadership appointed by existing shareholders. The proposed scheme retains the leadership of the same shareholders. The company is technically insolvent and creditors should be afforded the opportunity to appoint a new leadership. This is the only available option to secure their interests. The existing leadership was appointed by shareholders and it is to be expected that the leadership will represent the vested interests of the appointing authority. The performance of the company as stated above casts doubt that the leadership of the company will represent the interests of creditors.
2.3 The scheme of arrangement is being driven by directors appointed by Government as shareholder, which directors are responsible for running the company to its current state.
2.4. Government as shareholder changed the composition of creditors by issuing a shareholder loan in the form of Government Treasury Bills to Mota Engil without following due process in terms of the articles of association and company’s act. This was done after obtaining the court order seeking for the scheme of arrangement. This has the effect of predetermining the outcome of the creditors’ meeting.
2.5 The state of the company demands that creditors take charge of the corporate governance process of the company within more appropriate legal process to redeem the company.
3. Creditors Arrears
The accumulation of creditors is part of the mismanagement of the company. The scheme validates and concretises claims by creditors. The verification exercise by a firm of auditors was not a validation process to eliminate claims arising from mismanagement. Mismanagement by its inherent nature would have created fraudulent transactions.
The scheme of arrangement overlooks this fact which could be determined by a forensic audit process. There are creditors that are crowding out authentic creditors who are part of the scheme of arrangement. The company could get relief if fraudulent creditors were isolated. As given the scheme places all creditors at the same level.
The government as a shareholder should have insisted on a forensic audit ahead of committing public funds to the company that it has an interest in with other third parties. The actions so far undermine minority interests in respect of both shareholders and creditors.
4. Turnaround Strategy
4.1 Cost Reduction
The cost reduction program is centred on reducing headcount. The implementation of the programme is increasing liabilities. Workers are being retrenched on the basis of financial packages which, in effect, increases creditors. This commits the company to future obligations compromising its recovery. It also makes the company less attractive to potential financiers.
There are three legal options available in dealing with the status of the company.
5.1 Scheme of Arrangement as Proposed
The scheme as described above is fraught with flaws. It gives current leadership continuity. This will make it difficult for the company to break from its past of mismanagement and inefficiencies.
5.2 Judicial Management
The option is broader in effect than the scheme of arrangement. The option proposed by management is an element that can be applied by a judicial manager. A judicial management process will bring in new blood, fresh ideas and accountability to creditors and the courts. It is more comprehensive and offers wider powers to deal with the problems facing the company.
The company is in financial distress. The removal of creditors would breathe a new lease of life to the company. The company has demand for its products and has opportunities to develop more value-added products compared to those that have been the mainstay of the company in the past. The option would lead to closure of the company, given the circumstances the company should be afforded an opportunity to operate under a suitable legal framework.
5.4 The company requires a new leadership appointed on competencies that will generate confidence with stakeholders including workers, banks and suppliers.
5.5 The scheme of arrangement is a piecemeal legal process and will not sustain the recovery of the company. The option to place the company on judicial management is a better option. It will yield new loyalties to stakeholders and will bring the requisite discipline and competencies.
5.6 The liquidation of the company is an option that will always be available. The company should be given an opportunity to be run under a new leadership appointed by a legal process which excludes shareholders who have failed other stakeholders of the company.