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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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Mondial | Publication | Q1 2022
Steinhoff International Holdings NV (SIHNV) and its subsidiaries engaged in the manufacture and retail of furniture, household goods, and clothing. It once operated thousands of stores in over 30 countries, but became embroiled in significant financial irregularities that were uncovered in December 2017.
The Steinhoff saga has resulted in a number of lawsuits instituted against the company, its directors and auditors, both in South Africa and other jurisdictions such as the Netherlands and Germany.
One of these lawsuits unfolded in South Africa's Western Cape High Court, when it recently handed down judgment in the matter of Trevo Capital Ltd & Others v Steinhoff International Holdings (Pty) Ltd & Others. The High Court was tasked with interpreting the financial assistance provisions of the South African Companies Act (the Companies Act).
The genesis of the matter is to be found in a South African statutory scheme of arrangement proposed by Steinhoff International Holdings (Pty) Ltd (SIHPL), Steinhoff's South African holding company, to its creditors and in terms of which it sought to settle all claims against SIHPL and its South African subsidiaries (the Scheme). The Scheme, in broad terms, makes provision for three classes of creditors (market participant creditors, financial creditors and contractual creditors) and then goes on to propose different settlement terms for claims of the respective classes of creditors. The distinction between the creditors were in large based on the nature and legal basis of their respective claims against SIHPL. The South African Scheme was one part of the overall settlement. The other part was suspension of payments proceedings for the ultimate parent company (SIHNV) in the Netherlands.1
Dissatisfied with the proposed terms of the South African Scheme and how the market participant creditors in particular would be treated in comparison with others, certain disgruntled creditors approached the High Court contending that the guarantee-type claims of the financial creditors were based on financial assistance advanced by SIHPL in contravention of the solvency and liquidity requirements provided for in the Companies Act, 2008 and were therefore void. Thus, the challenging creditors contended that the financial creditors were being overcompensated under the Scheme to the detriment of the other classes of creditors.
Section 45 of the Companies Act sets out certain requirements that have to be met before a company is permitted to provide financial assistance to a related or inter-related company.
Financial assistance in this context includes lending money (other than in the ordinary course of the company's business), guaranteeing a loan or other obligations and securing any debt or obligation.
One of the requirements for valid financial assistance is that the board directors of the company must be satisfied that, immediately after providing the financial assistance, the company would meet a statutory solvency and liquidity test, i.e. the company's assets must exceed its liabilities and that the company must be able to pay its debts as they become due within the ensuing 12 months (the Solvency and Liquidity Test).
In addition the board must be satisfied that the terms under which the financial assistance is proposed to be given are fair and reasonable to the company and there must also be a special resolution by shareholders in place, passed within the preceding two years, authorising the financial assistance.
Failure to comply with the above requirements renders the financial assistance void.
The applicants contended that the SIHPL financial assistance in this particular matter related to the following claims of the financial creditors under the Scheme:
The High Court's judgment deals, in the first instance, with the question as to whether: (i) the applicants had standing to bring the application, and (ii) the provisions of section 45 applies to financial assistance being provided to a related company that is a foreign (non-South African) company.
Both the above questions were answered by the High Court in the affirmative. The main focus, however, is on the judgment insofar as it relates to the question whether:
On the 2014 Guarantee issue, there was no dispute between the parties that the 2014 Guarantee constituted financial assistance. The disputed issue was whether the board of directors could in the circumstances have been satisfied that the Solvency and Liquidity Test had been met.
The applicants argued that:
SIHPL on the other hand argued that:
The High Court agreed with the applicants that there is a measure of reasonability that must be present in the board's decision. However, in then siding with SIHPL, it criticised the applicant's hindsight approach and "ex post facto analysis of the company's financial position" with reference to the accounting irregularities uncovered some three years later. It was held, given the considerations taken into account by the SIHPL board at the time, it cannot be said that the board acted unreasonably in relying on the financial information then before it when approving the financial assistance.
Noteworthy though is that the High Court did not expressly rule the so-called hindsight approach was per se incorrect, but in coming to its decision rather sought to place more reliance on a South African procedural and evidentiary rule. In that regard, the High Court determined that where there is a genuine dispute of fact between the parties, then it must be determined in SIHPL's favour in circumstances where SIHPL's version of events was not untenable or far-fetched. The High Court also held, with reference to the CEO and CFO's knowledge at the time that, given the number of board members, it cannot be validly suggested that the entire board's decision was tainted.
The CPU issue involved a complex set of facts and legal intricacies that followed the uncovering of the financial irregularities and a call by bondholders on the 2014 Guarantee that SIHPL was unable to comply with.
In very brief and simplistic terms, the failure to abide by its obligations under the 2014 Guarantee resulted in a financial restructuring of SIHPL and the Steinhoff Group which amongst other matters, entailed that the bondholders had their existing debt restated in the CVA pursuant to revised terms:
The above terms were reflected in the CVA which, as mentioned, was sanctioned by the English courts.
SIHPL argued in the High Court that the CPU did not constitute new financial assistance in that:
SIHPL therefore contended that it did not need to have complied with the requirements of section 45 of the Companies Act since the CPU was not a new obligation.
The High Court rejected SIHPL's argument, holding that:
In taking a substance over form approach, the High Court further held that the CVA resulted in SIHPL's debt under the 2014 Guarantee being discharged with a new debt being created, i.e. Lux Finco's debt under the Lux Finco Loan. The CPU was in turn held to constitute new financial assistance to Lux Finco in that it replaced the 2014 Guarantee and protected the bondholders in the event of a default on the part of Lux Finco under the Lux Finco Loan.
As such, it was determined that the CPU constituted financial assistance and, mindful that it was agreed by the parties that no test under section 45 was conducted at all by the SIHPL board, the CPU was therefore deemed void by the High Court.
The High Court's judgment is of significant importance specifically in the context of a financial restructuring scenario, whether through a scheme of arrangement, business rescue (a South African process to restructure the affairs of a financially distressed company and in which process it was recently held that section 45 does find application) or an informal workout.
The board of a company, business rescue practitioners, investors and financiers must be alive:
The judgment remains the subject of an appeal and, mindful of its novel nature and both factual and legal complexities thereof, it is left to be seen whether the South African Supreme Court of Appeal will agree with the High Court.
What would be particularly interesting is how the Court of Appeal will treat an aspect that the High Court did not pay much attention to, namely that the CVA is English law governed, was sanctioned by the English Courts and expressly provides that nothing therein should be construed as discharging SIHPL's liability to the bondholders—a position contradicted by the High Court's judgment that the CVA created a new obligation.
As the judgment did not directly affect the Scheme, it should also be noted that, in the interim period, the Scheme has been approved by the requisite majority of creditors. The Scheme now stands to be sanctioned by the High Court with that application also being opposed by certain disgruntled creditors. It is anticipated that the hearing of this application will take place in the first quarter of 2022.
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