Wind Down During Business Rescue

Masela Transmission and Distribution (Pty) Ltd made no provision for a downturn and cash resources were used to acquire companies that did not live up to expectations. When they could not trade out of the problems, we were able to assist them in winding down the company during business  rescue, which saw employees retain their jobs for a further two years and shareholders freed from liability for the debts incurred.

TYPE

100% BEE owned

INDUSTRY & SECTOR

Construction Electrical Reticulation

DATE OF COMMENCEMENT

August 2012

FILING

Resolution by directors and shareholders

PUBLIC INTEREST SCORE

250

REASONS FOR FINANCIAL DISTRESS

The difficult economic environment post 2010 negatively influenced gross profit margins due to:

GROSS MARGIN & PROFIT

  • Price reductions and competitive pricing through undercutting on tenders and contracts by competitors;
  • Materials comprise 70% to 80% of the total projects costs and margins are at an average of 10%.
  • Inefficient utilisation of labour due to lower activity and loss of production whilst waiting for delivery of materials,
  • Retrenchment and restructuring costs with the closure of the Eastern Cape and winding up of the KZN operations as well as Head Office.

AQUISITIONS

  • The acquisitions of Ercon and MCE did not have the desired impact. Revenue declined and profits were lower than the expectations on acquisition, R5.4 million of cash reserves from Malesela was loaned to Malesela Holdings to fund these acquisitions.
  • Management were over extended by the rapid increase in the size of the operations and the expansion of the company into other geographical areas.

ARREAR DEBTORS

  • Overhead costs in the new acquisitions were not reduced in time as the revenue and profitability declined rapidly.
  • The Marble Hall Golf Estate (Pty) Ltd (“MHGE”) is a large project that was executed in 2010. MT&D was responsible for the electrical reticulation of this housing estate and performed its obligations. Unfortunately, the developer did not obtain the requisite consents and rezoning approvals and bank funding was denied resulting in failure to recover R12 million (R9.7 million for work done and arrear interest not raised in the accounts) owed to Malesela.

BUSINESS RESCUE PLAN

SALIENT DETAILS

Concurrent creditors will be required to take a permanent write off of their debt of 50% with the payment of the remaining 50%  structured as follows:

  • 20c in the rand based on the collection of R7 million from MHGE (potentially before 30 June 2013);
  • 4 equal instalments of 5c in the Rand payable 6 monthly commencing on 31 March 2013 from cash flow proceeds generated from operations
  • 10c in the Rand payable on 31 March 2015 with a final  dividend in  30 September 2014 from cash flow proceeds generated from operations
  • This equates to a total recovery of 50c in the Rand. In terms of the liquidation calculation this compares favourably where no dividend is expected.
  • Secured creditors Voltex will be paid R1 million per month and Absa R100k.

ANNUAL TURNOVER

R60 to R100 million per annum

ASSETS

Most of the fixed assets were listed in a group company Tshepang Plant and Equipment (Pty) Ltd

OUTCOME

CREDITORS

A distribution of 3c in the rand was paid with a further 7c being forecast by 2015. Secured creditors Voltex reduced to R3.7 million from R20 million and Absa R1.3 million from R4.8 million.

SHAREHOLDERS

Voltex sureties will be cancelled when winding down finalized shareholders will no longer be liable.

EMPLOYEES

Employees retained their jobs for 2 years and then were paid leave pay.

PRACTITIONER ANALYSIS

This was one of those cases where no provision was made for a downturn and cash resources were used to acquire companies that did not live up to expectations.

In good times no contingency was made for a downturn and management thought they could trade out of the problems.