Senior Business Rescue Practitioner : Coronado
Louis Klopper, senior business rescue practitioner for the Gupta companies, talks about what it takes to turn around a failing enterprise.
CIARAN RYAN: This is CFO Talks and today we are joined by Louis Klopper, who’s a senior business rescue practitioner from the company, Coronado. Louis is not just any business rescue practitioner but one of the practitioners appointed to rescue the Gupta companies that were placed in rescue more than a year ago. In total, eight Gupta companies are under rescue at the moment, while application has been made for the liquidation of a ninth Gupta company, Oakbay Investments. We’re going to talk about that in a minute, since it provides a window into the shadowy world of corruption and it beggars belief that a family arrives from Uttar Pradesh in India some 20 years ago and managed to infiltrate all levels of our society. We’re also going to be talking about business rescue, which is a relatively new phenomenon introduced into the Companies Act in 2009, prior to that South African company law had very weak protections for companies in financial distress. The usual practice was to simply liquidate companies that had gone bankrupt but there is another way and we’re going to find out about that and the pros and cons of business rescue with Louis Klopper. Louis, it’s good to have you here, just to kick things off and set the scene, it’s been widely reported that you, the rescue practitioners had to face down nearly 50 court cases related to the eight Gupta companies that you’re attempting to rescue. Clearly anybody in your line of business better have some good lawyers standing at your shoulder, can you explain what went on here and why there were so many court cases?
LOUIS KLOPPER: Thank you, Ciaran, it’s an honour and a pleasure to be here. Yes, right from the outset it was very clear in these matters that the management and the executive of these companies under business rescue were quite used to having their own way. They had deep pockets and anybody who challenged them, they were just litigated out of existence. We have got very specific duties and responsibilities placed upon us as practitioners in terms of the act and we were not prepared to do their bidding for them, we were not prepared to close our eyes to any of the malfeasance that was happening and any of the flow of funds that was happening without documentation and so on. So we really opened up a hornet’s nest and because we were starting to challenge a lot of the ways and a lot of the financial information and starting to challenge the way they were operating the companies, which is what we’re supposed to do in our investigation on the company. They brought these numerous spurious cases against us, suffice to say that most, if not all, cases were struck from the roll with punitive costs. So the reasons for them bringing these cases against us were really, at the end of the day, just to try and get us to conform to their way of thinking and doing it their way. In their affidavits to the CIPC to commence business rescue they stated that…
CIARAN RYAN: CIPC, just explain what that is for people who don’t know.
LOUIS KLOPPER: The Companies and Intellectual Property Commission, which regulates businesses, business registrations and the business rescue proceedings in this country. The affidavit, which the directors of the company to go into business rescue place before them, was merely they were unbanked because the Bank of Baroda was exiting the country and that the business rescue practitioners were only employed to find banking facilities. Well, when we started investigating the affairs of the companies we found that banking was actually the least of their worries. The way that they had managed the companies, destroyed the companies, destroyed wealth. The way that they managed these mines and the other companies in particular were just simply beyond comprehension.
The inner workings of the Gupta companies
CIARAN RYAN: Right, okay, so for people who are listening overseas I suppose we should point out that the Guptas are a family who arrived in South Africa more than 20 years ago from India and ended up supremely powerful in this country, offering bribes to ministers and more than that, even deciding who was going to be appointed as Minister of Finance. It’s widely believed that they were behind the sacking of former Finance Minister Nhlanhla Nene in 2015. Books have been written about this but tell us about the inner workings of the Gupta companies, you’ve been quoted in the press and before Parliament in saying the Guptas had pillaged the companies and treated them as their own personal piggy banks, how did you come to that conclusion?
LOUIS KLOPPER: During our process of investigating the affairs of the company, as is required by us in the act, we found a huge amount of undocumented transactions and money flows through the various companies for no reason, to the extent that we employed the services of forensic auditors and the forensic auditors concurred with what our initial beliefs and findings on the surface were and that is that hundreds of millions of rands were stripped out of, in particular, the two coal mines, Optimum and Koornfontein, back into their holding companies and back into Oakbay and the company structure above it. We must understand that there were only seven or eight companies under business rescue but the group consists of 123 companies. So they had tentacles all over the show and their money was just transferred willy-nilly for no particular reason between companies, for whatever reason, and their contention was they were running a central treasury operation. Well, if you run a central treasury operation then you register and document it as such. There was no central treasury operation, this was purely unbridled theft of any excess funds that were lying anywhere in any account.
CIARAN RYAN: Do they not call that ‘kite-flying’ in business?
LOUIS KLOPPER: Kite-flying, money laundering, call it what you like, it’s all the same thing, it’s all the same crime.
CIARAN RYAN: Was there a company that they had designated as the central treasury or was it just an undocumented thing?
LOUIS KLOPPER: Basically, Oakbay was the centre, Oakbay and Tegeta were the two washing machines that were washing all these funds throughout the various group companies.
CIARAN RYAN: So there were transactions happening but there was no documentation for that?
LOUIS KLOPPER: Exactly.
CIARAN RYAN: No invoicing happening?
LOUIS KLOPPER: Exactly. There were no reasons for that and we have stated that in court papers, we attached the three reports by our forensic auditors at the time, two court papers. So being court papers this is information that’s in the public domain now.
CIARAN RYAN: Can you give us a brief update on the state of the companies in business rescue. The biggest of the companies, of course, is Optimum Coal, which supplies coal to Eskom, or used to, I don’t know if that’s still the case. In January we heard that the state-owned African Exploration Mining and Finance Corporation made a successful bid for the mine and then we heard that National Treasury was not too happy about that. So where do things stand right now?
LOUIS KLOPPER: The three main assets around the whole coal industry in the group, Optimum Coal Mine, Koornfontein Mine and the export allocation at Richards Bay through Optimum Coal Terminal, we are in the process of receiving bids at the moment for those three mines. The bidding process is closing next week sometime, by when the practitioners will evaluate all the bids for their successors and for the availability of funds and how the potential buyers aim to pay for these assets, which should lead to a so-called Section 151 meeting, where we place the various options before the creditors and then they will decide who the ultimate buyer of that is and that should happen, according to the current timeline, that should happen by early August. However, as someone quipped the other day, this is Optimum, nothing is cast in stone.
CIARAN RYAN: You, of course, are the business rescue practitioners, so you are standing in the stead of the shareholders, the shareholders being the Gupta family.
LOUIS KLOPPER: Well, not really the shareholders, the act says that a business rescue practitioner when appointed steps into the shoes of the board and preexisting management, so you effectively take control, you become like a super CEO of a company. That is what business rescue is all about, you don’t require any contact with any shareholders. The shareholders, if there is any money owing to them, just become a normal creditor, in a different class of creditor but as a practitioner you take effective control of a company as like a super CEO.
CIARAN RYAN: One of the companies that was not put under rescue, of course, was Oakbay Investments but there is an application for the liquidation of that company, what’s the status of that?
LOUIS KLOPPER: The liquidation of that company, as a matter of fact, is being heard today June 26 in the North Gauteng High Court, so we await the outcome of that and this is because they did not pay their rent at their offices in Sandton because the lease is in the name of Tegeta, which is under business rescue and they just simply didn’t pay their rent, they said it’s part of the treasury operation.
CIARAN RYAN: So Oakbay could end up in liquidation for not being able to pay its rent?
LOUIS KLOPPER: 100% correct.
Specialised skills required by business rescue practitioners
CIARAN RYAN: That’s interesting. Let’s talk for a minute now about business rescue, you said in the past that many lawyers and accountants foolishly think that they can become business rescue practitioners. I must say, I am a bit interested or staggered by what I have learnt from you and the goings on at the Gupta companies because you had these 50 court cases that you had to have lawyers at your side virtually day in, day out, to fight to protect the assets of the company. So people would be coming to the company, they would be liquidators, people trying to liquidate the company, people trying to have you removed as business rescue practitioners, probably because you are poking around in areas that may be sensitive for somebody who’s got something to hide. This is not a line of business that you go into with your eyes closed, you’ve got to be street-smart, you’ve got to be a bit tough, right? Can you explain what is required from a business rescue practitioner, what kinds of skills do you need?
LOUIS KLOPPER: Well, to follow on from that, as a business rescue practitioner when you’re appointed you become a de facto super CEO of a company and it follows, therefore, that a business rescue practitioner is a person who should have competencies to facilitate the rehabilitation of a business in distress. As such, a business rescue practitioner should possess certain minimum or critical competencies. First of all, you should have a good legal knowledge, thorough knowledge of the Companies Act and its regulations, the Close Corporations Act and various acts that regulate labour, like the Basic Conditions of Employment Act and so on because business rescue is about the creditors and the staff of the company. It’s not about the owners, it’s not about the shareholders but it’s about the creditors and the staff because they are potentially the ones that could get hurt. So you’ve got to know your way around certain legal ways minimum. You’ve got to have a good accounting knowledge, preparation and presentation of enterprise management accounts and their financial statements. But, more importantly, the interrogation of source documents and accounting systems and you should, at least, have a good working knowledge of the independent review process because that is where you are going to, as you said, poke around and find out what is wrong and what illegal transactions, if any, happened in the company, and follow the money, that is it, follow the money, where has it gone to, has it been documented, are there documents. You’ve got to go there like a forensic auditor and poke around in those company accounts and if you are not an accountant or trained in accounting you are not going to know where to find it.
CIARAN RYAN: So it’s best to have some knowledge of accounting and it’s also important to have some knowledge of law. But now let’s say you’re appointed to go into a company, you’ve got to come up with a rescue plan within a few days, so you really have to know where to put your attention and where to quickly come up with where is the rot in the company, you’ve got to find that very quickly, not so?
LOUIS KLOPPER: Absolutely and that brings us to what I believe is the third necessary skill for a business rescue practitioner and that’s analytical skills and that’s the analysis and interpretation of financial statements. If you are unable to analyse and interpret the financial statements using many techniques, ratio analysis and a lot of other techniques that have been developed by scholars over the years, you’re not going to be able to find out what is the core rot of the company or what are the core problems in the company. Then, of course, on top of that is your business management skills, you’ve got to have a strategic view on a company because, as you quite rightly pointed out, you’ve got to devise a business rescue plan at the end of the day. If you can think strategically and see the future, there’s no ways you will be able to devise a saleable business rescue plan that you can put before the creditors. Obviously, also, you’ve got to have a very good operational insight in that you’ve got to be able to identify operational issues and inefficiencies because, let’s forget about these particular matters, and just talk about business rescue in general or any other turnaround of a company in general, you’ve got to be able to analyse through your operational and analytical abilities and find what is the core reason for the business distress. If you cannot identify the core reason for the business distress then you cannot address it in a business rescue plan and in an efficient turnaround plan.
CIARAN RYAN: So if I give you 24 hours and say find out where is the rot in this company, where would you look first?
LOUIS KLOPPER: You go and analyse the historical audited financials and hoping that that information is at least 80% or 90% correct but this is when your analytical comes in that you’ve got to be able to find that there were money flows happening that were not recorded. Let’s look at Steinhoff and all these others that are happening, debt that gets put into a special purpose vehicle that’s never recorded on it. I believe Steinhoff is just one of many, many more similar cases to come out, where there’s been manipulation, share price maintenance and so on. But, at the end of the day, you can only play a game for so long, over time it’s going to catch up with you, whether you hide whatever you hide but, therefore, these kinds of things that we’ve seen that started with Enron and Steinhoff and a lot of others that are still to come, tells us that at the end of the day that you as a business practitioner have got a huge, huge job on your hands to try and unearth and uncover all those shenanigans and hiding of funds and debt and so on. What is the true picture of this company, that is what the business rescue practitioner must go and find out, what is the real, true state of affairs of the company.
CIARAN RYAN: We’re also joined here by Nicolaas van Wyk. Nicolaas is the chief executive officer of the South African Institute of Business Accountants. Nicolaas, did you want to make a comment about that?
NICOLAAS VAN WYK: Ja, I see, Louis, that you are also a CFO(SA), you’ve earned this designation, and just for our international audience, SAIBA recently launched a new global designation for CFO’s and the competency framework speaks a lot to what you’ve just highlighted, a business rescuer should have, strategic knowledge, operational knowledge, analytical knowledge, legal knowledge, accounting knowledge. Can you just share a little bit more about your designation with our audience?
LOUIS KLOPPER: Thank you, yes, Nicolaas, it’s really an honour to have that designation and be seen as one of the senior members of the organisation. I see my work as a business rescue practitioner and as a certified financial officer as hand in glove because, to me, the competencies, as you’ve just highlighted, are exactly the same because if you are appointed as a CFO of a company or a group, you are going to do exactly what a business practitioner does. You are going to go into that company and strategically look at what is wrong and devise a plan of how to take that company into the future. So for any aspiring accountants, to me, you’ve got to go and equip yourself over time, by your experience, and acquire these skills, so that you can become a competent CFO going forward because we are seeing with these matters that are coming out of the woodwork nowadays that a CFO is not just somebody who can sit there with a basic accounting qualification and think you can do it. It takes a huge amount of business management skills and analytical skills and strategic skills that you have to bring to the party and a pure basic legal or basic accounting qualification is not going to give that to you and, therefore, the CFO designation is a recognition of the combination of the skills that you’ve acquired over the years and it is a certification of your competencies.
Why are CFO’s so easily corrupted?
NICOLAAS VAN WYK: We’ve also recently seen these accounting scandals, from Steinhoff to Tongaat, even Bosasa. Now, we’ve noted the Gupta’s involvement and corruption but what bothers me always is the CFO is the one who signs the cheques or who transfers the money. In your estimate, why are CFO’s so easily duped into supporting these decisions?
LOUIS KLOPPER: My personal view on that is that they are sucked in by the board into preserving a share price for investors out there, instead of considering the long-term consequences. At the end of the day, my personal view is when you see the pain coming, take the pain then because the pain is small, don’t wait until the pain gets so large that you actually cannot address it anymore, which, by the way, is exactly what the act requires, the act says that at the first sign of distress go into business rescue then, don’t wait until it’s too late when the company has got to be liquidated. If we look at Steinhoff, if we look at the potentials you mentioned, Tongaat Hulett, there’s Omnia, there are all these kinds of things bubbling under the surface at that moment that has been reported in the press and I do believe that they all suffer from the same fate. Tongaat already has got another outside firm of auditors and investigators to go and look at their asset values and we’re talking of a possible R4.5 billion impairment. We’re not talking about small change here, we’re talking about huge amounts of money. Steinhoff lost billions of rands for shareholder wealth across the country. So I believe that a CFO should also be able to stand up to his board and draw a line in the sand and say no, rather let’s fix the small problem now, before it becomes a huge problem that we cannot actually fix in the future.
CIARAN RYAN: I have a question around this because you raise Tongaat, and Tongaat and the R4.5 billion or R3.5 billon impairment that they’re going to announce, it seems to be related largely to their valuation of inventory and stock, and also land deals that they were doing. They are big landowners in the Durban area, they’re selling off parcels of land. I went and had a check at the IFRS treatment of land and, of course, it’s very difficult with land, at what point do you start recognising revenue, at what point does it become collectable. It seems, and maybe Nicolaas you can comment on this, there’s a bit of fuzziness around IFRS, that’s the way I would see it. So there’s a lot of wiggle room for a CFO or an accountant in a situation like that.
NICOLAAS VAN WYK: Ja, I suppose that’s where all the scandals originate from. Like Louis has said, there’s pressure from the board on shareholder price and the short-term way of fixing that is applying liberal judgement on the valuation of assets and moving expenses from the income statement to the balance sheet. But that’s just short term, eventually your plan will run out and you will have to face the music. There’s a big movement now in the profession again to become much more conservative, auditors are much more strictly engaging with their clients. I recently heard from a CFO that it’s like a war room when the CFO’s now meet with the auditing team. So those things aren’t being taken for granted and I suppose that’s the good result from these bad scandals that have plagued the profession of late. Louis, what I also want to ask you is, many of our listeners are from big corporates, CFO’s themselves, if they are in a situation where they suspect financial distress, what would be the next step, how would they go and explain it to their board and what does a board need to do?
LOUIS KLOPPER: Well, as a CFO you are most probably a director of a company, and if you go and look at Section 75 and 76 and so on, the duties and responsibilities of a director of a company clearly says that you have fiduciary duties to address these issues. Don’t look past them, address them when they come up. So what have you got to do when you go to the board, well, if you are in financial distress then you’ve got to go and apply for business rescue because the Companies Act very clearly says at the first sign of distress go into business rescue. Take the small pains quickly, before it gets too big. Take some cough medicine before it turns into pneumonia, this is what we’re trying to say. Do not ignore the prescriptions of the act and the duties and responsibilities placed upon you as a director because ultimately Section 412 says if you don’t do that, you and your auditor are going to go to jail for ten years.
Business rescue works if you apply it early enough in the process.
CIARAN RYAN: Some people have said that business rescue doesn’t have a good history in South Africa, can you point to some successes and would you agree with the statement that business rescue has a poor history?
LOUIS KLOPPER: It is true, business rescue does not have a good success because it’s still new. Corporate South Africa is still trying to get their head around it, although it’s only been in for about eight years, since 2011 when the act was promulgated. It doesn’t have a good history because people are scared, one, they are either scared to go into it because it’s sort of tainted, they see it as a liquidation, which it is not. They wait too long, the big problem is, and we find it in case after case after case, people wait too long before they go into business rescue. They do not go into business rescue at the first sign of distress. However, there are very good and documented and recorded cases of successes. For example, recently Morgado Plant Hire went under business rescue a bit more than a year ago, owing R150 million, they are back out of business rescue, they paid the last bit of their R150 million debt back. They are now flying, a debtless company with a great future. So business rescue works if you apply it early enough in the process.
CIARAN RYAN: That’s a good example that you’ve given there, so now they are debt free, they paid off R150 million over what period of time were they able to do that?
LOUIS KLOPPER: They were able to do that within 18 months and that’s exactly what business rescue says, just give the company space to reorganise their affairs so that they can actually address their financial distress.
CIARAN RYAN: Do they suffer from any reputational loss as a result of having gone into business rescue in the first place?
LOUIS KLOPPER: No, companies that successfully come out of business rescue are actively engaged, back in the economy, there are no problems, their creditors are happy with them, the creditors were happy to wait a bit and get their dividend and continue supplying them. I have not had any negative [feedback] out of successful rescues, as a matter of fact the creditors supported the rescue process and they were thankful for the business rescue process because they got to keep on trading with a company, rather than going for liquidation, where they would have only got a few cents of the rand.
CIARAN RYAN: There’s another company under business rescue at the moment, Vantage Goldfields, which I think you know about. The problem that you have with Vantage Goldfields is that you have an asset, you have a viable goldmine and gold in the ground, but you have these warring parties, it’s mired in court cases. Now, you’ve got 1000 workers there, who are sitting on the sidelines, not getting paid, the local town that relies on this mine for employment is dying. This is like vultures feeding over a carcass, everybody is trying to grab this thing for the lowest possible price. Is that avoidable?
LOUIS KLOPPER: Well, I suppose it depends on the actions of the business rescue practitioner. In a matter like that a business rescue practitioner is just going to have to strengthen their resolve and address the warring parties, take the warring parties out of the equation and take the right decisions in the interest of the labour and the creditors.
CIARAN RYAN: Louis, we’re running out of time here but tell us a bit about yourself and your background, your career and what do you do for fun? Are you a fisherman, do you go mountain biking, skydiving, what is it?
LOUIS KLOPPER: I had a 20-year banking career, I went through retail banking, asset finance, as well as corporate banking, which to me was the best school I could ever have been in, preparing myself – not knowing at that time – but preparing myself for business rescue. But after I had had enough of the corporate environment, I styled myself, about 18 years ago, as a business turnaround after I left the bank and I did a number of very successful turnarounds. I suppose at that stage there was no law governing it as it is [now] and the owners of the businesses were quite happy for an independent guy to come in there, show them where their problems were and assist them in turning their businesses around. So, of course, I was an ideal candidate when the act was promulgated in 2011 to become a formal business rescue practitioner and the rest is history, there we are today.
CIARAN RYAN: It was 2009 that the Companies Act was changed to include business rescue, is that correct?
LOUIS KLOPPER: The Companies Act went through Parliament in 2008 but it was only signed off by the then president in 2011, so it only actually became law in 2011.
CIARAN RYAN: So prior to that you didn’t have business rescue but you had a thing called administration…
LOUIS KLOPPER: Ja, judicial management.
CIARAN RYAN: Judicial management, okay, but it was very weak, right?
LOUIS KLOPPER: No, judicial management was there but it was managed by the legal fraternity and it had a very sad history and there was zero success in that because purely and simply, judicial management never really…it was always going to be a forerunner for liquidation, it was never really intended to rescue the company, the act was never about that. So business rescue or chapter six in the Companies Act, which enabled business rescue, which followed international trends in your other major economies, is the right way to go because rather rescue the company and save the jobs and the creditors, rather than liquidate.
CIARAN RYAN: The temptation to liquidate is always there because the person initiating the liquidation will collect 10% of the value of the assets sold. So if you’re talking about several hundred million rand, that’s a nice bit of pocket money, so you are going to be fighting that kind of thing all the time.
LOUIS KLOPPER: Absolutely.
CIARAN RYAN: You didn’t tell us about what you do for fun?
LOUIS KLOPPER: Not too much time on that unfortunately, I like to play a bit of golf when I have some time and I like to go out into nature. You are under so much stress and pressure and travelling is a bugbear, so just getting out into nature, into the Berg, into the game reserve…
CIARAN RYAN: What’s your favourite spot?
LOUIS KLOPPER: The Drakensberg, it’s just so amazing, away from everything else and fresh air and bright stars, it just reinvigorates you. It’s just so amazing.
CIARAN RYAN: One of the great treasures of the planet.
LOUIS KLOPPER: Absolutely.
CIARAN RYAN: Any good books you’d recommend?
LOUIS KLOPPER: From a management point of view, anything written by Michael Porter. Michael Porter has probably given to the world management theory in the last couple of years, which is just absolutely so dynamic, and around what you should do as a CFO in a business rescue …Michael Porter is, what he brought to management theory was the value chain. I go to companies and I say where is your value chain and they say what is that. If you don’t go and draw up the value chain in your company, you don’t know what’s happening in your company.
CIARAN RYAN: Just explain that in a sentence, if you can.
LOUIS KLOPPER: It really is just documenting every single activity in your company that adds value, from raw material coming in, until your finished product reaches the customer and in all those activities lies hidden a host of inefficiencies, that just by fixing those inefficiencies, you’ll probably quadruple your profit without doing anything else. So value chain, to me, is just a cornerstone of any company and understanding any company. But people don’t know about it.
CIARAN RYAN: Okay, I’m going to rush out and read Michael Porter because I certainly didn’t know that. We’re going to have to leave it there. Thanks very much for joining us, Louis, and also Nicolaas. That was Louis Klopper, one of South Africa’s best-known business rescue practitioners.