The unenviable task of the Chief Restructuring Officer (CRO)

By Matodzi Ratshimbilani

President Cyril Ramaphosa and the Minister of Finance have, on several occasions in the recent past, informed South Africa that mega state-owned enterprises (SOEs) will soon be under the helm of chief restructuring officers (CROs), of whom a lot is expected to turn around the fortunes of beleaguered SOEs.

On 30 July 2019, the appointment of Freeman Nomvalo as CRO of Eskom was announced. However, previous announcements were scant on the details around the role of CROs at SOEs. The nomenclature of CROs seem to be borrowed from the United States where the practice was abound after the 2008 financial crisis.

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The difference between what happened in the United States and the intended CROs for South African SOEs is that, in most cases, CROs were appointed by funders who would have been empowered to do so in terms of funding agreements that they would have utilised to provide funding to American companies prior to the 2008 financial crisis. Another nuance is that South African CROs are intended for SOEs, of which the legal governance framework comprise a myriad of related, unrelated and, at times, conflicting legislative frameworks.

Taking into account the legal role of directors and the delegated roles of executives, should the roles not be clearly-defined down to minute and practical details, there is likely to be conflict between directors, CROs and executives.

For starters, directors will be beholden to an outsider who is not a director, yet they will remain answerable to their stakeholders. Most importantly, their fiduciary and other duties will not be diluted. Simply put, directors will remain legally answerable for decisions that they may not be entirely responsible for. If not carefully managed, CROs may fetter the discretion of directors which goes against the fundamental tenets of directors’ duties.

Another significant stakeholder that CROs will have to contend with, given that, as matters stand, they will be appointed by the government as a shareholder, will be the funders and holders of various securities employed by the SOEs in the capital markets to secure funding. The financing agreements and terms of the various bond programmes often contain onerous terms that would ordinarily not be accommodating to an outsider making decisions on behalf of a SOE. The lenders to SOEs and the holders of their financial instruments wield extensive powers when significant changes are made on the governance framework of SOEs that are heavily indebted.

In the past 18 months, given the many widely-reported financial problems within SOEs and the Johannesburg Stock Exchange’s revision of its bond listing requirements, more onerous terms are applied to SOEs when they access the capital market. CROs will thus be bound by funding terms likely to the point that any decisions a CRO makes will be vetted by financiers. This limitation may constrain even the most able CRO.

It is true that the bigger SOEs, such as Eskom and Denel, which are listed in Schedule 2 of the Public Finance Management Act (PFMA), have some latitude when undertaking financial commitments and may, generally, decide on their own affairs without too much involvement from the government, as opposed to smaller SOEs listed in Schedule 3 of the PFMA. The PFMA can be seen as restrictive on the ability of SOEs when making long-term financial commitments or materially varying long-term plans. A CRO schooled in the private sector may find the level of compliance required of SOEs when implementing important decisions to be restrictive given that, in most instances, decisions may need to be made on an urgent basis for them to have the desired impact.

It is noteworthy that CROs cannot have the powers akin to those of business rescue practitioners whose role is clearly defined in terms of the Companies Act. One of the most potent powers of a business rescue practitioner is that they have the power to suspend legally-binding contracts for the duration of business rescue. If the powers of a CRO could be any closer to those of a business rescue practitioner, they would have a fighting chance to make decisions that may be felt within SOEs.

It is understandable that government has not opted to put any of the SOEs under business rescue, as such a move would trigger default provisions contained in important legal agreements, such as funding agreements, and the various terms of SOE instruments in the capital market. CROs will have to contend with the fact that their decisions will depend on the goodwill of directors and government as a shareholder.

For the idea of a CRO to work, a lot of thought needs to be invested in how this role, important as it may be, shall co-exist with other stakeholders, such as directors, executives and employees in the context of a highly legally-regulated SOE environment.

Matodzi Ratshimbilani is an attorney and Director of Tshisevhe Gwina Ratshimbilani Inc. Views expressed in this article are his own.

Fin24