Accountability is more important than government’s desire for control

Jacques Jonker
Jacques Jonker

The department of public enterprises is actively trying to undermine the respective business rescue processes of SAA and South African Express (SAX).

With respect to SAA, Public Enterprises Minister Pravin Gordhan stated that the Public Finance Management Act (PFMA) remains in force because, according to government, the business rescue practitioners effectively became the accounting authority when appointed, and are thus “accountable to the executive authority”.

Gordhan later effectively backtracked on this statement when various draft versions of the business rescue practitioners’ different proposed rescue plans were released, saying that government had no authority because they were the business rescue practitioners’ plans.

This backtracking, however, was most likely purely an ex post facto act of diplomacy.

Such a suspicion is substantiated by the fact that government is now also trying to interfere in SAX’s business rescue process.

Section 140(1)(a) of the Companies Act states that business rescue practitioners have full management control of a company in substitution for its board.

Section 49(2)(a) of the PFMA states that a public entity’s board is the accounting authority for that entity. Government argues that the business rescue practitioners became the accounting authority for SAA because they replaced the board in terms of management control.

A concurrent reading of sections 1(c) and 50(c) of the PFMA implies that whomever takes on the role of accounting authority of a public entity should effectively be accountable to government (in common parlance, the term ‘government’ usually excludes reference to the judiciary, and this interpretation will be used in this article).

On the other hand, section 140(3)(a) of the Companies Act stipulates that business rescue practitioners are officers of the court and thus accountable to the judiciary rather than government.

There consequently seems to be a conflict between the Companies Act and the PFMA.

Section (5)(4)(b)(i) of the Companies Act contains a closed list of legislation whose provisions prevail when conflicting with provisions in the Companies Act, and this list includes the PFMA.

Government has given roughly R52.6 billion in financial assistance to SAA between 2007, when SAA was placed under direct government control, until October last year.
According to research by aviation industry expert Joachim Vermooten

The case seems to be clear-cut from government’s perspective: the business rescue practitioners, as the de facto accounting authority, are accountable to government and not to the judiciary.

However, the constitutionality of such a conclusion is questionable.

Why should business rescue practitioners be accountable to government in the case of public entities, but accountable to the court in the case of private entities?

Why should government be given preferential treatment?

Surely such preferential treatment stands in stark contrast to section 9(1) of the Constitution, which entrenches the principle of equality before the law.

Another constitutional issue relates to the independence of the judiciary. Section 165(2) of the Constitution explicitly states that the courts are independent and subject only to the Constitution and the law.

Subsection (3) complements subsection (2) by stating that no person or organ of state may interfere with the function of the courts.

The independence of the judiciary is further entrenched in subsection (4), which stipulates that organs of state must assist and protect the courts to ensure their independence and impartiality, dignity, accessibility and effectiveness. If government is going to deem the business rescue practitioners accountable to it, these provisions would be undermined.

Surely, if effect is to be given to section 165(2)-(4) of the Constitution, the provisions of the Companies Act should take precedence over the PFMA.

The Constitution also addresses resource management in public administration directly. Section 195(1)(b) states that efficient, economic and effective use of resources must be promoted and maintained.

Government has not done this. According to research by aviation industry expert Joachim Vermooten, government has given roughly R52.6 billion in financial assistance to SAA between 2007, when SAA was placed under direct government control, until October last year.

This excludes the recent cash bailout provided by the Development Bank of Southern Africa to the tune of R3.5 billion.

This type of financial mismanagement is clearly not in line with section 195(1)(b).

Section 195(1)(f) states that public administration must also be accountable.

SAA is undergoing business rescue exactly because the government was not held accountable during its administration of this state-owned enterprise.

To make the business rescue practitioners who are charged with attempting to rescue the airline accountable to the very institution that brought it so close to collapse would be illogical and a travesty of justice.

The moment government launched this attack on the independence of the business rescue practitioners, they should have applied to the court for an urgent interdict.

One of the rescue practitioners sadly confirmed to journalists that he agreed with the minister’s initial position.

Allowing the business rescue practitioners to be accountable to either the legislature or the executive instead of the judiciary would show complete disregard for the principle of formal equality, the independence of the courts and the principles that underly public administration.

The Constitution would be thoroughly undermined.

But government is clearly determined to interfere in the business rescue process of SAX as well. The department of public enterprises has been accused by SAX’s business rescue practitioners of plotting their removal on two separate occasions.

Government has mismanaged SAA and SAX through a malevolent mixture of incompetence and corruption, and is now trying to undermine the Constitution to avoid being held accountable.

Department of public enterprises officials allegedly met with Ziegler SA, the creditor of SAX who launched the court application that resulted in SAX being placed in business rescue, to try to persuade it to either withdraw the application or remove the rescue practitioners from the restructuring process.

After Ziegler SA refused to participate in government’s scheming, the department of public enterprises opted to lobby Airport Companies South Africa and Transnet, both also creditors of SAX, to vote against the official appointment of the business rescue practitioners.

Fortunately, all the independent creditors voted in favour of appointing the practitioners.

Ironically, Deputy Public Enterprises Minister Phumulo Masualle, who had to be pressured by the business rescue practitioners’ lawyers to meet with them, stated that the department supported the business rescue process and that there was commitment to working with the rescue practitioners.

But Masualle also told the business rescue practitioners that, before they vetted potential equity partners for SAX, he needed to approve any proposed transaction under the auspices of the PFMA.

Government is thus once again arguing that the PFMA should enjoy precedence over the Companies Act, and this is problematic for the same reasons outlined above. Ironically, the objective of the PFMA is to “secure transparency, accountability and sound management” of organs of state.

The way government seeks to employ it in this case, however, is specifically designed to undermine all those objectives.

Government has mismanaged SAA and SAX through a malevolent mixture of incompetence and corruption, and is now trying to undermine the Constitution to avoid being held accountable.

In an open and democratic society where the Constitution and the rule of law are supposed to reign supreme, such conduct cannot be tolerated.

Jacques Jonker is an economic and legal analyst at the Free Market Foundation. The views expressed in this article are those of the author and not necessarily those of the Free Market Foundation

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