Court grants cash-strapped Denel access to surplus funds in Medical Benefit Trust

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In the recently tabled National Budget, Denel has been allocated R3 billion to settle interest payments. (Pic: Reuters)
In the recently tabled National Budget, Denel has been allocated R3 billion to settle interest payments. (Pic: Reuters)
  • State-owned arms manufacturer Denel is allowed to access surplus funds in a Medical Aid Trust created in the early 2000s.
  • A group policy will be bought from one of the major insurers to cover future obligations before any excess funds are allocated to Denel.
  • Currently Denel has immediate debts of R2.2 billion. 

The Gauteng North High Court in Pretoria has ruled that cash-strapped state-owned arms manufacturer Denel can access the surplus funds held in its Medical Benefit Trust, provided the welfare and well-being of members are taken care of.

"The deal was arrived at after a long negotiation process with pensioners - supported by actuaries and financial advisors - to ensure the interests of pensioners were protected. It formed part of the court papers to enable a decision on the funds," Denel said on Wednesday.  

Denel will have access to excess investment funds in the trust that it is not required to discharge. 

"Denel will have no access to funds required to discharge the medical aid obligation. The excess amount that will go to Denel will be determined based on the value of the investment on the implementation of the transaction minus the capital amount that must be paid to the insurer to continue making the medical aid payments," Denel spokesperson Pam Malinda said in response to a query by Fin24.

A group policy will be bought from one of the major insurers to cover future obligations before any excess funds are allocated to Denel.

Denel established the fund in the early 2000s with a capital amount believed to be sufficient for future obligations. But over the years, investment returns were better than expected, resulting in assets that exceeded projected future liabilities.

The idea is for monthly contributions to be paid from the capital investment at the insurer to the medical aid.

"There was no purpose for maintaining the excess assets over liabilities in the trust. In this manner, Denel and other beneficiaries can now benefit from the excess funds," Malinda said. 

Minister of Public Enterprises Pravin Gordhan recently told Parliament that accessing these funds will "give Denel some room to meet some of its obligations, for example to [SA Revenue Service] SARS, and place some of its entities on a better footing to deliver on contracts".

"In practice, all those who accepted the offer from Denel will receive an individual policy from an insurer to be paid to the medical aid. Members that did not accept the offer will continue to receive their benefit from the trust - from the proceeds of the group policy which will be bought on their behalf," Denel said.

About 70% to 80% of the beneficiaries had accepted the offer.

Currently Denel has immediate debts of R2.2 billion. It owes about R789 million in unpaid salaries to employees (which includes R440 million for PAYE). It also owes about R900 million to suppliers and R529 million to SARS.

"Although Denel suffers from its poor liquidity position, we are certain that we will get the situation back to normality," Malinda said.

The union Solidarity said in a statement on on Wednesday that it had issued warrants of execution to be served on Denel after the company did not comply with a Labour Court order to pay outstanding salaries totalling R90 million to its members.

Some employees have had their salaries go unpaid or partially paid for more than two years.

It is not only Solidarity members trying to obtain their outstanding salaries from Denel. A group of 14 current and former employees have said they aim to attach around R4.3 million said to be held in Denel's RMB corporate bank account after Denel failed to comply with a court order to pay their unpaid salaries dating back to May 2020. It is as yet unconfirmed whether the account has been frozen. 

The North Gauteng High Court in Pretoria granted the order in January this year. Denel did not oppose the application and was ordered to pay up within 10 days, by 3 February. 

In August last year, interim group CEO William Hlakoane told MPs the company's balance sheet showed it was technically insolvent, with a negative cash flow of around R600 million. The arms manufacturer made headlines after it controversially awarded contracts to Gupta-linked company VR Laser.

In the recently tabled National Budget, Denel was allocated R3 billion to settle interest payments. This amount is inclusive of the R2.9 billion announced during the medium-term budget policy statement in November 2021. Recently, the JSE suspended Denel bonds owing to its failure to submit annual results for the 2021 financial year. Denel has relied on government support to reduce its debt from R3 billion to R290 million over the past two years. 

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