Analysis

The Pillagers of The R700m Annual Tyre Levy Are Back In Office

Following the Supreme Court Of Appeal Judgement Setting Aside Liquidation of Redisa, Its Management Is Already Demanding Assets From Waste Management Bureau

DIRECTORS of Recycling and Economic Development Initiative of SA (Redisa) – Hermann Erdmann, Stacey-Inger Davidson and Charline Kirk – used the R700 million per annum tyre levy to enrich themselves over several years. This is an undisputed fact. What is in dispute, in both the courts of law and public opinion, is whether their conduct was unlawful. They established companies in the waste tyre stream through which they channeled money from Redisa to these companies and indirectly to themselves.

Redisa directors appointed Kusaga Taka (KT), 97% of which they owned, to run the government’s waste tyre levy programme. They rented offices from their own companies. They bought the National Centralised Computer System (NCSS) for an estimated R97million and this remained the asset of their own company.

Conflict of Interest and Indirect Shareholding In Other Companies In The Tyre Waste Stream

Redisa made newspaper headlines for what seemed like pure looting of public funds. And Judge Henney in his judgement granting final liquidation of both Redisa and KT agreed. He said there had been “an unlawful misappropriation of public funds” by the Redisa directors Herman Erdmann, Stacey-Inger Davidson and Charline Kirk through Kusaga Taka to Avranet and Nine Years Investments as well as by Kirk and Kusaga Taka chief executive Christopher Crozier through Nine Years Investments.

The companies directly benefiting from Redisa, Kusaga Taka and Nine Years Investments

These unlawful payments were in direct contravention of the Companies Act, as well as Redisa’s memorandum of incorporation, he said. Judge Henney said Erdmann had a substantial shareholding in Kusaga Taka through Nine Years Investments and Davidson through Avranet.

Davidson was the sole shareholder in Avranet.

Kusaga Taka, as a private entity, through its chief executive Crozier “had been implicit in using Kusaga Taka as a vehicle through which money had been misappropriated to Erdmann, Davidson and Kirk”, he said at the time.

But in January this year, the Supreme Court of Appeal set aside the liquidation order, clearing the multi-billion rand tyre recycling project, making way for the pillagers of the waste tyre levy to return to business. The judgement is contained below. However, the order was not without dissension. Judge Mahube Molemela disagreed with every point taken by her colleagues on the bench. She said she would have dismissed the appeal with costs.

Her colleagues, Judges Azhar Cachali, Halima Saldulker, Christiaan van der Merwe and Owen Rogers found there was no justification in the DEA bringing the matter before the courts as there was no evidence of wrongdoing on the part of Redisa directors. They said the directors had disclosed their indirect interest in the management company and that the management fee paid to KT was within the agreed fee structure contained in the project plan.

The majority judges said the remuneration of Redisa directors was set by an independent committee and that they were not excessive.

Judge Molemela disagreed. She said the directors were ineligible to be appointed because of a “linked series of relationships and directorships in other companies involved in the tyre waste stream.

“There was an untenable conflict of interest. They flouted various principles of corporate governance. Three of the directors controlled KT and this was never disclosed”. She said while the salaries were benchmarked by PriceWaterhouseCoopers (PwC) she could not agree that a salary of the CEO at R4m per annum and perks including R548 000 for rental for his home, was not excessive.

The majority judges said the DEA had no need to act urgently as there was no alarming and sinister dissipation of cash reserves from Redisa. They also found that Minister of DEA, the late Edna Molewa, had extensive non-disclosures, and concluded the provisional wounding-up orders were granted wrongly.

Redisa has wasted no time in reviving production following the SCA judgement. It sent out a letter in mid March demanding that the assets, which were transferred to the Waste Management Bureau as part of the liquidation order, be returned.

The question is what now for government’s billion rand waste tyre business! Will it be business as usual for Redisa? Will its directors, through their interests in various companies within the waste tyre stream, continue to milk the levy?

Some Background to the Saga

In 2012 the Department of Environmental Affairs (DEA) launched a tyre-recycling programme, which would charge a mandatory levy of R2.30/kg on any new tyre sold. Redisa was appointed to manage the programme, after it undertook to turn “waste into worth”, and create 10 000 new jobs by 2018. Its job was to create a national network for collecting, storing and delivering used tyres to recyclers.

Redisa appointed Kusaga Taka (KT) as the management company to implement the plan at a management fee of R100million per year. Redisa paid KT management fees of R432.832 million over the years 2014-2017 and over the same period KT paid its shareholders dividends totalling R84 million, dividends equal to around 19.4 per cent of the management fees.

Redisa’s executive directors indirectly own 92.5 per cent of KT. Redisa rented office space from KT, which in turn rented the same office space from Nine Years Investments (Pty) Ltd (NYI). All this information was vented out in the courts. 

Television network Carte Blanche in a series of documentaries, showed how the lifestyle of Redisa’s executive management blossomed. Chief Executive Hermann Erdmann was paid over R4m per annum with additional perks such as R548 000 rental for his home.

In 2017 following a barrage of media articles highlighting the pillaging of tax payers’ money from Redisa, the DEA conducted an audit to establish where the monies went, the findings of which, together with Redisa’s presentation of a depletion of their cash reserves in May of 2017, prompted then Minister of Environmental Affairs, Edna Molewa to go to court. She got ex-parte urgent provisional orders to liquidate the two companies and in September that year both were wound up.

Redisa appealed the judgement and the Supreme Court of Appeal this January cleared the tyre recycling project.

The Case Made By DEA for Redisa and Kusaga Taka to be Placed in Liquidation. Excerpts taken from the  judgement of the SCA SCA Judgement Redisa and DEA

First, Redisa’s directors had not disclosed their relationship with or significant shareholding in KT. In particular, they withheld the management contract and other information pertaining to the financial interests that Redisa’s directors had in KT. This enabled them to misappropriate public funds by using KT as their vehicle to unlawfully channel funds collected by Redisa under the Plan for their personal benefit. Secondly, Redisa’s presentation of their business plan on 23 May 2017 revealed a rapid depletion of its cash and reserves.

Second, Redisa’s executive directors, who indirectly own 92.5 per cent of KT, abused KT’s corporate personality by unlawfully diverting public funds generated by Redisa to themselves. This was done by: Paying KT a management fee of some R430 million; renting office space from KT, which in turn rents the same office space from Nine Years Investments (Pty) Ltd (NYI); Redisa paying R97 million to KTC to acquire assets including the National Centralised Computer System (NCCS) to the value of some R76 million, even though it through the MOI contemplated that the computer systems would be owned by Redisa and managed by the management company.

Third, the income derived indirectly by Redisa’s executive directors, as shareholders of KT was not justifiable and contravened item 1(3) of Schedule 1 of the 2008 Act; and, finally, Redisa and KT had for all intents and purposes merged and that the persons in control of Redisa were effectively also in control of KT.

The Judgement reads in part:

“(i) Redisa reported regularly to the Minister on its finances and the extent of the independence of its board, receiving clean audits every time.[22]

“(ii) KT was appointed as the management company under the Redisa Plan, and three of Redisa’s executive directors are indirect shareholders of KT. There is no overlap between the two boards.[23]

(iii) The Minister and the Department were aware of the management contract between Redisa and KT throughout. They were also aware that the management fees the latter had charged fell within the 20 per cent of Redisa’s revenue allowed in terms of the contract.[24]

(iv) While there was a dispute as to whether Redisa had withheld the management contract from the Minister it is unlikely that Redisa would have done so deliberately. The Plan envisaged just such a contract. Its existence was disclosed in the financial statements. The management fee stipulated in the contract was in line with the Plan.”

(v)  The Minister and the Department were aware that Redisa’s directors had interests in KT through their shareholding.[27]

(vi) The Minister’s portrayal of the business plan that Redisa presented on 23 May 2017, which prompted her to bring the ex parte application, and which according to her reflected alarming and sinister dissipation of cash, was not only misleading, but wrong.[28]

(vii) Redisa’s executives’ remuneration was set by an independent committee on which the executive directors did not serve. They were not excessively remunerated according to the PwC benchmarking reports of June 2013 and the explanations contained in the 30 November 2016 letter.[29]

[99] The foundation for this case was the ‘new substantiating evidence’ raised only in reply based on the findings of the A@L referred to earlier.[31] However, before I consider this report it is necessary consider the alleged unlawfulness of the management contract as it seems to me that it constitutes the foundation of the Minister’s case to wind up the two entities. Closely related to this question is the contention that Redisa’s directors abused KT’s corporate personality.

(iv) The allegation that KT’s shareholders received unlawful dividend payments is similarly without any foundation. As stated, it is common cause that KT received fees strictly in accordance with the Plan and, as contemplated, was reimbursed for start- up costs associated with its initial implementation. The fact that KT, which had duly discharged its functions under the Plan, paid dividends to its shareholders was not unlawful. Its shareholders were entitled to receive dividends. It is perhaps worth mentioning that, according to the A@L report, Redisa paid KT management fees of R432.832 million over the years 2014-2017 and over the same period KT paid its shareholders dividends totalling R84 million, ie dividends equal to around 19.4 per cent of the management fees. Since the management fees totalled 18 per cent of the tyre levies collected, a net amount of around 3.5 per cent of the tyre levies ultimately found its way to KT’s shareholders as dividends.

Both Mr Erdmann and Mr Crozier’s affidavits and the documentary evidence show that the Minister and Department were aware of the intended structure and roles of Redisa and KT and that Redisa’s executive directors had interests in KT as (indirect) shareholders.

[109] In short there was not one iota of evidence, let alone undisputed facts, to support the allegation that the management agreement was not a genuine, bona fide agreement and that the payments made by Redisa to KT were done in accordance with its tenor and in line with the objectives of the MOI or that the setting of tyre levy at R2.30 was a manipulation. It was not shown that Redisa or KT would have known, when the tyre levy was determined and the management agreement concluded, precisely how the implementation of the Plan would pan out. They were working on best estimates. Depending on the costs involved in administering the Plan (which were for KT’s account), and the time, effort and expense that Mr Erdmann and others had put into developing and having it approved by the Department these estimates may have turned out to be more conservative or generous.

The Minister brought two ex parte applications on an ‘extremely urgent’ basis for the provisional winding-up of the appellants in terms of s 81(1)(c)(ii) and or s 81(1)(d)(iii) read with s 157(1)(d) of the Act, the appointment of provisional liquidators to take control of the businesses and ultimately for their final winding-up. In addition she sought orders directing the liquidators to ‘distribute the entire net value of the appellants’ to the WMB.

[148] She was granted the provisional winding-up orders wrongly because she had not justified her resort to ex parte proceedings and had not disclosed material information to the court. She had also not established any right, in terms of s 157(1)(d), to pursue this relief in the public interest. The court below therefore ought to have discharged the provisional orders.

[149] In this court, counsel for the Minister also abandoned reliance on ‘s 81(1)(c)(ii) and or s 81(1)(d)(iii)’ to sustain the finding that it was ‘just and equitable’ to wind-up the appellants. Instead it was contended that the Minister, as a public interest litigant, could rely on any of the substantive grounds in s 81 of the Act to apply to wind up a solvent company. On the assumption that this contention was correct, I nevertheless concluded that the Minister had, on the facts, not established grounds for the winding-up of the appellants.

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2 Comments

    1. This is what they mean by the law being an ass. These people looted literally the levy, enriched themselves and one court sees it exactly as it is and another says, nope, nothing wrong. They did inform you they would be looting so there’s no wrongdoing.

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