In a media briefing on Tuesday, Ismail Momoniat, a deputy director general at the Department of National Treasury, highlighted the need of African Bank (Abil) subordinated debt investors to take responsibility for their losses.
This followed the failure of the subordinated debt holders to reach an agreement with government on proposed amendments to the Banks Act of 1990.
According to the Banks Amendment Bill, which was released in November 2014, the proposed amendments look to “expand the basis on which a curator may dispose of all or part of the business of a bank to enable an effective resolution of a bank under curatorship; and to provide for matters connected therewith.”
These amendments were proposed after the collapse of African Bank in August 2014. However, some of the bank’s subordinate debt holders feel that these changes are prejudicial.
The amendments
Following Abil being put under curatorship, the bank was split up into two parts: the good bank, which was set to be listed again, and the bad bank which received a R7 billion bailout from the South African Reserve Bank.
However, according to the Banks Amendment Bill, “The Bill will expedite the curatorship of African Bank Limited, and will thus reduce the possible financial liability to the State in the event that African Bank Limited fails.”
The proposed amendments will look at the “power of the curator to dispose of assets,” as well as the “powers of the curator to manage the bank.”
According to a report, “If the proposed changes are made to the Banks Act, African Bank may be able to make a formal offer to its creditors in May, obtain a new banking license and apply for an initial public offering.”
It has been proposed that Section 69(2C) of the Banks Act be amended to allow the curator to transfer the whole or part of the bank “in circumstances where a reasonable probability exists that the transferee entity will be able to meet the transferred liabilities and that as a result of the transfer the bank’s creditors will not incur greater losses as a result of such transfer than would have been incurred if the bank had been wound up under section 68 of the Banks Act on the date of the proposed transfer.”
Section 68 of the Banks Act looks at “special provisions relating to winding-up or judicial management of bank.”
Under Section 69(2C) this transfer of bank assets would only take place where the transfer would enable the bank to “become a successful concern.”
Amendments to Section 69(3) propose to allow the curator to “be able to make decisions on behalf of corporate shareholders, in order to avoid additional fetters on his or her ability to perform his or her duties.”
A further amendment proposes to “allow the institution of claims against the bank for damages in respect of any loss sustained by, or damages caused to any person as a result of the security after the expiry of a period of one year from the date of the provision of the security.”
Opposition to the amendments
The Banks Amendment Bill states that there are no constitutional implications to the amendments. However, reportedly “while senior debt holders, who will take a 10 percent loss on their investments, have agreed to the changes, junior bond holders (second-tier creditors) say the amendments undermine their contractual rights and may be unconstitutional.”
Under the current arrangement for the division of assets, “senior creditors who hold debt of about R40bn would get about 90c in the rand while second-tier creditors, who hold R4bn, would get almost nothing.”
Momoniat pointed out: “The issue of constitutionality will always come up from people who are opposed to a bill. Internationally, what we are doing is in line with what is happening in the most-advanced economies.”
Any oppositions or legal challenges to the proposed settlement and the Banks Amendment Bill will lead to delays in the restructuring of Abil. According to reports, “The legislative amendments are required to allow Abil curator Tom Winterboer to transfer assets and liabilities to the "new" bank, which will ultimately be listed on the JSE.”
African Bank results for the six months ended 31 March 2015 are set to be released in June, revealed Reuters.