A recent court decision has upheld a subordination agreement that had the effect if indefinitely freezing a R300 million loan extended by the Southern African Clothing and Textile Workers' Union (Sactwu) to Sekunjalo Independent Media (SIM), highlighting significant missteps around unpublished financial statements and the intricacies of financial agreements.

Court Judgement: https://lawlibrary.org.za/akn/za-wc/judgment/zawchc/2024/59/eng@2024-04-24

In 2013, Sactwu lent R150 million to SIM, a subsidiary of Sekunjalo, to assist in purchasing Independent Media. This amount was expected to mature to R300 million by 2020. The union aimed to convert this loan into equity in Sagarmatha Technologies, a tech company within the Sekunjalo Group, which was eyeing an ambitious listing on the Johannesburg Stock Exchange (JSE). This listing was anticipated to drastically elevate the company's value, promising substantial returns for Sactwu.

However, complications arose when Sagarmatha failed to submit the required audited financial statements, a crucial step for the listing process. This failure not only halted the listing but also left Sactwu's planned investment conversion in jeopardy. The absence of these financial statements was a critical oversight that raised questions about Sagarmatha's financial health and operational transparency.

The situation was further complicated by a subordination agreement signed by Sactwu's head, André Kriel, in 2017. Under the pressure of ensuring ongoing financial stability for SIM, and possibly under assurances that the document was merely a procedural necessity for auditors, Kriel agreed to terms that stipulated the loan could only be demanded once SIM became solvent. This agreement effectively locked Sactwu’s funds with SIM, regardless of the loan's maturity date.

Subordination agreements are used to prioritize the repayment of newer or more senior debts over older or subordinate ones. They can make a company more attractive to new lenders, as these agreements assure new creditors that their claims will be prioritized in the event of bankruptcy or liquidation. However, they do not alter the fact that the company’s liabilities exceed its assets or that it has ongoing financial issues. In the case of Sactwu and SIM, the misunderstanding might have been around the implications of the subordination agreement.

The court ruling emphasized that the subordination agreement is legally binding, meaning Sactwu cannot claim its funds until SIM's assets exceed its liabilities—a condition that may not be met for an indefinite period, given the unclear financial status of SIM following the failed Sagarmatha listing.

This case underlines the importance of robust due diligence and transparency in financial dealings, especially when large sums and the financial well-being of many are at stake. For unions and similar entities, the episode serves as a cautionary tale about the need for comprehensive legal review and the potential pitfalls of informal assurances in business transactions. Furthermore, it stresses the necessity for timely and accurate financial reporting, as the lack of such transparency can have far-reaching and adverse consequences on investment decisions.

As Sactwu contemplates an appeal, the broader implications for trust and accountability in financial agreements remain a hot topic within financial and legal circles, drawing attention to the vital role of clear, enforceable, and transparent contractual commitments.