Cash Paymaster Services (CPS), which used to pay out social grants on behalf of the South African Social Security Agency (Sassa), is to go into liquidation.

The company wanted to be placed under business rescue, but Sassa says CPS has no hope of a viable business plan.

Sassa says the profits made by CPS from the social grants contract are a liability on the company’s balance sheet, because the consitutional court has ordered that these must be repaid. The exact amount of the profits is still under dispute.

Sassa did agree to prioritise some of CPS’s debts over others and low priority debts, up to R10-million, may be negotiated at a discounted rate.

CPS — a subsidiary of Net1, which is listed on the JSE and on the Nasdaq in the US — was contracted to pay social grants by Sassa in 2012 and the contract was extended twice, ending in September 2018 when the Post Office took over grant payments. This left CPS “financially distressed”, said Net1 CEO Herman Kotze in a business rescue application to the high court in Johannesburg dated 26 March. CPS was subsequently placed in business rescue in May, according to Net1’s most recent quarterly report.

Pending claim

Kotze said in court papers then that CPS’s assets amounted to about R15-million but the company owed Sassa — CPS’s main creditor — about R316-million plus interest. He argued that a business rescue plan, as opposed to liquidation, was the best outcome for creditors because CPS had a pending claim for about R338-million (plus interest) against Sassa. This relied on “diligent and efficient” litigation, said Kotze, and this could “significantly reduce, or set off entirely” CPS’s liability to Sassa.

But in its court application filed in the high court in Pretoria on 10 September, Sassa argued that there was no reasonable prospect of CPS’s claim against Sassa being successful. And even if it was successful, the claim would not make a dent in CPS’s actual liabilities, said Sassa.

Sassa said there was a factual dispute between the two parties about the extent of CPS’s liabilities. “Sassa contends that the liabilities of CPS have been understated by an amount of R252-million (at a minimum) and/or by an amount of R850-million (at a maximum),” read Sassa’s court papers.

This finding was made by Sassa’s auditors, who verified CPS’s audit report to determine how much profit it made from the social grants contract. The constitutional court has ruled that CPS may not retain profits, and ordered the company to file audited statements of expenses, income and net profit earned under the contract, and Sassa to obtain “an independent audited verification” of the CPS statements and file this with the court.

“Accepting then, as we must, that CPS will not retain the profit earned from the unlawful contract with Sassa, it follows to say the profit earned is in fact a liability in the books of CPS,” said Sassa in court papers.

Until accurate findings are made, Sassa said, CPS could not come up with a viable business rescue plan.

Sassa requested that the decision to place CPS into business rescue be set aside. Sassa committed to subordinate its debts by up to R10-million if CPS is liquidated.

In response to Sassa, CPS said in its court papers filed on 25 September that the aim of the business rescue plan was not to rescue the company, but to secure the best outcome for creditors.

CPS said Sassa had failed to show how business rescue did not yield better results for creditors than liquidation.

But without the support of CPS’s largest creditor, Sassa, CPS said “one is reluctantly forced to concede” that a successful business rescue plan is not possible.

‘Should be dismissed’

“Sassa’s application to set aside the business rescue resolution should be dismissed. However, relying specifically on the undertaking and commitment of Sassa to subordinate its claims in liquidation to the extent of R10-million, CPS concedes to an order terminating the business rescue proceedings and that it be wound up…,” said CPS.

The dispute over the amount of profit CPS made is currently before the constitutional court. Freedom Under Law has asked the court to order CPS’s auditors to hand over all financial records so that Sassa’s auditors can accurately determine the profits made by CPS.

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