In the on-going legal saga over the Ahrlac aircraft, the business rescue practitioner (BRP) appointed to settle the shareholder battle has arrived at a proposed solution that sees the Potgieter family being bought out of the company and Paramount taking full control of the Aerospace Development Corporation (ADC) and its subsidiaries.
Ahrlac, an acronym for Advanced, High-performance, Reconnaissance Light Aircraft, is a high-wing, push propeller, single-engined aircraft designed as a lower cost alternative to unmanned aircraft for reconnaissance and attack missions. The Potgieter family and the Paramount Group began working together to develop, produce and sell the aircraft, subsequently creating ADC.
Prototypes of the Ahrlac have more than 500 hours of testing and field trials. Construction and commissioning of a 7 000 square metre production facility at the Wonderboom Airport for the Ahrlac was completed several years ago.
The business rescue (BR) plan, released on 23 August, states that ADC, the parent company for the Ahrlac, “was beset by a range of financial, commercial and operational challenges triggered as a result of the breakdown of the relationship between the shareholders and various deadlocks at the board level.” Governance, record keeping, data management, organisational structures and contractual relationships was at times poorly managed. The ADC Group before business rescue was run by shareholder representatives who were not able to reach agreements on their respective roles and obligations and “the parties were unable to resolve the various disputes, resulting in operational and financial disputes, which resulted in the Company being unable to raise working capital, and ultimately a liquidity crisis,” the Business Rescue Practitioner (Stefan Smyth from PricewaterhouseCoopers) found.
ADC was placed into business rescue when an application to the North Gauteng High Court was made on 28 February 2019. 50% shareholders of ADC, Paramount Aerospace Holdings, together with the directors of ADC, applied for business rescue and a business rescue practitioner, Stephan Symth, was appointed on 12 April 2019.
ADCs shareholders and subsidiaries Aerosud Innovation Centre Ltd (AIC), AHRLAC Ltd, Ahrlac Logistics Ltd and ADC Surveillence Systems are under the control of the rescue plan while Mwari SA Ltd and ADC Aeroswift Ltd are not in business rescue nor under the control of the business rescue practitioner (BRP).
The ADC’s business is principally aimed at the development and sale of the Ahrlac. ADC’s board of directors are Paul Potgieter Snr – chief executive officer, Paul Potgieter Jnr – chief operations officer and TGN Kotze.
Ahrlac Logistics is a recently registered company set up as an Aircraft Maintenance Organisation (AMO) responsible for Ahrlac maintenance and logistic support activities.
Aerosud Innovation Centre was taken over during the unbundling of Aerosud (Pty) Ltd and its primary function is to offer engineering design and development services to other ADC subsidiaries and houses the majority of the skilled engineers and designers, who focus mainly on the design and development of the Ahrlac aircraft.
AHRLAC (previously named Ahrlac Manufacturing [Pty] Ltd) focuses mainly on aircraft production activities.
ADC Surveillance is a new company intended to group all activities related to Ahrlac mission and payload installations.
Aeroswift is a new start-up company responsible for all activities associated with Laser Additive Manufacturing (LAM) technology, and co-owns associated patents developed by ADC and the Council for Scientific and Industrial Research (CSIR). It is currently not in business rescue and its sole director has advised the BRP that it is being put into provisional liquidation, states the rescue plan. Several components for the Ahrlac were produced through the Aeroswift project.
During business rescue proceedings, the Potgieter family, 50% shareholders of ADC, opted for liquidation over business rescue. However, according to Symth’s business rescue plan backed up by a Mazars Recover and Restructuring report on ADC and its subsidiaries in business rescue, creditors of ADC and its subsidiaries would not be paid the full amount owing to them. Liquidation dividend is expected to provide secured creditors with 3.35 cents to the Rand, preferent creditors with 100 cents to the Rand and unsecured creditors with 7.38 cents to the Rand. The Potgieter family then proposed a late business rescue plan on 14 August 2019 that would see outside investors pull ADC out of debt with creditors, continue with production and have the Potgieter family acquire all assets, liabilities and intellectual property (IP) of ADC and its subsidiaries. However the family was unable to produce proof of this funding and therefore this could not be a viable proposal by Smyth. The Potgieter family intend to produce proof of funding to Smyth and creditors as soon as possible.
The business rescue plan does not believe ADC will currently trade back to solvency. After engaging with both Paramount and the Potgieters, it became clear, “that the outcome might be two competing plans from each shareholder group or a single plan from either one of them with an offer to settle the other party”.
Smyth’s business rescue proposal is the one presented by Paramount. The proposed transaction contemplates the acquisition of the business and assets of the ADC and its subsidiaries by Paramount. The acquisition would be done via two new South African companies. The first will house all the manufacturing and tangible assets, and will also take on all employees and take on all associated liabilities. This first new company will be 100% owned by Paramount.
The second new company will hold all intellectual property (IP) rights and be 100% owned by a Riverston-nominated company. Riverston already have an IP agreement in place with ADC. The first and second company would enter a new licensing agreement on essentially the same terms as the existing licensing agreement.
There is an individual business rescule plan for ADC and its subsidiaries due to the companies having their own assets, liabilities and creditors but the proposed rescue dividend to creditors is at the same rates. If the BR recuse proposal is opted for, post commencement finance (PCF), with creditors being Paramount, SARS and employees, can expect a dividend of 100 cents to the Rand and concurrent creditors can expect a dividend of 35 cents to the Rand.
The proposed transaction states that in recognition of Dr Paul Potgieter and his son, Paul jnr, ex gratia payments to them will be calculated on the basis of an amount equal to 3% of the bill of material cost for the first 50 aircraft, 1.5% of the bill of material cost for aircraft 51 to 100 and 0.5% of the bill of material cost for aircraft 101 onward sold by Paramount to independent third party end-users subject to expiry after 10 years after the adoption of the rescue plan.
Smyth is positive that if the proposal is partially implemented, that the new companies will trade to solvency, stating that an advantage of the Paramount proposal is that the company has a wealth of experience, reach and contacts in the defence and aviation industry. ADC and ADC subsidiary employees, along with most creditors, will see the monies owing paid back to them in the Paramount proposal as well as no effect on their employment. The main creditor of AHRLAC Ltd, the Industrial Development Corporation (IDC), is owed an amount of R231 742 731, which Paramount’s new company will be set to take over. It will also give IDC 81% voting rights when voting on the business rescue proposal for AHRLAC Ltd.
On 30 November, creditors will vote on whether the business rescue plan and proposal should be implemented. It must be approved by more than 75% creditors.