Cash Paymaster Services agrees to go into liquidation

Sassa says CPS has no hope of rescue because it owes all its profits

30 September 2020 - 08:08 By Zoë Postman and GroundUp
The SA Social Security Agency says Cash Paymaster Services, the company formerly contracted to pay social grants, should go into liquidation rather than business rescue.
The SA Social Security Agency says Cash Paymaster Services, the company formerly contracted to pay social grants, should go into liquidation rather than business rescue.
Image: GroundUp/Barbara Maregele

Cash Paymaster Services (CPS), the company formerly hired by the SA Social Security Agency (Sassa) to pay social grants, has agreed to go into liquidation after Sassa refused to back down over debt the company owes to the agency.

The debt includes profits made by CPS during the contracts, which the Constitutional Court has ruled must be paid back.

Sassa did agree to prioritise some CPS debts over others, and low priority debts up to R10m 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. The contract was extended twice, ending in September 2018 when the Post Office took over grant payments.

This left CPS “financially distressed”, Net1 CEO Herman Kotze said in a business rescue application to the South Gauteng High Court dated March 26.

CPS was subsequently placed in business rescue in May, according to Net1’s most recent quarterly report.

Kotze said in court papers then that CPS’s current assets amounted to about R15m but the company owed Sassa,  its main creditor, about R316m 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 R338m (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.

However, in its court application filed in the North Gauteng High Court on September 10, Sassa argued there was no reasonable prospect of CPS’s claim against Sassa being successful. The agency said even if it was successful, the claim would not make a dent in CPS’s actual liabilities.

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 R252m (at a minimum) and/or by an amount of R850m (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,” Sassa said 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 enter CPS into business rescue be set aside. The agency committed to subordinate its debts by up to R10mn if CPS is liquidated.

In response, CPS said in its court papers filed on September 25 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.

However, 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.

“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 R10m, 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 Sassa's auditors can accurately determine the profits made by CPS.

This article was first published by GroundUp.