Questions need to be asked after Steloy Castings goes into liquidation

The demise of the 283-employee company leaves families, clients and suppliers angry.

Statistically the company employs approximately 10% of the working population in the Ekandustria area, where the company has two foundries and a machine shop.

It is well known in industry that Bronkhorstspruit, Mpumalanga based foundry Steloy Castings has been in business rescue proceedings since the beginning of July 2016, reportedly owing between R120 and R130 million. Now the business rescue practitioner has issued notice that they have “concluded that no reasonable prospect exists for the entity to be rescued.”

This is no surprise considering the amount needed to keep the entity operating as a going concern. The amount of money owed by Steloy Castings, including to state owned enterprises such as SARS, IDC, Metal Industries Benefit Funds Administrators and the Mpumalanga Economic Growth Agency (Mega), who is responsible for the supply of power to Steloy Castings runs into many millions of rand. At the time of the business rescue notice it was rumoured that the company owed R6,7 million to SARS (including PAYE and VAT), R1,2 million to the Metal Industries Benefit Funds Administrators and Workman’s Compensation R3,3 million. Whether these amounts have now been paid to avoid criminal charges, is unknown.

The demise of the company has been swift when you consider the glowing press releases sent out by the company in the last quarter of 2015 expounding on how it had been in business for 30 years and how well it was doing. The company also announced that it had invested millions in the latest equipment and technology to secure lucrative railway industry contracts for the localisation projects. This included boasting about being the only foundry in South Africa to be accredited with the Iris standard, the international rail industry standard.

This publication also fell into the trap and published a lengthy article in February this year on how Steloy Castings had invested in the installation of a new sand reclamation plant at the company’s Tungsten Road foundry facility, and new state-of-the-art CNC and CMM equipment at its machine shop.

Earlier this year the IDC, one of Steloy Castings biggest funders, and now, as a result of the liquidation, one its biggest creditors, published an article that Noma Nibe, who is “no ordinary worker, but a businesswoman of note” had approached the IDC to provide her with funding to become a major shareholder in a consortium that purchased a 26% stake in Steloy Castings in a BEE deal, and the IDC “came on board with funding”.

In the same article Steloy Castings’ CEO Danie Slabbert is quoted as saying: “It is good that unlike the banks, the IDC doesn’t look at the security like assets but their finance schemes are more based on opportunities that exist and that is a good business principle. They came on board and an opportunity was created for young investors.”

This ultimately begs the question if this so called policy of the IDC is correct, especially as it had provided funding to Steloy Castings the company and also to the company’s BEE partners. The IDC is reportedly owed R20 million by Steloy Castings that ostensibly was funding to be used for the capital equipment purchases that were installed in the latter half of 2015. However, in the creditors list there is a capital equipment leasing company listed and other capital equipment in the foundry is known to be on a lease agreement.

The exact timing of these funding agreements is unknown but surely if the IDC has ‘invested’ such a large amount in a company it would conduct regular audits of the company and not be surprised when the business rescue notice is issued by the CIPC. By that time it is too late and debts of between R120 and R130 million are not incurred overnight.

It has since been learnt that further funding was applied for from the IDC but the IDC confirmed that it would not be willing to grant additional funding to Steloy Castings. Due to the lack of operating capital, all production and trading activities of Steloy Castings came to a halt towards the end of September 2016.

It has also been learnt that numerous clients have subsequently cancelled their orders with Steloy Castings and have proceeded to uplift their patterns. This has resulted in the value of the order book dropping to approximately R2.5 million from a supposedly healthy order book of R85 million and a contract value of R1 billion, just for the railway business.

The power supply to the premises was also cut on 04 October 2016 due to the fact that the Mpumalanga Economic Growth Agency (Mega), who is responsible for the supply of power to Steloy Castings is owed a substantial amount of about R15 million. This has led to several incidents of theft from the Steloy Castings facilities, even though there is 24-hour security.

Third party investors have also expressed an interest in purchasing Steloy Castings as a going concern, and a period of two weeks was requested to conduct a due diligence. Two offers were made to the Business Rescue Practitioners. However, when the Business Rescue Practitioners requested payment into the trust account of its attorneys to determine whether the first offer received would be viable and could be presented to creditors for acceptance, no payment was received. The second offer would require Steloy Castings to pay holding costs for a further two months before the offer could be implemented and, according to the Business Rescue Practitioners Steloy is not in a position to pay holding costs for a two month period.

The IDC also indicated that it would be willing to reconsider its position regarding funding. However, after various meetings took place by interested parties due to the high running and holding costs that would be required to sell the business as a going concern, it was decided that this option was not feasible and hence the liquidation notice.

As indicated earlier you have to ask yourself how such a large amount of debt can be incurred and why it was allowed to be incurred; were there not enough controls in place or was it bad business practice by the Directors? The outcome is that one of the largest stainless steel foundries in South Africa is now in liquidation. Suppliers, banks and other institutional lenders are now owed big sums of money and the suppliers in particular will probably only get paid out 10 cents in the rand once the secured creditors have taken their share. The biggest losers are the staff at Steloy Castings and their families. While the reality of this bad news hits home just before the end of the year and the holiday period, others will not be affected drastically because they have taken care of themselves through complicated tools that allow them to do so in our law. The challenge is to negate these laws that make it ‘easy’ for one to wash ones hands of the situation and not be held responsible.