fbpx

High Court dismisses application to set aside B-BBEE Commission’s findings: lessons for stakeholders

 In Ubuntu News

A recent South African High Court decision explores some interesting issues regarding the scope of the Broad-Based Black Economic Empowerment Commission’s (the “Commission”) investigative powers, as well as what constitutes a fronting practice.

CRRC E Loco Supply (“CRRC”) was incorporated as a joint venture between CSR: Zhuzhou Electrical Locomotives (a Chinese-owned entity) (“CSR”) and Matsete Basadi Consortium (“MBC”), an empowered entity.

CRRC was established for CSR to fulfil various contractual obligations to design, manufacture, test and supply locomotives to Transnet.

The Commission launched an investigation into CRRC following two separate complaints lodged by former directors of CRRC, who alleged that MBC members:

  • who served on the board of CRRC were mistreated by CSR;
  • were excluded and discouraged from substantially participating in the core activities of the business of CRRC, including in the making of key decisions;
  • were denied access to project information relating to the contracts concluded with Transnet;
  • failed to derive any economic benefit from the contracts concluded with Transnet; and
  • were bullied into approving financial records of CRRC.

The Commission following an investigation of the aforementioned complaints issued a report against CRRC setting out its final findings and recommendations in terms of section 13J(3) of the Broad-Based Black Economic Empowerment Act, as amended, (the “B-BBEE Act”), as read together with regulation 15(4)(g) of the Broad-Based Black Economic Empowerment Regulations, 2016.  CRCC subsequently launched an review application in terms of which it asked the High Court to:

  • review and set aside the Commission’s final findings report in accordance with the provisions of the Promotion of Administrative Justice Act (“PAJA”); and
  • interdict and prohibit the Commission from publishing its findings and implementing its recommendations.

The court held that:

  • the Commission’s function is not to administer but to investigate, report, recommend and make findings and to approach the court for an interdict to restrain a fronting practice identified during an investigation;
  • CRRC’s rights were not adversely affected in a manner that has a direct and external legal effect given that the findings and recommendations issued by the Commission are of no legal consequence;
  • the Commission cannot publish any finding and recommendations pending the investigation of certain outstanding matters by other regulatory bodies;
  • the Commission’s investigative powers as provided for in section 13J of the B-BBEE Act do not constitute administrative action as contemplated in PAJA;
  • the exercise of the Commission’s powers must be reviewed in terms of the principle of legality;
  • the Commission is not restricted only to investigate complaints lodged by those who are involved with an enterprise under investigation;
  • a “harmonious relationship” is not a factor the Commission needs to consider in deciding whether or not to investigate a complaint;
  • the B-BBEE Act cannot find its true meaning without reference to the Promotion of Equality and Prevention of Unfair Discrimination Act (“Equality Act”); and
  • the shareholders agreement between the parties was just a ruse designed to disguise a window dressing type of a relationship as an empowerment deal.

As such, the application to set aside the Commission’s findings was dismissed, and the court ruled that the Commission may not publish its final findings report pending the outcome of the investigations by other regulatory bodies.  

In our view, Acting Judge Mokoena’s finding that the Commission cannot publish its final report pending the investigation of outstanding matters by other regulatory bodies is correct. 

Naturally, the outcome of investigations by the other regulatory bodies may have a substantial impact on the Commission’s findings and, consequently, its recommendations, rendering such publication premature.

In assessing the relationship between the parties and whether their relationship amounted to a fronting practice, the court considered:

  • the level and extent of experience and requisite skills acquired by MBC during the implementation of the awarded contracts;
  • whether there was compliance with adopted measures meant to achieve B-BBEE and if not, why;
  • the role played by CRRC in securing the awarded contracts and negotiated arm’s length terms on a fair and reasonable basis which does not significantly impact its empowerments plans;
  • the nature of the relationship between CRS and MBC; and
  • whether MBC derived any benefit flowing from the awarded contracts.

The judgment is also a reminder that stakeholders, particularly in the public procurement space, must ensure that their empowerment partners:

  • derive economic benefits commensurate with its shareholding;
  • acquire a sufficient degree of skills and experience;
  • are not discouraged and/or inhibited from substantially participating in the core activities of the business; and
  • have access to such relevant information relating to the business.

In addition, stakeholders must carefully scrutinise any:

  • decision to take the findings made by the Commission on review and the basis for review; and
  • B-BBEE transactions to which they are a party, in order to ensure that such transactions are aligned with the spirit and purport of the B-BBEE Act as read together with the Equality Act.

-Sanjay Kassen, Aslam Moosajee & Parusha Desai Valodia

Recent Posts

Leave a Comment