The SAAF Forum

MEDIA RELEASE
AHRLAC Aircraft Development Program – Status Report

Pretoria, South Africa | 21st July 2019 – Paul Potgieter Senior.

Media reports around the future of the Aerospace Development Corporation (ADC) and its Ahrlac aircraft program have generally been impartial and well balanced, but a few factual misconceptions have nevertheless arisen. My son, Paul Junior, and I, referred to as the "Potgieters", acknowledge that a failure to respond could be interpreted as an admission to the correctness of the status as reported in the media.
Historically, Ivor lchikowitz, Chairman of the Paramount Group of Companies, and I have enjoyed a largely successful business relationship, and the earlier phases of the Ahrlac development program were even signified by a good measure of shared enthusiasm. Since more or less 2016 onwards, this relationship has progressively deteriorated, mainly around cashflow delinquencies by Paramount during the difficult transition from development to production. The resulting stresses were compounded by increasingly disparate business styles, growing disputes around marketing and manufacturing rights, and disputes around ownership of the Ahrlac intellectual property. These conflicts finally came to a head in September 2018 when, upon being confronted with the necessity to review and regularise the relationship between ADC and Paramount, the Paramount leadership responded via punitively withholding payments due to ADC, thereby forcing ADC into effective insolvency.
It is exactly around this very point that the first misconception comes to the fore - the ADC executive management, led by the Potgieters, considered that in the interest of safeguarding the company against increasingly vocal creditors' claims, they had no alternative except to apply for business rescue. During ongoing settlement negotiations spanning the period September 2018 to February 2019, the Paramount team consistently resisted all attempts at applying for business rescue, and three consecutive attempts ensued whereby to achieve an equitable resolution outside of business rescue. With none of these succeeding to resolve the said disputes, the Potgieters had no alternative except to resume their intention to file for business rescue.
Since business rescue on the basis of an ADC board decision would have required the consensus of a majority of ADC directors, the 50:50 board deadlock compelled the Potgieters to consider business rescue by way of the alternative legal process of acting as affected parties. Paramount however proceeded to apply for business rescue, and when the application served in court, the obvious conclusion was that since both parties did then seemingly agree, the simplest way forward would be for a board resolution to be passed, which was done.
A second major misconception arose around reports that Riverston, an off-shore company and one of the parties withholding payment from ADC, is an independent third party, whereas it was always known that Riverston was indeed a company created and controlled by Paramount. This is borne out by the fact that key elements of the dispute with Paramount arose around their persistent claims to ownership of the Ahrlac IP, whereas in fact all agreements around IP ownership were entered into between ADC and Riverston.
Witness also the numerous public and media announcements to the effect that "Paramount" was responsible for developing Ahrlac and its weaponised variant referred to as MWARI, whilst Paramount in any event never was a majority stakeholder in ADC, and ADC never was a subsidiary under the control of Paramount - further demonstrated some of the issues at the root of a progressive deterioration of the relationship between the parties.
• This reaction was brought about by the business rescue practitioner insisting that his role was not to resolve "shareholders' disputes" - a reaction which came as a surprise to the Potgieters, who were of the belief that dispute resolution would surely assist in mitigating for the best outcome for the company, its shareholders, employees and creditors.
• In any event, the largest portion of payments due to ADC arose, not from the shareholders' loans referred to in the media, but from the signing of a formal Purchase Agreement (also known as an "offtake agreement" - refer www.businessdictionary.com/definition/o ... ement.html) between Paramount and ADC. This agreement afforded Paramount a first offer of refusal to the purchase of the first three years of Ahrlac production, or vice versa, constituting a form of guarantee obligating Paramount to such purchase - hardly a "shareholders' dispute", then.
• In contrast to the impression that could be derived from the media coverage, the total owed by Paramount to ADC as at the end of December 2018, inclusive then of their obligations towards funding production, was in excess of R100 Million, with further payments towards continued production due into 2019 - obviously then well in excess of that required to duly repay all creditors and to proceed with production, the simple truth being that had Paramount honoured its obligations, ADC would not have been obliged to revert to business rescue in the first instance.
• Whilst the business rescue practitioner has undoubtedly acted in good faith and per his interpretation of his legal brief, he nevertheless opted to entertain a Business Rescue Plan from Paramount, the net effect of which would be to allow Paramount to effectively "convert" its past funding and payment obligations to ADC into shareholders' loans/recapitalisation, on the basis of which Paramount plans to gain outright control of the Ahrlac assets.
This situation left the Potgieters with no alternative except to contest these business rescue actions by, in the interim, then resorting to the more robust and established legal rights afforded them under provisional liquidation, and affording them adequate time to solicit the support of trusted associates in resolving the effects of these crippling cash flow deadlocks between ADC and Paramount. The Potgieters remain totally committed to the salvage of the Ahrlac program and the safeguarding of the Ahrlac team, whereby to finally counter what can only be described as a hostile take-over attempt by Paramount. It can be expected that the Potgieters could on the basis of the progress achieved with these initiatives, further adjust their position such as to most expeditiously and with the least of further delay successfully propel the Ahrlac aircraft into the future.

That's a pity. Most probably only way forward is for a foreign investor with deep pockets in the aviation business who sees some potential to invest. The Embraer A-29 version of the Tucano seems to be doing well. The US keeps evaluating light single turbine attack aircraft (A-29 vs. AT-6B competition). There must be multiple smaller defense arms / paramilitary organizations who could do with a low cost option.

From what I've been told, overseas customers (plural) are still very interested in the continued acquisition of the aircraft, just that the business tactics of the one Ahrlac partner leading to this drama is delaying the finalisation of the external financing from these interested parties.

_________________
How come every time my ship comes in, I'm at the airport?

It appears the 21 July media release that Roger posted was as a response to this Defenceweb article:

https://www.defenceweb.co.za/featured/a ... der-battle

Ahrlac fate in business rescue practitioner’s hands in on-going shareholder battle
July 19, 2019

The business rescue process for the Ahrlac aircraft, being developed by Paramount and the Aerospace Development Corporation (ADC), is fraught with complications as the Potgieters (50% shareholders in ADC) are now seeking liquidation. The business rescue practitioner and Paramount Aerospace Holdings (the other 50% shareholder) are opposing the Potgieter’s liquidation application.

The Ahrlac’s developer, original equipment manufacturer and designer is the Aerospace Development Corporation, of which Paul Potgieter Snr and Paul Potgieter Jnr, are executive managers and directors. Paramount Aerospace Holdings (PAH), a Paramount Group company, are 50% shareholders in ADC. Paramount Logistics Corporation Ltd, another Paramount Group company, is the launch customer for the Ahrlac aircraft.

Due to various reasons, including a dispute over intellectual property and funding, ADC has since the end of last year been unable to manufacture, design or develop the aircraft. The Potgieters advised ADCs staff that they may seek other job opportunities and work elsewhere as ADC cannot pay their salaries nor suppliers.

On the 28 February 2019, Paramount Aerospace Holdings applied to the Pretoria High Court to place ADC in business rescue, this application was initially resisted by the Potgieters. On 20 March, the Potgieters agreed to place ADC in business rescue and signed an ADC board resolution to that effect. The High Court subsequently placed ADC into business rescue. The Potgieter family has had four main issues with the business rescue process concerning: the post commencement financing (PCF) to be provided by Paramount, ownership of intellectual property (IP), funding by Riverston and the decision made by the ADC board (which the Potgieter’s agreed too and signed off on) to put the business into rescue instead of applying for immediate liquidation. As a result, the Potgieter’s seem to have changed their position and are now advocating that the Ahrlac programme be liquidated rather than continue with the business rescue process.

In an affidavit by Stefan Smyth, the business rescue practitioner from PricewaterhouseCoopers, he states that the Potgieter family, “…fail to appreciate that business rescue proceedings are designed for the development and implementation of a plan to rescue the company in a manner that maximises the likelihood of the company continuing in existence on a solvent basis.”

In the business rescue proceedings to date, Smyth was only able to find funding for business rescue through Paramount. The Potgieter family stated that the PCF agreement is based on Paramount converting funding into equity, but Smyth’s affidavit advises that “ No funds advanced by Paramount as PCF have been converted into equity as the applicants seek to imply”.

In addition, Smyth’s affidavit stated, “were it were not for the PCF provided, the ADC group would have been liquidated; the PCF provided is provided on eminently reasonable terms – interest-free and to cover BR [business rescue] costs as well as a contribution to employee salaries.”

Riverston, a separate company that had a loan funding agreement with ADC, failed to loan the full amount, short of R49.5 million, according to Smyth. However, in the business rescue practitioner’s investigations, he found that, “The ADC group had in excess of R60 million in outstanding trade creditors and employee arrears. Accordingly, the balance of R49.5 million outstanding in terms of the Riverston loan agreement would have been insufficient to settle these current liabilities, let alone provide sufficient working capital to complete the two aircraft to be delivered to Paramount Logistics Corporation (PLC)”.

The affidavit by Stefan Smyth goes on to say that the alleged breach in contract by Riverston dates back to before business rescue operations began and yet these claims were not pursued by the Potgieter family.

The Potgieter family maintain that have been heavily concerned that the IP of Ahrlac is in jeopardy. Their affidavit has proposed that ownership of the IP and its location shall be regularised and resolved in the ADC’s business rescue plan.

The Business Rescue Practitioner’s affidavit concludes by stating that, “It appears that their [Potgieter family] expectations regarding business rescue were wrong and that their expectations for a liquidation are also wrong”. The affidavit believes that the Potgieter family are pushing for provisional liquidation because it would give them a better standing in the ADCs shareholder dispute.

The future of ADC will be determined by a vote by the creditors of ADC on whether or not to adopt the Business Rescue plan, which is anticipated to be published by 1 August 2019.