It’s pay back time for MKM

MASERU — The High Court has ruled that MKM should be liquidated and its assets sold to pay back 400 000 Basotho who invested in the business that went bust four years ago.

The judgment delivered by acting judge Justice John Musi, a South African judge hired to deal with the matter after local judges recused themselves, brings to an end a bruising court battle that lasted four years.

During that time applications and counter-applications have been filed as Simon Thebe-ea-Khale fought the Central Bank of Lesotho (CBL)’s effort to liquidate the company.

Several local judges have recused themselves and some people have staged demonstrations to force the government to pay out MKM investors.

But that fight came to an end yesterday afternoon when Justice Musi granted the CBL its wish to liquidate the company which the Court of Appeal had already ruled to have been illegally operating banking and insurance businesses.

MKM companies are MKM Marketing Ltd, Star Lion Group Ltd, Star Lion Insurance Ltd and Star Lion Gold Coin Investment (Pty) Ltd.

These were deemed by the central bank to be illegal businesses that fleeced millions of maloti from nearly 400 000 people by offering them unrealistic profits on their investments.

The central bank has said the companies were a pyramid scheme that lured people to invest their monies by promising super-profits as high as 60 percent.

The liquidation of the companies means that depositors could finally get a portion of what they invested.

The problem however is that of the more than M400 million that was invested, MKM can only account for M100 million.

PricewaterhouseCoopers, a South African audit firm hired by the central bank to investigate MKM, found that the company was insolvent to the tune of M300 million and its directors could not explain how the money was used.

They have also failed to reveal where they invested the money they got from investors. 

At the time of the investigation the M100 million was not in the form of cash but assets like cars and buildings.

If we assume that the value of those assets has remained at M100 million the best MKM depositors can hope to get is just less than 25 lisente for every loti they invested.

But because most of MKM’s assets were cars that lose value there is no way they are worth as much as they were in 2007 when the central bank closed the company.

That means less money for the desperate investors if the cars are sold.

There are more complications.

MKM has buildings which are quite valuable but are unlikely to fetch their true value because they will be sold through an auction at a time when the economy is going through a recession.

Its biggest assets in terms of real estate are the former Agric Bank Building along Kingsway Road and its unfinished building opposite Engen Fuel Station along Pioneer Road.

Yet even before MKM investors are paid liquidators will have to subtract their commission first and the costs of running the process.

The liquidator’s commission is charged from the total amount of money and assets in the business.

Any costs that will be incurred during the liquidation will be passed on to the MKM investors.

If liquidators hire lawyers to defend the company against claims they will subtract the legal fees from the amount that investors will get at the end of the liquidation process.

The same will happen if the liquidators hire more people to help during the liquidation process.

Then there is the time element.

Because MKM was a colossal entity that had nearly half a million depositors it might take years before the liquidators finally decide to pay investors.

The fact that MKM’s systems were not computerised makes the consolidation process a mammoth task that might take years to complete.

Tracing all the assets, creditors and debtors will also be a challenge.

The longer it takes to liquidate a company the more the process becomes expensive for the investors.

All this means that MKM investors are unlikely to get much of what they invested.

Yet there is more bad news for the MKM’s investors. In his ruling yesterday Justice ‘Musi threw out an urgent application by the central bank which sought to attach Thebe-ea-Khale’s wealth to recover investors’ funds.

In other words Thebe-ea-Khale is being allowed to keep the wealth that he might have otherwise accrued using investors’ funds.

PricewaterhouseCoopers’ investigations revealed that more than 150 of MKM’s cars were registered in Thebe-ea-Khale’s name.

That means the liquidators might have to fight another gruelling court battle to get the cars.

And the chances of success in this case are not guaranteed. 

In the understanding that liquidating MKM’s four companies as separate entities would be a colossal task, the central bank’s lawyers Webber Newdigate submitted that they should be treated as a single company.

They argued that “it will be to the advantage of creditors if there is a single estate rather than separate estates for various companies”.

Webber Newdigate said treating the companies as separate estates in liquidation would be “expensive and a waste of money since there will be no reliable result”.

They argued that PricewaterhouseCoopers’ report had shown that “there was substantial cross subsidisation between schemes and scheme operators.”

“The cross subsidisation will result in the various estates having claims against one another.

“Every payment from one estate to another increases the total cost of administration since liquidators are entitled to a fee on all funds or assets in each estate. A sale in estate A, and a payment from estate A to estate B means that two fees will be payable on the same proceeds.”

Justice ’Musa directed the Master of the High Court to appoint two attorneys, Chavonnes Badenhorst from St Clair Cooper in Bloemfontein and Daniel Gerhardus Roberts from Webber Newdigate as the joint liquidators.

Thebe-ea-khale had in the past made several failed attempts to avoid liquidation.

He first proposed to sell part of MKM properties and also secure loans from banks to pay out the investors.

The CBL found the proposal to be unprofessional and lacking in substance, Finance Minister Timothy Thahane told parliament last year, after he had come under pressure to use government money to bail out MKM.

Thahane said the central bank said the money from the sale of MKM’s building would not be enough to plug the gaping holes in the company’s books.

“No financial institution will lend the significant amounts of money the group would require to borrow to repay the members,” the CBL said, according to Thahane.

“The Star Lion Group would have no way to repay the loans as the money could not be invested in revenue generating activities, since the money would have been used to repay members.”

 “None of the Star Lion Group businesses are profitable.”

After this proposal failed, Thebe-ea-Khale proposed a takeover deal with Channel Life.

But the CBL refused to sanction the deal.

Thahane said, the CBL observed that Channel Life’s solution was not based on injection of new capital into the Group’s businesses.

“Channel Life, in that sense, clearly did not want to be drawn into the existing liabilities of the group (MKM).”

Thahane said the CBL rejected the proposal because the MKM needed money to pay back members but Channel Life was not prepared to inject funds.

Channel Life was “not willing to accept unlimited exposures”, he said.

The next take-over deal was made with Oricle Investment Services, which submitted a report “that was found to be completely irrelevant in that it did not address itself to the problem at hand and further failed to prove the extent of liability”.

Thahane said MKM was supposed to submit its own version of its liabilities to the CBL to prove its assertion that the M400 million PricewaterhouseCoopers has claimed to be its total liability was wrong.

However, Oricle, acting on behalf of MKM, submitted information that had already been overruled by the High Court and the Court of Appeal.

Thebe-ea-khale told the Lesotho Times last night the battle is not yet over.

He however said the ruling only affected two MKM buildings; the former Agric Bank and the one along Pioneer Road.

“This means that MKM Marketing Ltd properties will not be taken away because it was just a promoting company,” Thebe-ea-khale said.

“That is why we argued against treating all these companies as a single entity,” he said.

“MKM Marketing, as the name clearly indicates, had nothing to do with Star Lion businesses other than providing them with a marketing service.”

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