MASERU — Sharp differences have emerged between the cabinet and the Central Bank of Lesotho (CBL) over how thousands of depositors with money locked up in MKM should be paid.
The Lesotho Times can reveal that although a May 4 cabinet meeting resolved that MKM should be allowed to pay its depositors immediately, the central bank governor Moeketsi Senaoana is insisting that the MKM case should be resolved through liquidation.
The principal secretary in the Ministry of Finance presented the directive to CBL governor Moeketsi Senaoana a few days after cabinet issued it.
The directive that the principal secretary presented to Senaoana stated “the MKM should pay Basotho, who had invested in that company and appeared in the MKM list”.
Also in the directive to the governor was a copy of the liability report that MKM had compiled to indicate how much it owed.
Following the directive the CBL governor wrote to Finance Minister Timothy Thahane on May 11, saying he believed if government allowed MKM to pay its depositors, the situation could be chaotic and some depositors could lose out.
In the letter, Senaoana told Thahane that liquidation was the only viable option to facilitate payment for the MKM depositors.
“Pursuit of liquidation as a compensating mechanism (in favour of investors and creditors) is considered the most favourable approach in the circumstances of the Star Lion Group (MKM).
“Through liquidation, the court shall have opportunity to determine the precise extent of the assets of the group vis-à-vis the total value of its liability,” Senaoana said.
The governor said he also doubted MKM’s liability report in which it claimed to owe M165 million to depositors. He said MKM’s calculations were different from the findings of PricewaterhouseCoopers (PWC) which put the firm’s total liabilities at M400 million.
PWC is an audit firm hired by the central bank to investigate MKM’s operations and liquidity status.
In its audit report PWC said only M100 million of the M400 million invested by depositors was available.
“Payment/compensation of investors and creditors to the Star Lion Group will naturally depend on availability of funds to meet the demand,” Senaoana said in the letter.
“The bank is not certain whether or not the Star Lion Group is indeed in possession of approximately M165m that the group concedes to be the total liability.”
He warned that “in an event where the M165m that the group concedes to be the total liability may have been understated, the short-fall could create a tirade of discontentment”.
“Given that the correctness of M165m has not been tested in a fair, objective tribunal such as a court of law, possibilities of its incorrectness do exist.
“Any chance that the funds are not available could create chaotic response from investors and creditors.”
Senaoana said the discrepancies between the report compiled by MKM and the one compiled by the PWC were evidence that verification was required before paying the depositors.
Only a liquidation process sanctioned by the High Court can make this independent verification, Senaoana said.
“As motivated in preceding paragraphs, payment/compensation premised on incorrect determination could yield undesirable dissatisfaction on the part of investors and creditors.
“It is submitted that liquidation, on the other hand would provide a legal, uncritisisable and transparent route through which the courts would have opportunity to make reasoned judgment on the basis of proven claims.”
Senaoana added: “Any other payment/compensation method could result in a situation wherein some investors have received more than their fair share of entitlement, and some have ended up with less than they ought to receive.
“It is on that basis that the bank hereby advises government to allow the eminent liquidation process to take its course.
“The benefit of judicial pronouncement, as opposed to executive decisions, would be that they would carry obligatory weight (and therefore facilitate compliance) against the instructed party.”
The governor also warned of the potential difficulty that could arise if the government used an executive order to compel MKM to pay out depositors.
“However, in the event of default or failure to comply with a directive issued by the executive arm of government, questions would remain regarding the enforceability (or otherwise) of the directive so issued.
“In a bid to avoid circumstances in which the Group (MKM) may decline to honour the directive issued by cabinet it would be preferable to pursue a directive issued within the powers of a court of law. “Following the liquidation route would create an environment within which a legally enforceable directive (or order, as the case may be) could be issued.”
CBL’s application to liquidate MKM is still pending in the High Court.
At least 164 000 depositors’ funds are still locked up in MKM after the firm was shut down in November 2007 for operating illegal banking and insurance businesses.
Even if the liquidation is approved, it is highly unlikely that the depositors will be able to get the full amounts they invested.
PWC investigations revealed that most of MKM’s assets were cars that were however registered in Thebe-ea-Khale’s name.
The company also has buildings and land as assets but observers say these might be difficult to sell at replacement costs.
Because of the ongoing recession, observers say, these assets are likely to be sold at a massive loss.
Hundreds of cars that the firm has are likely to be worth only a fraction of their initial value.