Issue link: https://maltatoday.uberflip.com/i/229731
14 BUSINESS & FINANCE maltatoday, WEDNESDAY, 18 DECEMBER 2013 Spare us tales of Priceclub, Enemalta and other misery H George Mangion ot on the heels of the preChristmas cheer, we are shocked to hear and read about the live streaming of the Public Accounts committee concerning the revelations under oath of Mr George Farrugia (the latter having received a Presidential pardon to spill the beans on alleged corruption concerning the oil procurement procedures at Enemalta). Father Christmas is excusably jealous of Mr Farrugia, given the latter must have broken the record in dishing out multiple gifts of substance just to warm the hearts (and line the pockets) of the politically placed Mandarins at Enemalta. Enemalta clients continue to labour under hefty electricity tariffs may be excused for feeling angry to hear that for the past ten years kickbacks or commissions were paid by Mr Farrugia to the highest echelons of management. The bizarre story of kickbacks was blatantly an open occurrence each Christmas, with generous gifts of all sizes and values graciously distributed by Mr Farrugia – a well-known oil broker representing Total and Trafigura who remembers that such gifts were openly accepted by top management. In his testimony, he naively declared of his mistaken impression that his generosity would help him to gain easy access to lucrative oil tenders running into millions. Apparently there is no honour among thieves, as Mr Farrugia is concurrently accused of siphoning off massive profits (circa €40 million) in the oil business affairs conducted within the family company Power Plan Ltd before a settlement was reached through legal intervention. So why are these scary stories always hitting the headlines around Christmas? Surely thus is a time to rejoice and forget the temptations that bedevil our business community? Again, where scandals are concerned, it does not rain but it pours. Can anyone remember the Priceclub collapse almost 17 years ago, which left over 400 jobless and many local suppliers losing millions in unpaid merchandise? The unexpected news this week – that a Big 4 accounting firm and its partners were found to have been negligent in connection with the work they carried out for Priceclub Operators Ltd – surprised many professionals. The Big 4 firm of international repute had then been engaged to carry out an audit report for Priceclub on the basis of audited accounts which were finalised on June 2000. Needless to say, the audit firm is a highly respected member if the commercial community and does sterling work auditing many firms of stature, including banks and insurance companies of international standing. Mr Justice Joseph Azzopardi, in the First Hall of the Civil Court, delivered this judgment following an action filed in 2001 by Valle Del Miele Ltd against the firm and against its seven partners. Valle Del Miele (VDM) told the court that it was owed for supplies by Priceclub supermarket and consciously relied on the accounts and the auditors' report which portrayed an optimistic picture of Priceclub's business and in no manner indicated that Price Club had financial difficulties that forced it to cease payments in April 2001. The company had debts of Lm2.6 million owing to its creditors and this debt exceeded the stocks in hand by Lm1.2 million. Taking a path down memory lane we discover how Priceclub Operators Ltd (one of two companies owned by three shareholders) burdened the Priceclub chain with loans and payments incurred by other associated companies, in circumstances that often benefited the directors' personal interests, putting suppliers at risk. But the true story was nothing like the misleading picture the supermarket directors wanted to portray in April of 2001, when telling that the retailer was "not in difficulty… everything is now back to normal". The truth was that the beleaguered supermarket giant had been weak at its foundations from the start of its operations, with its directorshareholders never having exercised the necessary care to keep it solvent. The larger creditors, those owed between €500,000 and €2.3 million, include Alf Mizzi and Sons, Foster Clarks, General Soft Drinks, Farsons, P Cutajar, and Paolo Bonnici grouped and commissioned PWC to carry out an investigation into the books of Priceclub as it was placed into a creditors' liquidation administered by Andrew Borg Cardona. According to the PWC affidavit, the Priceclub directors enabled the company to generate more available cash by paying their suppliers at a slower pace. The investigation unearthed nasty findings, such as the discovery that during the period where Priceclub incurred losses in excess of €10 million, directors had diverted over €2m of cash into their personal businesses, and incurred costs of over €1.2 million on the other branches, "without in any way seeking to strengthen the equity base" of the company. The report continues to surprise readers that the directors diverted "further cash of €2.2 million to meet capital and interest repayments on this and other borrowings taken out by other companies within the Priceclub group". By 2001, one of its directors was even telling creditors the supermarket was heading towards breakeven, and presented a 20% investment proposal to creditors, which liquidator described as an attempt to "defraud third parties to the tune of Lm1 million through their estimation of the value of Priceclub at Lm5 million, when the company was effectively bankrupt virtually from its birth". Priceclub can be described as a rotten shell with no assets and which is ridden with debts, and this state of affairs led the courts to lift the corporate veil. In simple terms, the court ignored the dictum of limited liability by imposing a charge of corporate misconduct on the persons or entities other than the corporation itself, irrespective of companies being legal entities distinct from its shareholders or owners. This is a milestone judgement in the short history of our insolvency rules within the 1995 Companies Act. Insolvency practitioners point to article 214 of the Companies Act, 1995 which describes an insolvent company as one which is unable to pay its debts. Wrongful trading can be defined as occurring when a director of a company that has gone into insolvent liquidation and at some time before the commencement of the winding up of the company, knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. Back to VDM, as can be expected its lawyers took the auditors to court, claiming damages. Their plea, inter alia, showed that the accounting firm had acted in a negligent or fraudulent manner when it prepared Priceclub's accounts because the said accounts did not reflect the true and fair financial position of the company. The judge disagreed with VDM's claim for compensation by the partners of the audit firm (usually jointly and severally liable) as a consequence of liabilities it suffered. This case made accounting history as it not only hit the headlines during Christmas time (similar to the kickbacks and gifts bonanza at Enemalta) but the judgment is unique as it said the accountants had a duty of care to their direct employers and to any third party to whom they themselves showed the accounts or to whom they knew their employer was going to show the accounts. Mr Justice Azzopardi said that it resulted that the firm and its partners had shown an element of negligence in their work. The defendants were experts in their field and should have been obvious to them that Priceclub was in financial trouble. The PWC report also revealed stock control was deficient and this was one of its main weakness in an industry where margins are low and merchandise if not tightly controlled can easily be pilfered. However the learned Judge concluded that in a case such as this VDM, ought to have engaged its own accounting experts to examine Priceclub's situation and not to rely upon Priceclub's own auditors. Thus the judge concluded that the audit firm had not caused VDM to suffer damages and after seventeen years in court it lost its remedy for compensation. It is a pity that on the eve of Christmas, we are contemplating such sorrowful affairs when really and truly this is the time of rejoicing. gmm@pkfmalta.com