News • February 1 2004

How the Priceclub suppliers were misled

Julian Manduca, Kurt Sansone, Matthew Vella reporting

According to PricewaterhouseCooper’s audit expert John Zarb, the suppliers of the Priceclub supermarket chain that crashed spectacularly in 2001, could have been misled by the directors of Priceclub in 2000 and 2001.
In April of 2001, Priceclub director and major shareholder Victor Zammit told our sister newspaper The Malta Financial and Business Times: "The Priceclub is not in difficulty. It is true that a creditors’ meeting was held last Friday night and everything is now back to normal."
Whatever Zammit had in his mind when he said normal, according to John Zarb’s testimony in court, the Priceclub director should have been well aware that the supermarket chain was technically bankrupt.
Zarb told the court that the directors: "should have realised by June 1999 and certainly shortly afterwards, when the bank refused their application (for additional funding), that Priceclub was in serious difficulties and had no reasonable prospect of avoiding being dissolved due to its insolvency."
While John Zarb’s court testimony makes it clear that the owners of Priceclub, Victor Zammit, Christopher Gauci and Wallace Fino should have known their company was bust in June of 1999, the suppliers were not made aware until the crash became public knowledge.
Unlike the owners of Nicolsons supermarkets who organised meetings for their creditors, in order to inform them of the companies situation so as to arrive at the best possible deal for the suppliers, the Priceclub directors ignored such niceties.
The original owner of Priceclub, Frans Gauci, who was bought out by the new owners, had made a reputation for himself by paying on time, but, according to Zarb’s report, all changed when the new directors took over.
"The Priceclub crash has had a disastrous impact on my business," bread supplier Edgar Portelli, of Daily Bakes told MaltaToday. Portelli’s business was owed nearly Lm20,000 and he does not expect to recover any of it.
"Prior to the Priceclub crash my business enjoyed a good cash-flow, but the Priceclub nearly destroyed me. My business is doing better now, but still suffers the impact of the Priceclub loss. I feel very frustrated because I have been misled."
"The horrible thing is that shortly before the Priceclub crashed, Wallace Fino and Christopher Gauci approached me to sell my bakery to them. They did not offer any money but intended to pay me with shares in the Priceclub. Thank God I followed my intuition and decided against.
"Up to a week before the Priceclub went bust, the directors were telling me that there were no problems and that I would be paid. Together with their accountant, David Demarco, we were working out a payment schedule."
Edgar Portelli’s business is not a big one and like him many other small suppliers had their business endangered by the Priceclub. MaltaToday spoke to some of the larger suppliers of Priceclub.
Edible Oil Group Director Tony Psaila told MaltaToday that his company believed up until the last day that Priceclub would continue paying its creditors. "We cashed a cheque for a substantial amount a few days before the crash and even had a signed commitment from the directors to pay according to a schedule which was being followed.
"We had been given several commitments by the directors and for several months we continued to supply the Priceclub based on those commitments. What I find terrible is that while the Priceclub directors are still enjoying the good life, many of us have lost large sums of money.
"Furthermore our Companies Act supposedly regulates the actions of Directors and harsh penalties are envisaged for those engaged in fraudulent trading. I ask you if this is not fraudulent trading. What is? It is pertinent to point out that the Parmalat crack in Italy if taken pro-capita fades into oblivion when compared to the Priceclub story."
Pierre Mattocks, Managing Director of PJ Sutters Co Ltd, one of the top 20 creditors of the Priceclub told MaltaToday that shortly before the supermarkets crashed, he had received personal assurances from the Priceclub Directors that the amounts owed to his company would be honoured. "There was even an agreement of a payment schedule and bills of exchange, and on the Wednesday before the crash I was given personal assurances by the Directors, but on the Monday the Priceclub crashed."
"Prior to the crash we used to be paid regularly by Priceclub, even though the credit period had increased by a further 30 days in the last couple of months, and it was only in the last month that a payment made by cheque was not honoured. We never got the impression that Priceclub would not pay."
Some of the suppliers that MaltaToday spoke to but who preferred to remain anonymous, are very angry because they believe that some of the creditors have reached deals with the Priceclub and been compensated for the outstanding amounts in other ways.
Many of the creditors are doubly frustrated because while their companies have suffered, the owners of the Priceclub have continued their own personal businesses, and some of them have started new ones that are expanding. They feel that their money is now being used by the Priceclub owners to further their own interests.
The Priceclub’s fall adversely affected the lives and businesses of about 200 creditors, some of whom drastically. The larger creditors, those that were owed between Lm200,000 and Lm1 million, include, Alf Mizzi and Sons, owed about Lm900,000; Foster Clarks owed, about Lm450,000, General Soft Drinks, about Lm200,000, Farsons, P Cutajar and Co, and Paolo Bonnici. It is not expected that these will recover their money.
That the directors of Priceclub tried to give a positive impression of what was then the leading supermarket chain on the islands is clear.
The accounts of the Priceclub chain for the year ended September 1999 were approved in June of 2000, when the problems the company faced must have been evident to the shareholders and directors.
In the report of the directors for 1999, but approved in June 2000, it is stated:
"During the year under review, the company’s turnover reached Lm21,722,055 which the directors believe was a commendable performance. This increased turnover resulted in the company reporting an operating profit before depreciation of Lm87,263 (1998 Lm20,943)….The directors are confident that the operational performance of the company will improve in the foreseeable future…"
When a directors report is written it should always reflect the situation of the company up until the time the accounts are submitted.
According to John Zarb’s court testimony, however, the directors of Priceclub had commissioned a report from their auditors Deloitte and Touche in order to apply for additional finance in June 1999. The additional finance was rejected by the bank John Zarb believes, and that was the moment, according to Zarb, the directors should have been aware of the company’s difficulties.
At that point in time, in June 1999, the directors should have been in a position to warn their creditors of the difficulties Priceclub supermarkets faced in paying its debts.
Zarb continues "Trading losses were mounting, cash was absorbed by other transactions and payments to suppliers were continually falling behind. The financial statements to September were produced against this backdrop."
When the accounts were eventually presented to the Registry of Companies in September of 2000 they gave the suppliers, who were facing ever later payments for their goods, the possibility to inspect the first full year’s results for the Priceclub supermarkets.
Zarb comments: "It is hardly surprising in these circumstances that a number of suppliers may have been awaiting the filing of these financial statements."
MaltaToday contacted Priceclub’s auditors, Deloitte and Touche, and asked them for an opinion of Zarb’s testimony. The auditors said: "We stand by our audit opinion given on the company's financial statements for the periods ended 30th September 1998 and 1999. In our opinion the John Zarb affidavit so far as it relates, directly or by inference, to the audited accounts in question is subjective and misleading."