Priceclub • February 8 2004

With a Lm4 million loss, Priceclub directors told suppliers the company was making profits

If the Priceclub directors kept proper accounts of their business, they would have known that as at 31 March 2001 their company was carrying a loss of at least Lm4 million, but in April of that year, at a meeting held for creditors they said the company had started to make profits. The information comes from the evidence being presented in court by Dr Andrew Borg Cardona as liquidator of the supermarket chain that crashed spectacularly that year, in the case against the Priceclub directors and owners: Victor Zammit, Christopher Gauci and Wallace Fino.
Like auditor John Zarb, Borg Cardona suggests that bad management led to the downfall of Malta’s largest ever supermarket chain.
The supermarkets collapse was spectacular, Borg Cardona told the court, "spectacular - in a negative sense – meaning a loss to the creditors, much of which could have been avoided if it was not for the gross incompetence, the abuse, the lack of observance of responsibilities that arise from the law and the deceit of the accused."
Borg Cardona continued: "the capital of the Priceclub operating company was of Lm101,000. This is a ridiculous amount in the context of a company that had a turnover of Lm 22 million….In fact, while the shareholders lost their investment of Lm101,000, the creditors lost Lm8 million."
While it should have been perfectly clear to the Priceclub directors that their company was insolvent, it was a report asked for by the creditors and prepared by PricewaterhouseCoopers in April 2001 that revealed the full extent of their troubles.
According to Borg Cardona, prior to the auditors study, the directors of Priceclub told their suppliers that "although there was a loss in the past, they had, through a number of corrective measures allegedly taken turned the tide, so much so that at the beginning of 2001, the group was making profits."
Borg Cardona told the court how the accounts prepared by Priceclub for management purposes covering the year ended 30 September 2000, seven months earlier, had shown a loss of Lm844,000 and accumulated loses of Lm1.1 million, and that "according to Priceclub’s own calculations, that loss had increased to Lm1.6 million by 31 March 2001," just before the Priceclub directors told their suppliers that the supermarket chain was enjoying profits.
That auditors study, however, showed how Priceclub’s loss was much bigger than probably even the directors thought. According to Borg Cardona: the stock value was anything between Lm750,000 and Lm 1.5 million less than appeared on the accounting records and about Lm700,000 was counted as owing from related companies that were bankrupt.
Borg Cardona said that while the company’s accounts showed losses of Lm1,600,000 at 31 March 2001, the real loss as calculated by PricewaterhouseCoopers was at least Lm3.5 million and possibly as much as Lm4.25 million.
According to Borg Cardona, "despite the fact that the report of PricewaterhouseCoopers revealed the financially disastrous situation of the Priceclub group to the public, the directors continued their claims that the supermarket chain was a great success."
But even before that, Priceclub was in serious financial trouble, and Borg Cardona noted: "the disastrous figures of 2000 and those of the beginning of 2001 were hidden from the suppliers, in violation of the responsibilities imposed by law that are subject to criminal proceedings, until the problems of Priceclub became public and an investigation was started."
To add insult to injury, in May of 2001 the directors produced a document called ‘Investment Proposal,’ in which they proposed that: "the company’s present shareholders offer 20 percent of Priceclub Operators Limited shares for Lm1 million." Borg Cardona told the court: "in other words it was not enough that because of them the ordinary creditors of Priceclub had already lost more than Lm8 million; they continued to 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 with an accumulated (adjusted) loss of more than Lm4 million and with creditors of more than Lm8 million."
Referring to the investment proposal prepared by Zammit, Gauci and Fino, Borg Cardona told the court that it was "full of false and misleading declarations." In its conclusion, that report states: "the initial time horizon of 2001 to 2003 is mainly focused on turning the operation into a profitable one. This will put the company in good stead for the next time horizon, when the company will focus all its energies in ensuring a higher growth rate both in terms of new sales and like-for-like sales.
"Opportunities such as e-commerce, financial services and franchising of the Priceclub brand will surely be challenges which will need addressing in the next time horizon, when we expect that the supermarkets’ share of the market would have substantially increased."
The investment proposal then states: "Priceclub directors have signed an agreement with seven of its major creditors whereby Lm4 million worth of trade debts will be transformed into an eight year bond at 5 percent interest with a year’s interest on interest and capital."
MaltaToday asked several of Priceclub’s largest creditors whether an agreement had in fact been signed, but all of them denied it.
Investigations carried out by MaltaToday indicate that the last audit was carried out for the year ended 30 September 1999 and that the auditors refused to finalise the audit for September 2000. The September 1999 accounts showed accumulated losses and total liabilities of Lm7.9 million.

Marsovin led down the garden path
Among the companies that were misled by the Priceclub directors was the Marsovin group. In his evidence before the court, general manager Paul de Battista, explained how Marsovin was owed Lm 149,604 by Priceclub.
De Battista told the court that discussions with Priceclub were regular and were always about selling and payment schedules.
"Often payments were regular, but from time to time I was constrained to phone Wallace Fino personally to draw his attention to the lateness of payments," De Battista told the court.
"When the balance exceeded the limit that was acceptable to Marsovin, and at the same time payments virtually came to a halt, a decision was taken, following an internal discussion to stop the credit facility given to Priceclub until a repayment schedule acceptable to Marsovin was agreed.
"On 27 March 2001, Wallace Fino passed on to us a written repayment schedule to discuss…the repayment schedule covered the payments that were meant to have taken place in 2001. On 30 March Marsovin sent a counter proposal that was accepted by Wallace Fino on the same day. The credit facility that was stopped was reactivated and Priceclub once again started to purchase on credit."
Only a few months before the Priceclub crashed in July of 2001, Marsovin, was led to believe that it could offer further credit, but even prior to that date, rumours about the companies financial difficulties and empty shelves at the supermarkets indicated the writing was on the wall.
De Battista concludes: "In the negotiations to arrive at the agreed deal, Wallace Fino never mentioned anything about the financial problems that they were experiencing and he always led me to believe that payments would be effected according to the agreed repayment schedule. For that reason it was a surprise for us too when in the following weeks the grave financial situation of the Price Club group was made public."

julian@newsworksltd.com