Price Club saga comes to an end with Appeals verdict
Even under threat of libel, MaltaToday’s extensive report in supermarket bankruptcy was proved true by final verdict on creditors’ action
Matthew Vella An Appeals Court’s confirmation this week that the three directors of the bankrupt supermarket chain Price Club were personally liable for the debts incurred, is a vindication for the kind of journalism this newspaper believes in.
Julian Manduca, who died in May 2005, broke the news of a scathing audit report into the Price Club bankruptcy – compiled by PricewaterhouseCoopers’ senior auditor John Zarb – when nobody wanted to have anything to do with the aftermath of this financial catastrophe.
Julian said Price Club was Malta’s own Parmalat. For that we were sued for libel. But now the courts have confirmed that Victor Zammit, Christopher Gauci and Wallace Fino face claims said to exceed €20 million, after being found guilty of wrongful trading when they kept doing business despite knowing that the company was going under.
The story was simple enough: Priceclub Operators Ltd (one of two companies owned by the three shareholders) burdened the Price Club chain with loans and payments incurred by other 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 The Malta Financial and Business Times that Price Club was “not in difficulty… Everything is now back to normal.”
In the first months of the new Price Club, popular opinion was that of a flagship company that was strong enough to corner the supermarket business in Malta, enjoying the hype of its high-profile marketing.
The truth was that the beleaguered supermarket giant had been weak at its foundations from the start of its operations, with its director-shareholders never having exercised the necessary care to keep it solvent.
Priceclub’s fall adversely affected the lives and businesses of about 200 creditors, some of them drastically. 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.
According to the Zarb affidavit, the Price Club directors enabled the company to generate more available cash by paying their suppliers at a slower pace. However, the Zarb affidavit noted how the first months of operation were punctured by a loan of €1 million to a company owned by Georgina and Giosue Gauci, the parents of Priceclub’s 25% shareholder Christopher Gauci.
According to Zarb, in a period where Price Club 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 Birkirkara Day-to-Day supermarket and €600,000 on the Happy Saver supermarket “without in any way seeking to strengthen the equity base” of the company.
Perhaps most seriously, 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 Price Club group.”
By 2001, Zammit was even telling creditors the supermarket was heading towards breakeven, and presented a 20% investment proposal to creditors, which liquidator Andrew Borg Cardona 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, in a nutshell, was destined to fail.
But since the creditors only had a legal relationship with one of the chain’s companies, there was nowhere to pay them from when it went bankrupt.
So it was left up to the courts to lift the corporate veil: imposing liability for corporate activity or misconduct on the persons or entities other than the corporation itself, irrespective of companies being legal entities distinct from its shareholders or owners.
This week the Appeals Court upheld the first court’s ruling, that the way in which the company was structured, capitalised and managed led the company to a situation where, after June 1999, they could not have honestly believed that they could meet their debts.
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