George M. Mangion | Wednesday, 26 August 2009

Let the buyer beware

During a recession weird things happen. Particularly, heavy casualties are reported by the weakest players of the economy. Take the drop in tourism. We have been regaled by the media with news of a constant drop in tourist arrivals (a 20,000 drop in June). Surely when the flock of teenage tourists depart next month this will in turn add more pressure on hoteliers and tourist operators when the cash lake starts to dry up. The opposition stress that this situation is not helped by the increases in fuel and energy charges meted out by the government. The saga continues with the €10 million scam that evolved during this year with a number of retailers/wholesalers lured into paying VAT intermediaries and go-betweens to cancel their fines and appropriating refunds which were never due. This wave of events has stirred a hornet’s nest among consumers. They rightfully complain that while ordinary citizens are regularly fined for small misdemeanours. The irony is that the press is reporting huge VAT abuses which go undetected right under the noses of the authorities. In a culture of omertà and platitudes it appears that nobody is responsible at the top and no one runs into his or her sword in a fit of taking responsibility. Bloggers lament that consumers get fined because they did not ask for a receipt for a bottle of coke, yet how on earth was the owner of a larger white goods retailer (Mambra Stores) allowed to get away with thousands of unpaid VAT? Last year Mambra Electronics was the target of judicial protests filed by the Inland Revenue and VAT departments for taxes due to the government, claimed to be in excess of €600,000.
The VAT Commissioner recently filed a garnishee order against Mambra for €308,809. The plot got a twist of a financial thriller as The Times of Malta revealed that official documents deposited with the Registry of Companies show that on June 25 Mambra’s auditor resigned and stopped representing the company. Mambra closed down before the St Maria holiday and the owner has vanished and nobody knows his whereabouts. The impact of the collapse of the Mambra on a tiny island’s business community is probably equal to that of the possible impact of the Price Club scandal. This is all looking very surreal when the onset of the recession has driven smaller shop owners to the wall and no doubt we may hear of larger scale supermarkets who operate on a shoe string budget to follow suit and leave thousands of unpaid creditors (apart from toxic bank loans). Have we learned the lesson following the demise of Price Club in 2001? Not really as consumers are still without protection having bought goods from Mambra and lost their warranty cover.
It appears that the fallout from the Price Club explosion was adequately reported by the media and a lot of hard work was faced by its liquidator Dr Borg Cardona (the incumbent president of the College of Advocates). This brings up the issue of whether the consumer is adequately protected or is it always the notion of caveat emptor for the poor sod? Consumers are certainly shrinking their demand while it is the supply chain that is showing signs of buckling under the strains of a recession. Just have a look at the “sale“ notices fixed on shop windows through the summer period and the empty shops in Valletta and one can easily deduce that the supply chain is in trouble since again demand has dropped due to higher inflation and a resulting drop in purchasing power. But on the subject of inflation which started at a high of 5 per cent late last year, one can be placated by politicians that the interplay of huge discounts offered by large establishments (like Mambra) do contribute to a lowering of prices. Perhaps the slashing of margins did hasten the demise of Mambra but what about the proliferation of a number of foreign franchises offering discounted food prices in comparative luxury of modern air conditioned stalls? Will the food /grocery retailing business start spluttering under the weight of the credit squeeze perhaps as has happened in the Mambra case? Let us follow up the history of Price Club to try and detect any similarities in the consumer patterns that may have led to its downfall. The Price Club Supermarkets debacle was the casus classicus which occurred just months before the dot-com crash. Initially, the chain enjoyed a monopoly on food retailing and garnered one of Malta’s best turnovers. However, the chain’s demise was equally as outrageous. It has ended up in July 2002 owning some €19.8 million to over 200 creditors. Assuming the banks recover their money from Price Club (and as is likely, the trade creditors do not), the loss in tax revenue would be in the region of €7million, assuming €21 million to creditors is partially settled. The sad story has no end in sight. The positive outcome resulted in landmark legal decisions reached at Court which tested fully the insolvency rules under the Companies Act.
One thing is certain – Price Club’s insolvency did have negative reverberations on the Maltese economy. Another important concept which came out of the long legal process is that arising from wrongful trading. For sake of clarity, one can define this concept 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.
It is interesting to note that The Times of Malta reported in 2007 that Mr Justice Tonio Mallia, concluded that Victor Zammit, Christopher Gauci and Wallace Fino (all directors) had committed fraudulent and wrongful trading in connection with PCO and the company’s creditors. They were held personally and unlimitedly responsible for the debts incurred by Price Club Operators Ltd (PCO). Mr Justice Mallia added that PCO had commenced operating with a deficit and without a capital base culminating in the plight of unsecured suppliers been ignored by the directors. It is relevant to know that the chain at its peak employed around 600 people and a lot of suppliers and importers depended on the group for their livelihood. The larger suppliers now seven years after the declaration of liquidation are still owed millions.
Back then an urgent meeting was held between the creditors, the Price Club operators, the Prime Minister and other government officials in a bid to smoothen out the fallout on the unpaid suppliers. One may well ask if the consumer is again being faced with a dilemma of unpaid dues arising from Mambra and whether its auditor who just resigned had sufficient time to avert the shareholders on any tell tale signs of insolvency that may have been apparent from the examination of the books. In the case of the Price Club we know that John Zarb, a partner with PricewaterhouseCoopers and a consultant to the big six creditors, was appointed by liquidator Dr Borg Cardona to examine the books. This was a wise appointment as Mr Zarb unearthed vital information about the dealings of the group. Inter alia, he revealed how the multimillion market leader had continued to buy goods from its suppliers when the directors knew the company would never be in a position to pay for the goods ordered.
In his court affidavit, Zarb showed how Price Club, despite being in severe financial trouble, decided its stock values without keeping stock records or carrying out substantial stock-takes. One hopes that the lessons from Price Club will be heeded by the authorities so that the any abuses of wrongful trading will be identified at any early stage and consumers are protected from such abuses by operators who may try to evoke as their defense the limited liability protection of a company.

George Mangion
Partner at PKF – an audit and business advisory firm



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26 August 2009


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