David Whitehead collapses

Published: 10 June 2013
THE collapsed David Whitehead could be thrown into liquidation due to insolvency, denting the hopes of more than 3 000 employees who were expecting to return to work.

The provisional judicial manager, Mr Winseley Militala, admitted in his report that the reconstruction was not "serving any purpose" as no investor was prepared to inherit debt.Mr Militala also allegedly unearthed massive asset stripping by the majority shareholder, as he took a swipe at the former judicial manager and the then Master of the High Court for mishandling the sale to a new investor of the firm's 52 percent stake.

DW creditors are due to meet at the High Court today to consider PJM's second report.

The collapsed textile firm was, for the second time, placed under judicial management in December 2010, having gone through the same reconstruction between 2005 and 2008 under Dr Cecil Madondo of Tudor House Consultancy. Elgate Investment, which acquired a 52 percent stake in the firm, applied for a second judicial management after the company plunged into a serious financial crisis.

" . . . It is quite apparent that DWT is insolvent - going by its negative book, liabilities far exceeded assets," said Mr Militala. "The company has not operated for a number of years and that, coupled with the inability to pay creditors, even post-judicial management creditors, makes it a suitable candidate for liquidation.

"Against this background, all prospective investors were unanimous in insisting on a structuring transaction that was free of liabilities - actual and contingent. It is the provisional judicial manager's submission that such transaction can only take place after the liquidation process, a process I recommend."

The former ZSE-listed company was once one of the country's biggest employers, sustaining thousands of livelihoods directly and indirectly.

Formerly owned by Lonrho before a management buyout in 2001, led by former CEO Edwin Chimanye, it has three main plants in Chegutu, Kadoma and Gweru. DW requires US$3,5 million for plant refurbishment and US$2,6 million as initial working capital.

Mr Militala said various capital-raising initiatives were pursued to rescue the company, in recognition of its national significance, but none could materialise.

In his findings, he said DWT problems worsened at the peak of hyperinflation in 2008, when the former blue chip firm was seeking to raise capital.

Year-on-year inflation reached 231 million percent at the last official count in June 2008

Access to capital was a "virtual impossibility" as banks had minimal funds to lend. The little funding available was on a short-term basis which was not aligned to DW trading cycles.

Despite funding challenges, Mr Militala noted there were some policy shortcomings. The board did not come up with "credible" strategies to protect the business. Although the services of external consultants were enlisted, nothing was done in relation to implementation of the resolutions - until the collapse of the company.

On the toll manufacturing deal with Parrogate, Mr Militala established that the arrangement never benefited DW. Under the deal, Parrogate supplied lint and other raw materials to DW in exchange for a share of the finished product.

"Most of the production output went to pay Parrogate in this barter arrangement. Parrogate exported and got 35 percent retention on the forex, leaving DW with little or no cash resources to fund its operations directly," he said.

"DW was thus trapped in a cycle of dependency on Parrogate for operational funding."

He said the deal was a huge loss for Parrogate.

For instance, DW's cost of production, on average was US$1,20 per metre, but it traded most of its production output with Parrogate for an effective US0,40c per metre on average. Parrogate could have thus afforded to dispose of its fabric at DW's cost of production, make more than 100 percent margin and virtually eliminate DW from the market.

DW had cut CDIs for export proceeds in line with the Exchange Control Regulations, but did not get all the export proceeds as some cash went directly to Parrogate.

Sales to Tendas de Mozambique, an associate of Taylor's Canvas, is an example.

As a result of this practiCe, and other cash leakages, DW was not in a position to acquit CDIs they had cut with RBZ through FBC Bank and Stanbic Bank.

The amount of such unacquitted CDIs stands at about US$306 000 for FBC and US$164 000 for Stanbic.

"In the absence of the proper accounting records and supporting vouchers, it is quite conceivable that these monies could have been used by Elgate in the attempted purchase of 51 percent shareholding in DWT, in blatant contravention of the Companies Act.

"DW books and records could have cleared this suspicion but in their absence, Elgate need to be put on their defence to prove otherwise," he said.

Turning to the schemes of arrangement, which saw Elgate taking over DW, Mr Militala said the deal was not properly managed. He said there was no strategy in place to safeguard the company's interests. There was a void left open for abuse after the judicial manager resigned on April 3 2008.

Although there was a general agreement and understanding that Elgate Investment proposal met the criteria set by the company, the question of whether or not Elgate had adequate resources to meet its investment was not investigated sufficiently.

The report established that DW was left exposed, primarily because the former judicial manager had resigned on April 3, 2008, well before the share subscription agreement was concluded, and as a result could not see the deal through.

He said there was an oversight with regards to the payment of US$5,4 million by Elgate for the 52 percent stake, coupled with the absence of physical verification of DW assets.

According to the payment schedule, signed in December 2007, the new investor was supposed to pay US$3 million within 10 days of the contract, US$1,5 million within 50  days, U$500 000 within 70 days and US$400 000 within 90 days. In fact, the former judicial manager authorised the issue of shares worth US$3 million, the money being paid through the alleged purchase of raw materials and payment of some DW creditors.

Mr Militala noted that there was no independent verification of the DW obligation assumed by Elgate.

All that was presented as evidence were a "couple" of e-mails from some creditors, indicating that outstanding amounts were no longer owed by the company.

"Under normal circumstances, and having regard to the strategic importance of the transaction, one would have expected an independent audit, that would have confirmed, or otherwise, the flow of goods and services from the creditor company to DW, before giving away the control of the company," said Mr Militala.

He said this oversight was acknowledged by the then judicial manager. "He indicated that he could only vouch for US$1 603 130 and not the full US$3 060 317.

"As such, he suggested that an independent verification of the amount transacted be conducted, but his suggestions came after he had resigned, a clear case of closing the stable doors after the horses have bolted," said the PJM.

The report also alleges that the company's directors deliberately denied the PJM access to the company's records in a move to frustrate recovery of the assets.
- TH
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