Court declares FirstCred insolvent

• CEO blames former directors and shareholders for maladministration
• Absolves herself and current management
• Forensic report findings reported to regulatory authorities
• Legal action against individuals implicated

The CEO, in her submission before court, was seeking to block the liquidation of the lender, arguing that the company’s cash crunch is in “no way attributable to the business management and acumen of the current directors and shareholders”. She testified that “the cash constraints experienced by FirstCred are the result of maladministration by its erstwhile directors and shareholders”.

FirstCred had issued a note programme of P500 million, guaranteed by its mother company, MyBucks SA Luxembourg. GetBucks Botswana (as it was known) raised funds through the note programme which provided for notes to be issued in various series and tranches. Garekwe told the court that the first tranche of notes was in an aggregate amount of P200 000 000. The funds were primarily raised from AS Mintos MarketPlace and from a listed bond on the Botswana Stock Exchange whose investors included ALCB Fund managed by Lions Head and Ecsponent Limited (now Afristrat Investment Holdings Limited).

The creditors ALCB Fund and AS Mintos Market Place approached the High Court seeking to wind up the company, arguing that it is unable to repay its debts because it is burning cash. In their petition the creditors stated that it came to their attention that the company had instituted a forensic investigation into how the proceeds received by the company in terms of the bonds note programme have been utilised.

“There is an allegation that the proceeds were improperly diverted from the accounts of the company to those of the parent company,” the petitioners wrote. “That there is a real risk that the assets of the company are being dissipated dictates a provisional liquidator be urgently appointed in order to assess the position of the petitioners and take control of the assets for the benefit of all the creditors.”

According to Garekwe, forensic examinations have established that P160 million was raised between 2017 and 2019 and that “a considerable portion of the funds raised by GetBucks Botswana was misappropriated by its former board of directors, led by the original CEO, Dave van Niekerk”. “P120 million of these funds was grossly and inappropriately misused and this resulted in its loss,” she said. “Such was the level of malfeasance that investor funds only spent two days in the then Getbucks Botswana bank accounts before they were taken out of Botswana and spent.”

As a results of “misdeeds by previous management”, Garekwe said it is almost “impossible for the now FirstCred to repay investors who became victims of previous management’s mismanagement and poor governance practices between 2017 and 2019”.   She asserted: “We have reported the findings of the forensic reports to the regulatory authorities for investigation and have retained counsel with a view on legal action against individuals implicated,” The CEO said FirstCred would have claim against the former directors and shareholders as well as potentially the group’s then auditors. “That claim has not yet been factored into the assets and liabilities of FirstCred, but were this to be done the assets would increase even more,” said Garekwe.

The petitioners argued that FirstCred is trading in insolvent circumstances. They said tangible assets of the company are in respect of the GetBucks loans which are short term loans and a diminishing asset as time evolves. They sought to have the remaining proceeds of the GetBucks loans to be placed in the hands of the provisional liquidator on an urgent basis and to ensure that such proceeds are not dissipated but distributed on an equitable basis.

“The 31 December 2021 accounts disclose that as of that date, FirstCred is commercially insolvent (i.e. its immediate to short term cash inflow prospects are wholly insufficient to meet its immediate financial obligations) with its net short term liability position being approximately P60 million,” the creditors wrote, adding that it is highly likely that FirstCred is also factually insolvent.

Thus, notwithstanding that the 31 December 2021 accounts, record positive equity of approximately P57 million as of the date of the said accounts, the prospects of a full recovery of significant assets (being investment in MyBucks Malawi (24 percent) and Getbucks Zimbabwe (51 percent) and a loan to Getbucks Zambia) of P180 million appear to be low, said the creditors. In addition, they said matters which are recorded as assets such as deferred tax balances (P5.8m) and Right of Use Assets (P3.3m) in the 31 December 2021 accounts have no value.

In defence, Garekwe argued that the petitioners have not attached financial statements or balance sheets for FirstCred for the latest financial year, hence they were speculating when they contended that FirstCred is alleged factually insolvent. The CEO averred that the true position is that FirstCred is not factually insolvent. “It does not assist the petitioners to try to contend, without any actual first-hand knowledge, that assets may have been overstated in a balance sheet,” Garekwe said, noting that FirstCred had total assets of P268,184,406 compared with total liabilities of P210,719,809 as at December 2021 and total assets of P252,242,229 compared with total liabilities of P200,262,123 as at March 2022.

At the end of both of the last quarters, she stated, FirstCred was thus factually (and actually solvent). In support, she said FirstCred has comfortably exceeded the minimum Capital Adequacy Ratio (CAR) percentage of 5 percent (having a CAR of 20 percent in December 2021, February 2022 and March 2022). It is only with regard to the Liquidity Requirement (LR) that she said FirstCred has, since February 2022, been non-complaint with NBFIRA requirements  with its computed LR percentage being about half of the required 3 percent. “Management has been frustrated by delays in obtaining funding and has accordingly written to NBFIRA to advise them of the company’s plan to rectify the position,” she averred. “When the business obtains a cash injection, it will be able to meet the LR as well as satisfy other obligations.”

But Justice Zein Kebonang determined that the balance sheet extract was unhelpful as it had not been prepared in accordance with acceptable International Financial Reporting Standard (IFRS). In his ruling, the judge said the items listed as assets have not but should have been categorised into current and non-current assets. The same is true for liabilities. “This non-categorisation makes it difficult to determine with accuracy the liquidity of the company,”said Justice Kebonang. “While the balance sheet analysis shows, on the face of it, a balance sheet solvency properly scrutinised, it does not prove or show liquidity.”

Based on figures provided and working on basic assumptions, he ruled that one may conclude that contrary to FirstCred’s claim, its current assets are in fact not able to meet its current liabilities. “It holds no funds from which it can pay its current liabilities,” Justice Kebonang said. “In my view, its cash insolvency is sufficient to establish insolvency. Even if one was to accept the position being asserted by FirstCred as to its solvency, if it has no assets to meet its current liabilities, then it is insolvent.”