IDC ‘suckered’ into making a R185m business loan allegedly diverted to pay off debts and buy a Bentley

11-09-2020
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Daily Maverick
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Self-described “renowned industrialist” Sello Mahlangu and his “powerhouse” investment group, Southern Palace, stand accused of securing funding from the Industrial Development Corporation (IDC) under false pretences – and then misappropriating the money meant to recapitalise Genrec, a black-owned champion in the heavy engineering industry.

The alleged scheme is detailed in a summons the IDC issued from the Johannesburg High Court on 27 February.

At issue is Southern Palace’s acquisition of Genrec from construction conglomerate Murray & Roberts in May 2018.

The IDC claims that it was tricked into lending Genrec R185-million to recapitalise the business when Southern Palace took control.

The ruse allegedly involved Southern Palace pretending to fulfil a key condition for the IDC funding by committing R20-million of its own money to Genrec first.

Southern Palace provided an auditor’s certificate as “proof” of the payment, but the certificate actually “related to a payment between different entities and for a different purpose”, the IDC states in its particulars of claim. If not for this, it would never have provided funding in the first place.

Even more surprising is the use the IDC alleges the money was put to.

The IDC funding took the form of a R125-million loan and a separate R60-million revolving credit facility that were granted to Genrec on 16 February and 8 March 2018 respectively.

Of the first R125-million Genrec allegedly used only R20-million as intended. Of the rest:

R80-million was instead used to pay off an unrelated debt of Southern Palace. R6-million more was paid to Southern Palace. R1.6-million got paid to a front company called Acutucel, which was, the IDC claimed, a “proxy” for Southern Palace’s three founders.

Southern Palace was established in 2002 by husband and wife team Sello Mahlangu and Gladys Matitoane, who are the controlling shareholders, and business partner Lucas Tseki, who owns 15% of the group.

The three allegedly took the abuse of IDC funding to a new level when it came to the separate R60-million revolving credit facility. The IDC was told that this money was for working capital so that Genrec could fulfil a large contract it had landed to supply low-profile mining vehicles to a client called CMTi.

However, the money was “not applied for the stated purpose at all”. A relatively small portion of it, R2.7-million, was instead used to buy 51% of CMTi, the supposed customer.

Then came the most audacious part of the alleged misappropriation of the IDC money. Genrec paid R17-million to the “proxy” company Acutucel.

From there the money was used to, among other things, buy a “luxury Bentley vehicle” and pay R1.7-million to Mahlangu and his wife.

There was also a cash withdrawal of R500,000 from the Acutucel account, says the IDC.

All of these assertions apparently follow the commissioning of an investigation, although the IDC has refused to comment on the case or the transactions at all.

A spokesperson told amaBhungane the case was at a “sensitive” stage.

AmaBhungane had received an early tip-off in relation to this transaction last year where it was alleged that a senior IDC executive was facing a disciplinary process after failing to declare a conflict of interest when it was decided to fund Southern Palace.

At the time, the IDC provided only a vague response to questions.

AmaBhungane has established the executive has since left the IDC’s employ.

In May this year, two months after the IDC issued summons, Genrec was put into business rescue, a procedure which places a moratorium on claims against the company – including the IDC’s.

That moratorium does not apply to Southern Palace (which signed surety for the loans), or to the three Southern Palace directors, or to former Southern Palace group operating officer Sicelo Harvey Buthelezi, who signed the IDC loan agreements representing Genrec.

Business rescue practitioner Lebogang Mpakati told amaBhungane: “Yes, there is a moratorium on the litigation against Genrec but the IDC can still go after SPG [Southern Palace Group] and the others, which is what they are doing.”

The ‘proxy’

The alleged front for Southern Palace’s owners, Acutucel, is a shelf company that was activated on 13 April 2018, slightly more than a month after the IDC funding was secured.

It initially had three directors. One is Elvis Maledu, the personal assistant to Mahlangu.

Another initial director who soon resigned was Nala Mahlakoana, also an employee of Southern Palace.

The third director, who is still listed as such, is Sinayo Shabangu, who is or was an executive for business development at Genrec, according to the company’s website.

Only Mahlakoana responded to messages. He said he was “not certain” what the function of Acutucel was, “as I [was] only a director for a short while. [I] wasn’t a director at trading stage”.

He referred amaBhungane to Southern Palace’s lawyers for further clarification.

Ian Levitt, an attorney working for Southern Palace and its directors, however, denied that Acutucel had anything to do with Southern Palace.

“SPG does not own or control Acutucel. SPG has nothing to do with Acutucel whatsoever. The IDC allegation is untrue,” he said by email in response to amaBhungane’s questions.

“Elvis Maledu is in the employ of Southern Palace. He has no relationship with its directors… Nala Mahlakoana is in the employ of Southern Palace. Southern Palace has no knowledge of any relationship between Mr Mahlangu and Nala Mahlakoana,” Levitt said.

The certificate that ‘tricked’ the IDC

Levitt also specifically denied the IDC accusation that Southern Palace had used an irrelevant auditor’s certificate to “fool” the financier into providing Genrec with funding.

In terms of its funding agreement, Southern Palace was meant to “introduce shareholder funds” of R20-million which would capitalise Genrec and bolster the business’s viability, the IDC claims. This was meant to demonstrate that Southern Palace was invested in the business’s success and willing to risk its own resources.

The auditor who provided the contentious certificate is Thabo Mabotsa of Andisa Chartered Accountants.

He told amaBhungane the certificate was his authentication of a real payment, but for another transaction.

It reflects R20-million paid by a Southern Palace subsidiary called Concor to Murray & Roberts as part of the purchase price for Genrec.

This was completely different from what the Southern Place deal with the IDC called for, which was that Southern palace “introduce shareholder funds into” Genrec for Genrec’s use.

This obvious distinction lends credence to the allegation that there was collusion between Southern Palace and an executive inside the IDC. Either that or the funder displayed enormous negligence.

Nevertheless, the IDC is asking the court for a far-reaching order to enforce its claim against Genrec and Southern Palace.

It wants to hold the three founders of the group as well as Buthelezi personally liable for the debt due to their allegedly fraudulent conduct.

That total debt is R186.5-million plus interest calculated from the IDC’s initial notice of indebtedness to Genrec on 4 November last year. The revolving credit facility was slightly overdrawn, leading to the capital figure being larger than the face value of the IDC loans.

On top of this, the IDC wants the four declared delinquent directors “in perpetuity”.

This is a severe sanction allowed by the Companies Act that effectively means the four serial dealmakers, all of whom hold multiple directorships, will lose their ability to act as directors of any company.

As far as could be established, the directors and Southern Palace have yet to file a response to the IDC summons and Levitt told amaBhungane he was not authorised to answer questions about it.

‘Powerhouse’

In an advertorial published on 24 August 2018, Southern Palace described itself as a “black industrial powerhouse” and its chairman-cum-founder Mahlangu as a “renowned industrialist”.

Mahlangu appears to have a background in ANC security. According to an online profile, he was appointed in 1994 to help manage the “rationalisation, change and amalgamation” of the police and defence agencies in South Africa.

In the past, he has enjoyed significant support from both the IDC and the Public Investment Corporation (PIC).

In 2003, the IDC funded a company of which Mahlangu was the controlling shareholder to buy 25% of Reclam, the scrap and recycling giant.

Via Southern Palace, he was part of the IDC-led buyout of Anglo American’s steel subsidiary Scaw Metals in 2007.

Buthelezi, who was chief operating officer of Southern Palace until June this year according to his LinkedIn profile, is likewise politically connected. He recently made news for landing a number of contracts to supply personal protective equipment to the Gauteng health department through his company HSB Mercantile. Before taking up his job at Southern Palace he had been an adviser to the same department.

Genrec was also not the only part of Murray & Roberts that Southern Palace acquired.

In 2017, Southern Palace led a consortium that bought Concor, a construction subsidiary, for R314-million. The PIC had provided R277-million in debt funding.

Southern Palace’s financial statements show that Concor was seemingly quickly exploited to subsidise the group as a whole.

Soon after being acquired, Concor extended a R53-million loan to its new parent company in October 2017, despite having been in a loss-making position when Southern Palace took control earlier that year.

Levitt said that Concor passed the test set by the Companies Act when a company provides a shareholder with funding, which is that it maintains a viable level of solvency and liquidity.

In addition to the IDC case, Southern Palace faces yet another possible existential threat from Murray & Roberts.

Southern Palace partly bought Genrec with a R100-million vendor loan from the construction conglomerate in a commonplace empowerment arrangement that sees it pay off the debt over a long concessional period.

After Genrec went into business rescue this loan was written off. Murray & Roberts is aware of the IDC case and is also “exploring mechanisms to recover the vendor loan”, says spokesman Ed Jardim. DM