The KwaZulu-Natal Growth Fund (KGF), Industrial Development Corporation (IDC) and private investors have burnt their fingers and lost more than R330-million in an ill-fated cookware-manufacturing plant which has now been liquidated.
INSA, in which the KGF, IDC and private funders had invested hundreds of millions, was liquidated by the Pietermaritzburg High Court in November last year after failing to pay creditors.
The KGF invested more than R230-million through debt and equity funding in 2016. The fund, a so-called developmental finance institution (DFI), which was founded and funded by the KwaZulu-Natal government, also convinced investment company Brand Investments to invest R63-million in INSA.
At the time the company was looking to raise R270-million, through debt and equity, to finance the purchase and relocation of a cookware-manufacturing plant from Turkey to the Dube Trade Port, a special economic zone (SEZ) located north of Durban. INSA was buying the plant from a Turkish company called Ikra Metal.
Brand Investments has now filed a R63-million lawsuit against the KGF.
In court papers filed in the Pietermaritzburg High Court in December, the company claimed KGF bureaucrats, in particular former chief executive Siddiq Adam and former chief investment officer Aubrey Shabane, induced it to invest R63.2-million in the project. Shabane denied the allegation while Adam declined to comment.
The IDC said it had also commenced legal proceedings to recover R36-million it had lost in the project.
However, INSA's liquidation papers filed by business rescue practitioner Sipho Sono in the Pietermaritzburg High Court in February last year, showed the project was riddled with allegations of fraud, corruption and mismanagement.
Sono, who was appointed business rescue practitioner in November 2019, claimed:
INSA and the KGF paid a heavily inflated price to Ikra for the purchase and relocation of the plant. They forked out $10.375-million (about R153-million) for a plant worth not more than R18-million, with a new plant costing around R30-million.
More than 50% of the machines bought from Ikra were between 10 to 20 years old and were old, obsolete and needed maintenance.
INSA and the KGF paid Ikra an additional $850 000 for rental, although this was not provided for in the plant sale agreement.
When INSA was liquidated, the company owed shareholders and lenders about R396-million.
An independent valuation of the plant revealed it was not worth more than R17.7-million, said Sono in court papers, adding he had also been told a brand new plant would cost about R30-million.
"This begs the question why the company did not investigate the cost of new equipment at the time of committing to purchase the used plant.
He added in the liquidation application:
"Quite apart from the fact that the size of the of the plant is extravagant given the size of the local stainless steel cookware market, and that the already high purchase price of $8.5-million was further inflated for no apparent reason to $10.375-million, the company made a questionable further payment of $850 000 to Ikra as rental payment, although there was no provision for this in the sale plant agreement."
HOW INSA COLLAPSED
Around 2015, the KGF made a decision to invest R230-million in taxpayer funds in a company called Inoxa Industries, which later changed its name to INSA. Its funding to INSA was divided into debt and equity.
Sono's liquidation application showed the initial idea was for INSA to buy Ikra's plant for about R153-million and relocate it to Durban. The sale was accompanied by an off-take agreement which would have seen Ikra buy R175 000 worth of pots from INSA every month. However, the off-take agreement did not materialise, leaving INSA with no distribution channels.
"For reasons I have not been able to establish, the off-take agreement with Ikra was not implemented," he said in court papers.
The document showed the IDC had approved a R60-million loan for INSA's operational expenses. But officials refused to release some of the money after learning about possible irregularities at INSA, compounding the company's woes.
The R60-million was over and above the initial R36-million loan which the IDC had already advanced and lost in Phophoma Investments, a company wholly owned by Vusi Ndlovu.
Ndlovu was one of INSA's main shareholders, accounting for about 26% of the company's shares. He was also the company's chief executive.
The R36-million loan to Phophoma, the IDC said in a statement, was meant "to enable a black industrialist to increase his equity in INSA".
Its finances worsened after the IDC refused to advance part of the R60-million in October 2019. Its decision not to release the money was on the back of correspondence in which Brand Investments had alerted the financier's executives to the existence of a forensic report which had uncovered irregularities at INSA.
The forensic investigation had been conducted by auditors Accounts at Law (A@L).
THE COURT PAPERS SAID:
"The respondent [INSA] had received a facility in the amount of R60-million from the IDC for purposes of funding its working capital requirements. During September 2019, the respondents presented a utilisation request to the IDC under the facility, which the IDC deferred on or about 1 October 2019 on the basis of a letter that one of the shareholders of the respondent had sent to the IDC."
A@L had been commissioned by INSA, at the insistence of some of the company's directors, to investigate alleged irregularities.
It was A@L which found the purchase of the plant had been grossly inflated and there was possible fraud and collusion.
A@L had also found that that the KGF had submitted a fraudulent R50-million Black Industrialists Scheme (BIS) from the Department of Trade and Industry on behalf of Insa.
The report, Sono said, had also raised questions about the purchase of Ndlovu's shares in INSA and the payment of R3.2-million to Siddiq Adam, through a labour broker.
Adam, who was part of the KGF team that implemented the deal between INSA and Ikra, left the KGF to consult for INSA in March 2017.
He said he was paid substantially less than R3.2-million.
INSA, Sono's court papers showed, eventually ceased operations in January last year after the KwaDukuza Municipality decided to cut electricity due to non-payment. The company owed the council and other creditors about R396-million.
"The municipality, in disconnecting the electricity, is seeking to enforce payment of a pre-commencement debt owing by the respondent to the municipality of approximately R1.7-million.
"The amount owing to shareholders and lenders amounts to R396-million. The respondent is - as demonstrated below - factually insolvent [liabilities exceed assets] in an amount of R359-million."
WHAT THEY SAID
Ndlovu and his former business partner, Marius van Zyl, denied the purchase price for the pot-manufacturing plant was inflated or that it was actually worth about R17-million.
Establishing a cookware plant in South Africa was Van Zyl's idea.
He brought Ndlovu on board to comply with the KGF's policies that funding will be extended to companies which comply with broad-based black economic empowerment (B-BBEE) regulations only.
They pointed out before committing to buy the plant, the KGF had dispatched an engineer to Turkey to evaluate it.
"The IDC had also conducted a due diligence exercise," Ndlovu said.
Van Zyl, a 40% shareholder in Savanna Collections, added one of the reasons the project collapsed was that Ndlovu had discarded the off-take agreement with Ikra and found local companies which had promised to buy INSA's pots.
"This would not have worked as Savanna had exclusive rights to market and distribute INSA's pots in southern, east and west Africa," he said in a phone conversation from the UK.
However, Ndlovu disputed Van Zyl's version.
The off-take agreement, he said, collapsed because Ikra had unreasonable demands. "We were unhappy about those. The INSA board did everything for the off-take agreement to be enforced."
Ikra did not respond to questions sent on Thursday morning.
KGF chief executive Lwazi Zondi said the investment in INSA had been above board and due diligence had been conducted.
"The exercise was performed internally, including a trip to Turkey by KGT and Brand Investments to assess the state of the factory equipment being sold, including an off-take agreement between INSA and Ikra."
IDC spokesperson Chimwemwe Mwanza told News24 following the collapse of the project, the financier conducted an audit, which "uncovered several breaches and lapses in corporate governance".
"The IDC remains steadfast in its pursuit to recover its investments lost either due to alleged fraud or breaches in corporate governance. And INSA is not an exception to this approach. We have accordingly commenced with legal proceedings to recover our investment."
Correspondence seen by News24 showed the IDC had now blacklisted the directors of INSA and Brand Investments.
Brand Investments has written to the IDC's executives threatening court action.
Through its lawyers, the company argued it was not involved in any fraud and it was its executives who alerted the IDC to governance issues.
"This was through the letter we sent to the IDC in September 2019. It was this letter that caused the IDC not to release part of the R60-million. We actually saved them money," said a company representative who did not want to be named.
In court papers, Brand Investment argued that through a series of misrepresentations, it was induced by the KGF to invest the R63.2-million in the project.
Among others, the company claimed Shabane and Adam misled it to believe PwC had conducted due diligence and INSA qualified for a R50-million black industrialist grant from the Department of Trade and Industry.
Shabane and Siqqid, who have both left the KGF, denied Brand Investments was misled.
"The allegations are untrue. Brand Investments are experienced investors to whom an investment opportunity was presented. They were advised to conduct their own due diligence. Siddiq even insisted that they go to Turkey to see the factory. The pros and cons of the investment were discussed with them in several meetings. They decided to invest in INSA out of their own will."
Adam added there was nothing wrong with him working for INSA after leaving the KGF. "There was no restraint of trade."
He declined to comment about the presentations which he and Shabane had made to Brand Investments, arguing his comments might pre-empt court issues which would be raised in the company's R63.2-million lawsuit.