Business Practices Committee Report 80 Propalux 46 Ltd 7. A further meeting with Mthombeni on 17 April 2000

 

 

At this meeting an attempt was made to discuss with Mthombeni the documents given to the officials at the meeting on 29 March 2000 and to acquire further information. Aspects which were discussed included the share register, the Propalux "family", the commission register, the commingling of the funds of the various companies (Propalux, Sekheleng Propalux, L Mthombeni and Associates and L M Fibas) and Mthombeni, the amount owed to investors or shareholders, Mthombeni’s attitude towards company expenses and whether the shareholders or Investors could be refunded out of income generated by Propalux’s assets.

 

The share register: When asked about the share register of the company, Mthombeni again produced the two "books" referred to during the meeting on 23 February 2000. These "books" contained the names of the investors, the amounts invested and the maturity dates of the investments. The "books" were now updated to 9 December 1999 and a spot check revealed that Propalux took R4 755 300 from 4 October 1999 to 9 December 1999. Thus from 1 August 1999 to 9 December 1999 Propalux accepted R7 591 800 as loans or shares from consumers. The "books" were ordinary A4 ledgers with hard covers. The names of the investors were written in handwriting and the following were the headings under which the names were written: "Number", "Initial", "Surname", "Investment Date", "Maturity Date", "Amount Invested" and "Amount at Maturity".

 

The Propalux "family": Mthombeni tried to explain at length that it was immaterial whether the clients of Propalux bought shares in the company or whether they advanced loans to the company. They were all members of Propalux and regarded themselves as members of one big family. Mthombeni tried to explain that the culture of his clients, exclusively from the African community, shaped the philosophy and operation of Propalux. It was explained to Mthombeni that the Registrar of Companies does not have on his register Afrikaans, Chinese, English, Venda or Zulu companies which have to comply with different versions of the Companies Act, No 61 of 1973, as amended, but that all companies registered in South Africa had to comply with the provisions of a single Companies Act. Mthombeni, however, continued to argue that all that interested his clients was that they would be refunded their money, albeit shares or loans. It was explained to him that in terms of the Companies Act, dividends on shares could only be paid out of profits and that a company may only buy shares back from shareholders under certain conditions.

 

A resolution was taken by the board of Propalux to the effect that directors could withdraw money from their "shares". Resolution 11, undated, reads as follows:

 

"Directors who draw some funds from their shares their share certificates can be changed or a new share Certificate be given. A share allotment should be adjusted before only changes takes place and the borrower should give notice in writing 30 days prior to a material change".

 

The argument that shareholders, investors and directors were all "members" of Propalux was reflected in resolution 13, again undated, taken from the board minutes. This resolution reads:

 

"The members agreed that the current share capital be increased to R2 million. However it was obvious that a certain number of shares have not been paid in full. The estimated available number of outstanding was +-580 000. So new investors will crab the remaining lot" (Own underlining).

 

Undated minutes of a meeting held at "the opening of Nasua Building" also reflected the "family" philosophy of Mthombeni. The following four paragraphs are quoted from these minutes.

 

"Speech by Mr Mthombeni

 

He thanked everybody who came, he also point out that the business is for black is here to help black people to improve their lives. The company has improved compared to other companies on the black empowerment.

 

He also noted that the previous education, which was given in our country, gave black people problems than helping them but the Company will help them.

 

The company will also help its members in Transportation, Finance, and Education for the kids, etc.

 

The company is all about helping each other meaning even the members will have to help each other. He also talked about those who were in the business with him and left the company, at the moment they are suffering and other are poor so the is no place like Propalux Sekheleng."

 

Investors and shareholders are required to complete a form called a "Letter of Appointment of Financier". A copy of this unusual document is reproduced below. The words and letters in the font Lucida Handwriting and underlined are those which are to be completed by the "financier’ and the "consultant".

 

"LETTER OF APPOINTMENT OF FINANCIER

 

 

We hereby confirm the appointment of Mr/Ms/Mrs Mogabe as our FINANCIER; as the company requires a substantial financing to carry out its operation, we however pledge ourselves to the following terms and conditions. The company needs a financial boost of R50 000 (Fifty thousand Rand), in the next twelve months.

 

We however pledge ourselves to refund the amount 1.5 times, meaning the amount of R50 000 (Fifty thousand Rand), will yield the investor a guaranteed of R130 600 (One Hundred and Thirty Thousand and Six Hundred), this amount is the gross, which includes the investment portion plus the interest.

 

We also acknowledge that this investment is not subjected to risks/upswings/downfalls/ fluctuations in the operation, this is a sum fixed and will he refunded in full after thirty nine months months or years.

 

To confirm the above undertaking a letter of Loan for the (share certificate) will be signed and kept for the time illustrated. And can only be used if the above sum of R130 600 (One Hundred and Thirty Thousand and Six Hundred) is not repaid out of the proceeds of the company in due time frame.

 

We further renounce the investor’s right to claim for more if the company proves beyond doubt that it can put its potential abilities, expertise, strengths to fullest and generates more income, e.g. Five times more, therefore the investor shall does accept the distribution share as fair and equitable just as the company shall be expected to pay the full amount if it does not meet it’s obligation.

 

The company shall prefer that the amount loaned to be paid directly to investor’s account or bond. The option of receiving regular income of NIL can be paid upfront monthly but shall be deducted from the investor’s maturity capital.

 

Last but not least we would like to have the opinions or recommendation, changes from the investor and we would like to have the advice of competent, knowledgeable, expert, professional personalities. We will appreciate that if it’s not going to harm/change the above undertaking unreasonably or unknowledgeably or make the above business proposition unworkable under our limited financial resources strengths or abilities.

 

We believe that this proposition is going to benefit the company very much as well as the investor, therefore we are looking forward for the co-operation and commitments from both of us.

 

The investor Mr/Mrs Mogabe shall be entitled to loan from this investment immediately after 6 (six months), so that he/she can still pursue his life style however all the monies he shall have received will be deducted.

 

Thank you for considering this propositions favourably.

 

Yours faithfully,

 

L. M. MTHOMBENI

 

Signed at Vanderbijlpark this 14 day of April 2000

Signature: Director of Propalux signed other Director of company Director signature

Investor: Maria Mogabe

Signature: Signature of Maria Mogabe

Place: Vanderbijlpark        Witness:        1.

         2.

COMPANY OFFICIAL STAMP:

 

THIS CONTRACT SHOULD ONLY BE SIGNED AT THE COMPANIES REGISTERED OFFICE. MONEY FROM THE INVESTOR SHOULD BE PAID AS SOON AS SOON AS POSSIBLE BECAUSE THE PAY OUT WILL BE MADE ON THE 12 July 2003

INVESTOR’S BENEFICIARIES:        1...........................

 2...........................

 

In the "Letter off appointment of financier", undersigned by Mthombeni, the investor or shareholder is "appointed" as Propalux’s "financier" because the company requires a "... substantial financing to carry out its operation". The pledge to refund the invested R50 000 1.5 times (50 per cent annual interest rate), after 39 months, should amount to R131 250, but Propalux calculated it at a "guaranteed" R130 600. Investors are led to believe that the investment is not subject to risks and "downfalls". This cannot be said for any investment.

 

The document does not make it clear whether the investor grants a loan to Propalux or whether she bought Propalux shares. It states "To confirm the above undertaking a letter of Loan..." but in the same sentence it proclaims "... for the share certificate...".

 

The paragraph "We further renounce the investor’s right to claim for more if the company proves beyond doubt that it can put its potential abilities, expertise, strengths to fullest and generates more income, e.g. Five times more, therefore the investor shall does accept the distribution share as fair and equitable just as the company shall be expected to pay file the full amount if it does not meet it’s obligation" is incomprehensible.

 

The request to the investor that "... we would like to have the opinions or recommendation, changes from the investor and we would like to have the advice of competent, knowledgeable, expert, professional personalities" is probably one that few companies would insert in their share application forms.

 

The document further clearly states that the investor shall be entitled to loan from this investment immediately after six months, so that "... he/she can still pursue his life style however all the monies he shall have received will be deducted".

 

The commission register: Officials of the Committee were presented with the commission register or part of the commission register. This consisted of 11 A-4 pages. It contained a handwritten list of the names of the investors or shareholders, the amount invested and the consultant or agent who solicited the investor. A casual examination of the 11 pages revealed that directors of Propalux, such as Motshudi Jocobeth Sealanyahe and Daniel Tjelele, also acted as agents. Other directors may also have been involved.

 

As already stated, agents received a commission of 10 per cent on the amounts invested by consumers or investors who consulted them. The commission was reduced to three percent by Mthombeni as from 1 March 2000.

 

The commingling of the funds of Mthombeni, Propalux, Sekheleng Propalux, L. Mthombeni and Associates and LM Fibas Padec: The first page of a "Memorandum of Agreement of Sale" reflected that Mthombeni bought Meyerton Victuallers and investments CC (CK 86/089836/23) and Meyerton Hotel CC (CK 95/03925/23) in his own name. Mthombeni readily agreed that he bought the close corporations in his own name with Propalux funds. It was difficult to establish whether Mthombeni was pretending that he did not understand that he, Propalux and the other companies were separate legal entities or whether he sincerely believed that he was Propalux and that all properties (including money) owned by the various companies also belonged to him.

 

Mthombeni did not appear to be hiding anything from the investigating officials. He informed the officials that he bought a shopping center in De Deur for himself. On 24 February 2000 Mthombeni signed a Propalux cheque for R750 000 in favour of the seller of the shopping center. The cheque was not co-signed by anyone else. The R750 000 included a deposit of R600 000 and the payment of "... the loan for three months".

 

At other times the directors resolved that Mthombeni be authorized to sign all the necessary documents to give effect to a particular acquisition. For example, an undated extract of a meeting of directors of Propalux read:

 

"Resolved

 

(i) that the Company buy and take transfer of the following property, namely Holding 152, Unitas Park Agricultural Holdings, Registration Division IQ, Province Gauteng, in extent 1,6098 hectares; from Pro-Rep Building CC (CK 92/27708/23) for an amount of R300 000

 

(ii) that Lucky Motlalepula Mthombeni in his/her/their capacity as director of Propalux 46 Limited (97/05827/06) be and is/are hereby authorised to sign all the necessary documents to take transfer and all other documents which may be required to give effect to the aforegoing".

 

The amount owed to investors or shareholders: Due to an absence of proper accounting records, Mthombeni could not say with any degree of certainty what outstanding amounts were owed to investors or shareholders. He ventured a guestimate of R7.5 million. When asked by an official where the funds will come from to repay the shareholders or investors in the company should he meet with a fatal accident, he said that had taken out a life policy of R11 million rand and that the beneficiary was Propalux.

 

Mthombeni’s attitude towards company expenses: During the discussion about the unavailability of the annual financial statements, Mthombeni expressed the view that Propalux paid its own costs such as salaries and rent and that "... we do not claim from the Government as other companies do". This naive view merits no discussion. It can be said with certainty that the chaotic state of the financial records of Propalux, and the other companies, prevented a conclusive assessment of its financial position.

 

Could the shareholders of and investors in Propalux be refunded out of income generated by Propalux assets? Mthombeni was adamant that the outstanding amount owed to shareholders and investors could be generated from Propalux assets and the assets registered under his own name. He agreed to compile a register of the total assets of Propalux, the other companies and himself. A list of the total assets was not available when officials visited Mthombeni on 24 April 2000.