A Star investigation has uncovered a trail of corruption at corporate giant EOH. The Star can exclusively reveal EOH entered into clandestine transactions with one of its subsidiaries, Mehleketo Resourcing (Pty) Ltd.
The transactions took place at a time when Mehleketo was on the brink of liquidation. The investigation reveals the transactions were deliberately engineered to inflate the balance sheet of EOH, at the expense of the creditors of Mehleketo and possibly the South African Revenue Service.
Mehleketo was 100% owned by EOH and conducted business in the rail signalling industry. Mehleketo had been struggling to stay in business and EOH had funded Mehleketo to the tune of R150 million.
EOH is a JSE-listed company and is required to disclose the performance of its subsidiary companies as well as any funding provided by EOH to its subsidiaries and the prospects of recovery of shareholders’ money used to fund the companies.
In 2019, EOH identified certain of its businesses in its group that were no longer viable. One of them was Mehleketo. EOH planned to bring an application to court to wind up Mehleketo. The scheme to bring about the winding up was for another EOH subsidiary, Impact HR Resourcing (Pty) Ltd, to apply to the High Court to liquidate Mehleketo on the grounds of unpaid debt. The plan was to keep the liquidation process in-house, with EOH pulling the strings to ensure that its own rights were taken care of before the rights of Mehleketo’s creditors.
On November 13, 2019, Mehleketo had R3 287 752.87 in its bank account. The Star has seen documents that show EOH paid Mehleketo R68 173 012.50 in two amounts – R16 861 269.50 and R51 311 743.00. Mehleketo, in turn, repaid EOH R68 173 012.50 in five amounts, of R10m, R8m, R5 527 000.00, R3 113 671.50 and R1 532 007.00 on November 14, 2019. EOH round-tripped R68 173 012.50 between itself and Mehleketo over two days.
EOH instructed Impact HR Resourcing (Pty) Ltd to brief EOH’s attorneys, ENSAfrica, to attend to the liquidation of Mehleketo. Mehleketo was placed under provisional liquidation on November 21, 2019, just days after more than R130m had been round-tripped between EOH and Mehleketo.
While the Star has seen the liquidation papers, none of the information regarding the suspicious flow of funds was disclosed to the court.
The Star understands Sars is owed in excess of R39m
The Star asked the EOH board members whether they knew about the tax fraud and whether they had been made aware of the inter-company payments.
The Star asked the EOH directors about whether a reportable irregularity had been raised by EOH’s auditors, given the suspicious circumstances of the round-tripping of funds between EOH and the subsidiary just before its liquidation at the hands of another EOH subsidiary.
The Star also enquired about whether the board was briefed by EOH chief executive Steven van Coller, on the existence and rationale of the round-tripping and, if so, whether the board had approved Van Coller’s strategy and EOH had been in touch with the liquidators of Mehleketo, Cloete Murray and Ralph Lutchman.
The Star received a response from Aprio on behalf of Fatima Newman, the group chief risk officer of EOH.
EOH said that in late 2018, a new group treasurer was appointed to address the way inter-company loans had been dealt with by the group. As part of a balance sheet cleanup of its haphazard loans, EOH said it transferred and consolidated the inter-company loans into a holding company structure.
EOH said the regularising of the Mehleketo loans were, however, delayed due to a possible sale. When the sale fell through, EOH decided to liquidate Mehleketo as it was not able to settle its debts.
“EOH would like to advise that in late 2018, a new group treasurer was appointed for the first time in EOH, following the appointment of a new CEO. Legacy issues were identified in terms of how loans had previously been accounted for across the group via journal entries and not always through the settlement of cash transactions, as is accepted financial practise.
“Inter-group loans had been granted haphazardly and not in a controlled way through a treasury company such as that which exists in many large organisations. At this time, management started a process of cleaning up the balance sheet. Historically, EOH did not have a treasury function and had loaned money across over 270 wholly owned subsidiary companies, depending on which subsidiary had cash at the time. This meant that there was a complex set of loans between all the group subsidiaries. As part of the balance sheet cleanup, a process started whereby the inter-company loans were consolidated and transferred to a holding company, as would be standard in any large group.
“Mehleketo Resourcing (Pty) Ltd [(Mehleketo), a wholly owned subsidiary of EOH before the liquidation, was identified as one of the first companies to be addressed as part of this cleanup process, in early 2019.” the company said.
No answers were given by EOH on how the company preferred itself above other creditors and Sars. The company’s shareholders are tipped to question EOH’s management for an explanation of the Mehleketo at its AGM on Thursday.
The Star will report on the AGM.
Responding to questions, Sars said it was looking into the transactions.
“We appreciate the role played by media in revealing these things. We are seized with the matter and will respond accordingly in due time” Sars said.