Lupepe, Madondo clash over Merlin
… as bruising legal battle looms
BULAWAYO — Delma Lupepe, the owner of Merlin Limited, could be headed for a bruising legal fight with the company’s judicial manager, Cecil Madondo, for attempting to bring investors into the textile business through the back door, the Financial Gazette’s Companies & Markets (C&M) can exclusively reveal.
Lupepe took over Merlin in 2004 through his investment vehicle, Maydeep Investments (Private) Limited, after the troubled textiles giant was discharged from judicial management.
But in December 2011, the company relapsed into judicial management for the second time inside a decade, with the Bulawayo High Court appointing Madondo of Tudor House Consultants to lead the process.
Madondo had earlier been credited for turning around Merlin after it slipped into provisional liquidation in 2002.
At least US$25 million is needed in fresh capital to bring the company back to life, spread over a period of five to 10 years.
A report presented by Madondo at one of his meetings with creditors postulates that Merlin immediately needs US$1, 5 million in the short-term to purchase raw materials and refurbish plant and machinery to start production.
A further US$3,5 million would allow for major repairs and maintenance to bring the company back to near full capacity.
Thereafter, the new investor must replace obsolete plant with state-of-the-art machinery and also set up a ginning plant to complete the production cycle, which would cost an estimated US$15,1 million.
The investor would also require another US$5 million to discharge the company’s liabilities.
A fortnight ago, Lupepe had told C&M that Bulawayo’s oldest textile company would resume operations next month, having succeeded in roping in a new investor.
“We are looking at re-opening in three months time, which I can assure (you) will happen. We have secured capital injection to the tune of US$30 million and it is already sitting in the bank,” Lupepe said.
“I will be doing final meetings with our investors on Tuesday and will then be in a position to give further details. The investors we have secured are not local; they are from outside the country,” he added, without disclosing the identity of the investors.
But in a surprising twist to the events, the judicial manager seems to be in the dark pertaining to the discussions.
While permission was sought in January 2015 and granted for the potential investor in Merlin to access the company’s premises, no such visit has taken place.
And yet Lupepe claimed recently that money has already been secured from the investor, and is “sitting in the bank”.
This appears to suggest that a deal could have been struck between Maydeep Investments and the new investor behind the judicial manager’s back or that the discussions could still be in their infancy.
While welcoming efforts from all concerned to bring in the required capital to resuscitate Merlin, Madondo this week cautioned that potential investors must not be brought in through the “backdoor”.
The unilateral decision to look for foreign investors by Lupepe outside the participation of the judicial manager could therefore provide possible legal hurdles to any deal being sealed in the future.
“As the provisional judicial managers, we appreciate any efforts from anyone to bring investment to the company and then remove the company from judicial management in terms of Section 314 of the Companies Act, but this must be done through the right channels and within the proper legal framework,” said Madondo.
“The investors must carry out their due diligence under the supervision of the office of the provisional judicial manager. It must be noted that bringing in investors through the back door would be unethical and unlawful; such deals would be null and void. Interested investors should be approved by both creditors and shareholders and then sanctioned by the High Court of Zimbabwe,” he added.
Asked to comment on whether Madondo was involved in the process of finding a new investor for Merlin, Lupepe alleged this week that the judicial manager had been unreachable and there had been no communication between them for five years.
“He (Madondo) has never contacted me in five years; he has not been in touch with me. I am now trying to revive my company. I cannot get hold of him and we have given up trying to contact him altogether,” said Lupepe.
Madondo said he was the only one with an obligation to protect the assets of the company from attachments, writs of execution and any other action in the best interest of creditors and other stakeholders in terms of the High Court Order and as stated by Cillers & Bernade, Corporate Law, 3rd Edition (2000).
“As it is the task of the judicial manager to restore the company to being a successful concern, he must be allowed to run the business of the company as normally as possible. On the other hand, the fact that the company is unable to pay its debts or meet its commitments, means that the protection of the interests of creditors enjoys more attention than in the case of ordinary companies, and that certain principles of insolvency law are applied,” said Madondo.
He said Merlin collapsed due to “tragic failure of leadership, revealing that upon taking over the business, Maydeep did not follow the plan recommended by the judicial manager as provided for in terms of section 314 of the Companies Act.
Under the plan, Maydeep was required to capitalise the business in the short, medium and long-term through a five year model that would have culminated in the replacement of obsolete machinery and equipment with new modern technology.
“This negatively affected the company’s success coupled with gross-mismanagement of funds and lack of effective corporate governance structures by the new board led by Mr Lupepe. The company was run down with machinery not being serviced or repaired, resulting in the company halting operations towards the end of 2010,” he said.
Madondo said the company was already closed when it was placed under judicial management due to lack of working capital to repair the worn out machinery and to buy raw materials.
He alleged that there have been attempts to frustrate his efforts to revive Merlin Limited.
“When the workers union applied for judicial management and nominated me as the provisional judicial manager, the shareholders tried to interdict the appointment through court proceedings without success. The shareholders continued to undermine the efforts of the provisional judicial manager through various articles in the newspapers…saying that the judicial manager had failed to bring investors to resuscitate the company and that they have secured a Japanese investor expected to come in January 2015,” he said.
Madondo insisted that the company can still be turned around if it succeeds in getting the required capital injection.
He said liquidating the company would be against the economic revival plan set by the government under the Zimbabwe Agenda for Sustainable Socio-Economic Transformation, and this would be a major blow to the textile industry and all stakeholders of the company.
He said he was determined to find a suitable investor for the company and is willing to work with the shareholders, creditors and other stakeholders to revive the company.
“In addition, various efforts were made to bring investors on board including publishing an expression of interest document to attract investors which was again militated by the attitude of the shareholders and a series of court applications. We successfully negotiated with suppliers of other consumables who expressed willingness to supply on terms but, however, due to lack of working capital for repairs and maintenance and for purchasing major raw materials, the company could not resume operations,” he said.
“We also approached CABS for funding under Distressed Marginalised Areas Fund and engaged the Ministry of Industry and Commerce to assist Merlin Limited as one of the companies that need to benefit from funds earmarked for the textile industry. We have engaged various stakeholders in the financial sector to assist in securing credible investors for Merlin and we remain determined to ensure that we secure a suitable investor for Merlin,” added Madondo.
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