The Malta Independent 25 June 2019, Tuesday

Corinthia controversy exposes questionable National Bank debts

David Lindsay Sunday, 10 February 2019, 10:00 Last update: about 5 months ago

While the controversial Corinthia deal has been placed temporarily in limbo as the government works out a new deed, what began as a planning controversy has now brought some National Bank of Malta skeletons out of the Group’s closet.

In fact, questions are now being raised over the original seed capital loans taken out by the Corinthia Group, and whether they had ever been repaid in full when the National Bank had been forcibly seized and transformed into Bank of Valletta in the 1970s.

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This newspaper can report that it has never been fully ascertained that the loans had been repaid in full since the files had gone missing from Bank of Valletta’s archives when court-appointed experts went to track down whether the loans, and several others, had been repaid or whether they had been simply written off as bad debt.

It is also being posited that the Corinthia’s debt being wiped off Bank of Valletta’s books after the National Bank was taken over was not the only case in which loans were cancelled out of the National Bank’s books so as to give the impression that the bank was bankrupt when it was, in actual fact, very much solvent at the time of its seizure.

It is now three years since a court judgement ruled in favour of the National Bank’s heirs, who are now waiting for the courts to calculate the compensation due.

But when calculating that compensation, the judge will also be weighing in on those loans dealt out to the Corinthia Group, of Lm1.2 million in 1970s money, which some claim is now worth many times that amount after accounting for inflation, interest and other factors. The figure at the end of the day could run into the eight or nine digit region.

It was Opposition Deputy Leader Robert Arrigo who earlier this week alleged in Parliament that the Corinthia Group or its affiliates had some Lm1 million in loans at the National Bank of Malta that were written off when the bank’s assets were being processed and transferred to Bank of Valletta.

The Group, however, maintains that the loans in question had been paid off in full, a fact that Bank of Valletta and court-appointed experts have been unable to verify during court proceedings.

And while the Corinthia Group was reticent to comment or provide documentation on the matter with this newspaper this week, sources close to the Group insisted that, “The Corinthia Group has always settled all loans that were due and payable to any of its lending banks. Any information that suggests the contrary is misconceived.”

But court documents, drawn up by a court appointed expert from auditors KPMG, and seen by this newspaper show that out of the three seed capital loans the Group had taken out back in the 1960s, only one of them had had its provision fully recovered.

That loan, granted by the National Bank, which was one of the first investors in the country’s tourism sector, to Corinthia Palace Hotel Ltd, was of Lm487,000, and the provision for that loan had been fully recovered, according to court documents.

But there are two far heftier loans that court appointed experts have been unable to ascertain whether they had been paid off or not: one to Pisani Bros + Co Ltd to the tune of Lm604,000, and another to Pisani Developments, for Lm654,000.

A court expert report presented during the National Bank court case had found it was impossible to declare how much of these two loans had been written off by the bank and how much had been settled, as the files were, somewhat curiously, found to be missing from Bank of Valetta’s archives.

In attempting to trace the fate of those loans, KPMG found that, with respect to both unsettled loans: “The debtor balance and the respective provision were written to nil as at 31 December 1974. A note was made that the account was partly written off and partly settled. However, no figures have been disclosed in this respect.

“In view of the fact that this account is connected to Debtor 2 (the Corinthia Palace Hotel Ltd), on our request head office [Bank of Valletta] asked the branch where the connected account was held for further information. The Advances Department concerned provided us with boxes, which according to account number references, should have contained debtor’s file. The relative file was however missing.”

The conclusion: “Although evidence available is limited, it would appear that the amount provided for amounting to Lm164,000 as at 31 December1974 was partially recovered. No documentation has been made available to quantify this amount.”

KPMG also considered the argument that since the company is still in operation is evidence that the amount provided for at 31 December 1973 was recovered in full: “We discussed this with the bank’s management responsible for recoveries. We understand that it is not uncommon for the bank in specific circumstances to come to an arrangement with debtors which at least enable them to recover a part of the amount owed.”

The conclusion for both loans is that they were partially recovered, but there was absolutely no indication of how much had actually been recovered at the end of the day.

This will be of little comfort to the National Bank shareholders, whose predecessors had not granted such terms or chosen to write off portions of the debt owed and, as such, if Bank of Valletta had written off the debts, it was to the detriment of the National Bank shareholders.

 

Corinthia loans just beginning

The government had claimed that there was no value in the National Bank when it was taken over and as such, no compensation was due to its owners, after accounts were allegedly tampered with to show that a number of loans including those given to the Corinthia were worthless as they would and could never be repaid.

While the Corinthia may very well be the case in point, there were a number of other loans that had been written off the books at the time, giving rise to speculation that, like the run on the bank had been engineered, so had the bank’s balance sheet been engineered to make it appear insolvent when it was, in actual fact, very much in the black.

Twenty years into the long-winding court case, a judge had appointed KPMG to look into the files held by Bank of Valletta to determine which of the larger loans at the National Bank had actually been repaid and which had actually ‘artificially’ turned bad as predicted by the government when the provisions of those loans were inflated after the takeover of the bank.

Eighteen loans had been investigated by the court-appointed expert, 10 of which had an 84.5 per cent recovery. The other eight, two of which pertain to the Corinthia, had missing or incomplete records and, to the detriment of National Bank shareholders, these had been listed as ‘nil’.

When quizzed in court, Bank of Valletta claimed it was not in a position to state whether the loans were repaid or not, the same conclusion as that reached by KPMG.

That leaves the two Corinthia loans and eight others in no man’s land, with no one knowing whether the loans were paid or how much had been paid – meaning whether the National Bank was bankrupt at the time of its takeover is highly questionable.

The situation is a tricky one: if the original loans were never repaid and had been wiped off the National Bank’s balance sheet, then the government of the time would have granted the Group an enormous boon to the detriment of the National Bank’s shareholders, who would be owed that money. 

If, on the other hand, the loans had been repaid in full, then the accounts that justified the takeover of the National Bank through an Act of Parliament in 1973 were patently false and Bank of Valletta, in actual fact, owes an awful lot to the National Bank owners’ heirs.

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