Last month Moneyweb revealed that, according to Medscheme’s own court papers, the AfroCentric subsidiary faces a potential R1 billion legal liability. The company has, however, only made provision for R8.25 million on its balance sheet.
The amounts relate to a claim instituted by Neil Harvey & Associates (NHA) in 2007 in which it alleges that Medscheme copied source code from its software and misappropriated its intellectual property. The matter is under arbitration, although, even after 11 years, it has still not begun due to numerous delays.
In response to Moneyweb’s enquiries about whether the provision on its balance sheet was sufficient, AfroCentric argued that it has “raised appropriate provision” and that, in fact, it does not expect the NHA claim to materialise. It reiterated this stance in a SENS announcement shortly after the article was published:
“The Group’s legal advisors have consistently advised the Board that the NHA claim has no merit,” the company noted. “The AfroCentric Board has annually disclosed all details of the claim (subject to a confidential arbitration process) to its auditors each year since it was instituted in 2007 and that the Group’s 2017 Annual Financial Statements records as a provision, the maximum loss relating to a component of the claim, in the unlikely event of the claim being awarded in favour of NHA.”
It concluded the SENS announcement by noting:
“Finally it is important to note that in 2008, the shareholders of NHA sold NHA to a company in the Liberty Group and have not denied that NHA is today merely an empty corporate shell.”
Problem No 1
While the merits of NHA’s claim are unclear since the arbitration process is confidential, this final statement is problematic for two reasons.
The first is that Medscheme’s own court papers filed in a recent High Court application relating to the arbitration note that NHA has, in fact, provided it with a written denial that it is an empty corporate shell. The papers relate to an application by Medscheme to compel NHA to provide security for costs in relation to the arbitration, which the company lost.
Medscheme’s heads of argument record that in a letter received from NHA’s attorneys in July 2015:
“NHA advised that it ‘is still trading and currently has 717 276 members on Medware in South Africa, Uganda and Nigeria’.”
When Moneyweb raised this with AfroCentric, it acknowledged the contents of this letter. However, the company’s head of legal, Billy Mokale, argued that:
“There are ample allegations supported by documentation in the Medscheme founding affidavit … which demonstrate that NHA is not trading. NHA has not refuted this evidence under oath nor proffered any document to indicate that … it remained the owner of the relevant software at times materially fundamental to the vast bulk of its alleged monetary claims.”
It is questionable whether that explanation aligns with the original SENS announcement, which does not qualify that there has been no denial under oath, or that NHA has not proffered any evidence. It simply states that there has been no denial.
Moneyweb pointed this out to the JSE, which in turn sought an explanation from AfroCentric. The exchange was however satisfied with the company’s response, noting that: “it is not immediately clear to the JSE that the company made a false statement in relation to material facts”.
Problem No 2
Whether AfroCentric published a misleading statement or not is however secondary to the question of why it felt it relevant to raise this point at all. It does not explain in the SENS announcement why it should matter whether NHA is an empty corporate shell or not.
In its application for security for costs, Medscheme argues that if NHA is an empty corporate shell it raises the possibility that its directors are pursuing a case in which they have “everything to gain and nothing to lose”. This is because if they are successful they will win a large award, but if they lose there are no assets in the company with which to pay Medscheme’s costs.
However, NHA’s directors have undertaken personal liability for any adverse costs order. Mokale acknowledged this to Moneyweb.
The judgement handed down by Judge Lamont in the Gauteng High Court in the security for costs also addressed this issue:
“There is no evidence that the stakeholders [of NHA] have launched the claim in the name of the claimant to avoid personal liability nor evidence that they seek to evade personal liability for costs,” Lamont wrote. “It is common cause that the claim made by the claimant is properly made by the entity both as to the person making the claim and to the causes of action it is prosecuting.”
Moneyweb asked AfroCentric for an explanation as to why it would, under these circumstances, still feel it relevant to raise the question of NHA’s denial that it was an empty corporate shell. The company did not provide a response.
In this context, NHA’s own explanation for why it had not provided a denial under oath is noteworthy. Its founder, Neil Harvey, told Moneyweb that:
“We didn’t deny it because we didn’t feel that we had to deny it,” Harvey said. “NHA was not an empty shell.”