Bankrupt but boom!

The Colombo bourse is such that even technically bankrupt companies can boost shareholder value as share price of Hotel Developers (Ceylon) Plc (HDEV) yesterday rose almost close to its all-time high.

The company’s stock price peaked to an intra-day high of Rs. 155, just short by Rs. 10 from its all-time high. However it closed the day at Rs. 138.90, still up by Rs. 3.10 whilst on Thursday it gained by Rs. 5.80 from Wednesday’s close of Rs. 130.

In comparison to previous week’s close, yesterday’s finish reflected an increase of Rs. 3.90 whilst a relatively high 229,500 shares were traded. Last week only 5,600 shares traded.

Brokers said the renewed demand on HDEV and resultant price increase was on account of investors treating Government takeover of Hilton Colombo land positively. However, other analysts were puzzled over someone paying a premium for a stock of a company which is bankrupt and asset-less in addition to being saddled with Rs. 12 billion debt and mounting losses.

HDEV has been trading on the Default Board for nearly 10 years and there are no published audited or provisional accounts since the 1990/91 financial year.

Analysts are terming the company bankrupt because it is saddled with Rs. 12 billion debt and even if the building (Hilton Colombo) is valued at Rs. 5 billion, HDEV still has a huge debt.

“Following the Government’s decision to take possession of the land, HDEV has no land. This and other negative features make it a shell company,” they opined.

Huge debt and recurring losses have made HDEV a negative net worth company with its capital eroded. Legal experts said that these unfortunately make the Board of Directors personally liable under the Companies Act.

HDEV is 64% owned by the Government, with 28% owned by Japanese collaborators and 8% owned by the public.

The Hilton Hotel was built on the basis of Government Guarantees, which had been issued in 1984. In the early 1990s a former Director, Chartered Accountant, Nihal Sri Ameresekere successfully established in the Supreme Court a prima-facie case of fraud in the construction of the hotel.

Japanese collaborators requiring a settlement of this litigation in 1995 wrote-off Japanese Yen 17,586 million, then equal to US$ 207 million, from their claims from the Government under the Government Guarantees which had been given to them.

Analysts said HDEV was to be financially restructured in terms of the settlement, however for various reasons this had not been implemented. As a result, the Government from 1997 had been advancing loans to the company at Treasury Bill rates to pay the balance monies to the Japanese collaborators, after the above write-off.

As reported to Parliament in 2009 by the Ministry of Finance, the total advances and interests defaulted by HDL to the Government as at 31 December 2008 and updated to December 31, 2010 would amount to a default to the Government of Rs. 11.2 billion (see table).

A further Rs. 1.52 billion is payable to the Japanese collaborators and Daily FT learns that this had been paid recently by the Government, thereby making dues by HDEV to the Government to be around Rs. 12.5 billion.

In addition to issuing Government Guarantees for the construction of the Hilton Hotel, the UDA had made available seven acres of land on a 99-year lease to Cornel & Co. Ltd., at very concessionary terms, to be paid interest free over 33 years.

Cornel & Co. Ltd. had defaulted in the instalment payments and repudiated the lease agreements, resulting in the Attorney General advising that the under-lease of land to HDL by Cornel & Co. Ltd. was accordingly null and void.

Analysts opined that in such circumstances, on the advice of the Attorney General, the UDA in terms of the State Lands Ordinance had surrendered the land back to the Government, with surrender of State grant instruments having been executed in 1999.

Since then HDEV had continued to occupy seven acres of prime State land without making any payment to the Government for its use. This, it was argued, was tantamount to the illegal occupation of State land.

In such a situation, the Government in terms of the State Lands (Recovery of Possession) Act is obliged to take possession of these seven acres of State land. This is what happened recently as UDA had surrendered the special grant deeds to the Government.

Incidentally Ameresekere in 2006 filed a petition for the winding-up of HDL on grounds of bankruptcy. After the enactment by Parliament of the Companies Act No. 7 of 2007, which came into operation in May 2007, it was unlawful to continue to operate a company which was unable to pay its debts as they fell due.

HDEV’s share capital of a mere Rs. 452 million has been completely eroded by an estimated accumulated loss of around Rs. 11 billion. Some estimate HDEV has been operating incurring losses of over Rs. 1 billion per year for each of the last four years. However, this couldn’t be verified officially.

Nevertheless, Directors of the company who continued to operate the company under such circumstances in terms of Sections 219 and 375 of the Companies Act become personally liable for all the debts and could be sued for same.

Some legal sources questioned whether it was proper for the Government to have permitted the Directors of HDEV to have continued to operate violating the provisions of the Companies Act and perpetrating offences in terms of the act.

Country’s premier hotel badly needs upgrade, expansion

With the boom in post-war tourism and intense competition, including an upcoming brand new facility by Shangri-La, Hilton Colombo badly needs an upgrade and expansion, leisure industry experts said.        

As per the original plans, a third tower of hotel rooms was to be constructed  within Hilton property in addition to harnessing the land behind the Treasury building, to be developed with a high rise modern multi-functional complex.

However, they said the impasse between the Government and Hotel Developers (Ceylon) Plc, the owning company, as well as legal issues had previously deprived or delayed refurbishment and expansion.

Industry sources believe the recent Government takeover, if followed by proper procedures, could infuse a new lease of life to the hotel and property either in partnership with a strategic investor or special funding.