Banks DIH board made an error in buyback of shares

A letter by me published in the Stabroek News of December 11, 2016, on the decision by Banks DIH Limited to buy-back from Banks Holdings Limited, 150,138,464 shares in Banks DIH Limited provoked a four page response from Chairman and CEO, Mr Clifford Reis. As is usual for persons unwilling to deal with facts and arguments, Mr Reis went into the dangerous territory of questioning my integrity and understanding of legal documents and commercial law. He knows or ought to know me better.

Mr Reis pointedly refers to a Memorandum of Understanding entered into between Banks DIH and Banks Holdings Limited which he claims I do not understand. Forget for a moment that Banks DIH Limited has never released to shareholders a copy of that MoU. Mr Reis not only chooses to selectively and incorrectly refer to that MoU but faced with tough questions, he decided to speak of the “implied terms” and inserts into a simple, straightforward MoU words that are not there.

Mr Reis cites unnamed “legal and financial advisers” for what is a costly, damaging mistake by him and the Board of Directors he leads. The simple fact is that Banks DIH was under no obligation to repurchase any shares. Here is the relevant portion of the MoU governing the buyback of the shares.

“Banks Holdings Limited may not dispose of the shares it possesses in Banks DIH Limited as a result of this share transfer unless the first option to purchase those shares has been offered to Banks DIH Limited. The selling price of those shares shall be based on the net asset value of Banks DIH Limited as reflected in its most recent annual report or market value whichever is greater.”

It is not hard to understand that the MoU gave Banks DIH Limited a right of first refusal, not a duty to re-purchase the shares, and that the pricing formula for any possible transaction was set out in the MoU. This is no big science requiring the expertise of a major international firm; the numbers are easy to determine. The net asset value is the net book value divided by the number of shares, while the market value of the shares of a publicly traded company is the price at which the shares are traded on a recognised stock exchange, in our case GASCI.

An exception would be a case where there is a takeover bid with potential bidders trying to outdo each other for their own reasons, for example to get control of a competitor or access to backward or forward links. No such circumstance applied in the case of the Banks DIH buyback.

There was absolutely no reason for Banks DIH to buy-back the shares in the first place and worse, to engage in borrowings to pay for those shares, as Mr Reis has now admitted.

Mr Reis also admitted that the transaction was a Guyana dollar transaction and not US dollar transaction as the company had led the public to believe. He must now go the further step and tell shareholders and the public about the role, if any, of Banks DIH and its banking subsidiary in acquiring foreign currency for the transaction. Or whether Banks Holdings Limited, a Barbados company, came into Guyana, purchased twenty-six million United States dollars and transferred it to Barbados using one of the commercial banks. If that is so, those who were responsible for the purchase of US$26 million of currency either did not care or did not understand the implications of that purchase on the exchange rate of the Guyana dollar.

Finally, my response to Mr Reis’ snide remarks about misconception, seasoned commercial lawyer, misinformation, lack of knowledge and disguised reference to integrity is to recall an incident on March 5, 2003.

It arose out of a column I had done in the Sunday Stabroek (March 2, 2003) and my threat of legal action against Banks DIH Limited if it persisted with holding an improperly convened 2002-03 AGM. On March 5, Stabroek News published a letter by Mr Reis as Chairman claiming that Banks DIH had given proper notice of its AGM. Yet, during the very afternoon, I received a visit from two officials of the company offering inducements (not actual cash) if I withdrew my threat. I refused. The company then postponed the meeting, admitting improper notice.

I bear no malice or ill-will against Banks DIH Limited which I respect as an icon of the vision and entrepreneurship of Peter D’Aguiar. This share buy-back is a colossal blunder that stains the record of the company and drained it of liquidity. But I doubt the directors have the courage to admit their error.

Garnishment and Distress Proceedings

Two proposals announced in 2017 Budget Speech – inserting into the Income Tax Act distress proceedings similar to the provision in the Value-Added Tax (VAT) Act, and garnishment of funds in bank accounts for the settlement of tax arrears – have caught the national attention. The discussion has not been helped by the misinformed and misguided statements in the media, even by columnists and persons who have a duty to be better informed.

That failure which is the cause of much of the confusion, misinformation and “noise”, has led to a situation whereby two very different provisions are conflated and wrong premises are used to defend or justify the two proposals. They should be addressed separately. Here is why.

The terms garnishment and distress are of significant legal and constitutional import and depending on circumstances may have different application to action against the person (in personam) and against the thing or property (in rem). As these matters apply to our Constitution they also raise the tension, if not the clash, between, on the one hand, Article 65 which grants to Parliament the power to “make laws for the peace, order and good government” and on the other hand, Article 142 which protects property rights subject to exceptions, as well as Article 8 which makes void any law inconsistent with the Constitution.

But first a piece of history. There was no garnishment provision in the original British Guiana Income Tax Ordinance passed in 1929. That came thirty-three years later as one of the measures introduced by the PPP Government in Act 11 of 1962 to give effect to that year’s Budget presented by C.R. Jacobs Jnr. but which came to be known as the Kaldor Budget. Persons from my generation will recall that that Budget was described by then Opposition leader Forbes Burnham not as the cause of war but the occasion for it. Of course, being an erudite lawyer, Burnham used the Latin for the aphorism although as the events unfolded in February 1962, the consequences were far from learned.

So what is now being proposed is the crude strengthening of a measure to which the PNC and the United Force were violently opposed and were prepared to do anything to block it, among others. Our columnists and self-serving and opportunistic politicians who have had an epiphany about the illegality and evils of tax evasion being such a bad thing may wish to go on the internet and google Wynn-Parry Report.

Both distress proceedings and garnishment are provided for in the VAT Act (section 49 and section 51 respectively) although instead of the word Garnishments used in the marginal note in the Income Tax Act, the corresponding marginal note in the VAT Act is “Recovery of tax from third parties”.

While the provision in the Income Tax Act pre-dates the 1980 Constitution and the VAT Act came much later, both are subject to the Constitution. And while the Constitution naturally allows an exception to the protection of property Article in the case of taxation, (otherwise how would the government be able to finance public services?) a taxing statute or a provision therein may be set aside as unconstitutional if it is confiscatory, discriminatory, disproportionate, or provides inadequate protection machinery for the taxpayer.

Perhaps somewhat confusingly, section 49 of the VAT Act speaks of both “distress proceedings” and “executing distress”. Distress is a summary remedy by which a person is entitled to take possession of the personal chattels of another without legal process while execution imports a legal process to give effect to a judgement of the Court. Moreover, section 49 is directed at goods, including perishable goods and allows the entry into premises accompanied by a police officer. Clearly, the Minister of Finance could not be referring to this section in discussing the expansion of garnishing funds from bank accounts.

The garnishment provisions of the VAT Act in fact mirror those of the Income Tax Act and have no direct or indirect reference to a bank account. Since the Minister wants to harmonise the VAT and the Income Tax Acts in these enforcement procedures, it may be presumed that the VAT Act will also be amended in this regard.

With respect to garnishment under the VAT Act, it is highly doubtful that the Commissioner can lawfully apply the provision before he has made a proper assessment on the taxpayer and after the taxpayer has exhausted his right of objection to the Commissioner, and appeals to the VAT Board of Review and to the High Court. Of course, if the taxpayer refuses to exercise his statutory rights of appeal, or to seek a remedy by way of judicial review, the Commissioner General would be within his rights to pursue the debt.

Absent from the discussion too, is any recognition of two other drastic procedures for recovery provided in the Income Tax Act. The first is under section 97 providing for the enforcement of a tax debt by way of parate execution, a Roman Dutch legal concept generally available to banks. As applied in the Income Tax Act, parate execution allows for the relatively speedy process for the disposal of property by the GRA. The second is under section 101 which provides that a certificate registered with the Registrar of the Supreme Court has the same force as a judgement of the High Court. The Act is unclear whether the Commissioner is required to avail himself of the section 101 process before seeking to apply 102. But instructively, section 101 is also a product of the 1962 Act referred to above.

It is probable that the idea for the introduction of distress proceedings into the Income Tax Act arose from someone who is unaware of sections 97, 101 and 102 of that Act and of the Rules of the High Court dealing with enforcement of judgements. The Commissioner General has confirmed that the distress and garnishment provisions in the VAT Act have never been applied and we know as well that the Income Tax provisions for parate execution under section 97, for a certificate under section 101 and for garnishment under section 102 have not been applied in all or the better part of fifty-four years, so why should anyone believe that strengthening any one of them is necessary? Does Prime Minister Moses Nagamootoo, the leader of the National Assembly know these things or wants to know them, insulated as he is from the day to day challenges of the working class whose interest he once claimed to champion?

The measures purportedly to improve tax administration seem more designed as a substitute for effective, professional administration and constitute a textbook case of draconian legislation. To use the words of the Sri Lankan Bar Association in similar circumstances, the proposed legislation is “discriminatory, draconian in their nature and harsh and superfluous”, grounds under which it successfully brought a constitutional challenge.

Provisions of the various Tax laws already give the GRA enormous powers for the administration of the Act and the collection of taxes. Its new head is familiar with the successful operations of those laws, having been part of the tail end of the glorious days of the Inland Revenue Department when it was respected for its professionalism, impartiality, competence and independence, characteristics which no doubt enabled it to operate effectively using the existing laws.

The new head does not need new, additional and draconian powers to be effective. He needs to apply the existing tax laws without fear or favour, with the same deference to big and small, and undaunted by touchable and untouchable alike.

Why was $36.79 per share paid for shares in Barbados Banks DIH when the publicly quoted price is $22.5 per share?

Banks DIH Limited has just disclosed that the 2005 Memorandum of Understanding for a mutual share investment agreement between itself and Banks Holdings Limited of Barbados has now been substantially reversed. Almost every year since 2005, the Chairman and directors of Banks DIH have touted the virtues of the agreement, the synergies from the relationship, and benefits in export sales to both companies.

Keen observers also noted enhanced procurement and governance practices with the presence of nominees of the Barbados company having a place on the Board of Banks DIH.

So it was with some surprise that the public learnt, even before the shareholders did, that in 2015 Banks DIH had sold its shares in the Barbados company. With no reason offered for walking away from the greatest opportunity to expand the export market for Banks DIH products, speculation circulated about the true motive of the Banks management.

At the time, a Brazilian company, through its St Lucian subsidiary SLU Beverages Ltd, and Ansa McAl of Trinidad and Tobago were engaged in a battle to gain control of Banks Holdings Ltd of Barbados.

A couple of days ago, in what was described as an Amended Press Release, the Executive Management of Banks DIH announced that it had repurchased 150,138,464 of its shares owned by the Barbados company. It was disclosed that the price of $36.79 per share was based on a valuation conducted by PriceWaterhouseCoopers (PWC) in December 2015.

The full page ad volunteered that throughout the “whole process” the management was guided by the company’s financial and legal advisors.

Under normal circumstances when logic and common sense are evident, my questions and comments would first have been about the failure of the Clifford Reis-led management and board to have alerted its shareholders to a number of matters.

First, why are shareholders only now learning of the proposed buyback since it was in process since December 2015; second, how can any adviser worth their fees overlook the foundational principle of company law that a change of shareholders does not have any impact on the rights and obligations of the company, in this case whether it be Banks Guyana or Banks Barbados; and third, why did the directors and management not think it helpful and necessary to advise shareholders that the money the company will be paying out on this share buyback transaction is $5,523 million.

But since the transaction defies both logic and common sense, my questions to the geniuses of Thirst Park are:

1. Why pay $36.79 per share to the Bajans for shares in Banks DIH Limited whose publicly quoted price is $22.5 per share, a premium of 64% and worth in dollar terms $2,145,478,650?

2. How do they justify handing a gain of $3.6 billion to the Bajans when the gain a year ago in the sale of shares in Banks Barbados was $1,147 million?

3. Are they aware that the $5,523 million they will pay out for these shares is more than two years of the company’s 2015 after-tax profit, more than 2.3 times the value of its share capital and about 90% of its revaluation reserves?

4. Can they indicate whether they propose to finance the transaction with borrowings? At September 30, 2015 the company’s cash reserves stood at $4,060 million, current liabilities of $4,155 million, borrowings of $585 million, and current year (2016) capital commitment of $4,607 million.

5. The currency of the selling price quoted in the Amended Press Release was Guyana dollars. Translated in US dollars, the total proceeds amounted to approximately US$26.3 million. Would the company disclose whether it paid Guyana, Barbadian or US currency?

6. Would they be willing to buy back shares held by other shareholders at the same price they paid the Barbados company? In fact, they should be willing to pay a price in excess of the $36.79 since the deal with the Barbados company had marketing and other benefits.

I am sure that all shareholders have a right to these questions being answered promptly.

Guyana could have successfully defended the action by Rudisa/CIDI

Mr. Anil Nandlall, former Attorney General, has raised on his Facebook page the issue of the Environmental Tax paid by the Surinamese company Rudisa and its Guyana subsidiary Caribbean International Distributors Inc. (Rudisa/CIDI). He suggested that the current Attorney General “either did not study the [CCJ] case or having done so is still unappreciative of its gravamen.” The decision in that case was handed down on May 8, 2014 but the PPP/C Government did not comply with an order of the Court that the Government repay with interest the sum of US$6,047,244.77, and further amounts collected up to the date of the judgment. The matter was resolved only after the APNU+AFC Government gave an undertaking to cease collecting the tax and to repay the full amount collected from Rudisa/CIDI.

Mr. Nandlall was not the AG when the PPP/C introduced the tax in 1995 but it would have been gracious of him to acknowledge that the PPP/C Government erred when it introduced a tax that clearly violated WTO Rules, and compounded its error by continuing to collect the tax from CARICOM companies after the Revised Treaty of Chaguaramas was incorporated in Guyana domestic law in 2006.

The matter has assumed important currency following the commencement of a similar action in the CCJ by the Trinidadian-owned Guyana Beverages Inc. which has paid more than two billion dollars in Environmental Tax. That money, like the Rudisa money, was spent by the past administration, and the current Finance Minister is faced with the serious risk of having to pay back this huge sum. In an ironic twist of fate, proposed legislation to address the problem introduced in 2013 by the PPP/C administration was rejected by the APNU and the AFC MP’s!

In his Facebook comments, Mr. Nandlall took issue with a statement by Mr. Williams that the Government of Guyana never led evidence to show that the Environmental Tax paid was passed on to the consumer, claiming that passing on was never “a disputed issue”. The problem for Mr. Nandlall is not only that passing on was and is the principal defence to an action for reimbursement, but as the judgement at paragraph 30 states, Mr. Nandlall submitted that no such reimbursement should be made to the Claimants (Rudisa/CIDI) because the latter must have already passed on the tax “by a re-adjustment of the price”.

The Court rejected that submission, finding that Guyana “presented no evidence to show that the Claimants have in fact passed on the environmental tax to their customers. The mere assertion that the Claimants are motivated by profit and that the tax must (CCJ emphasis) have been passed on is not enough.” Having failed to prepare adequately the case which he chose to argue himself, Mr. Nandlall sought to establish, belatedly, the presumption of passing on by way of “robust cross examination”. That could not and did not find favour with the Court.

While criticising Mr. Williams’ understanding of the case, Mr. Nandlall states on his FB page that Rudisa contended that it was “forced to lower the price of its product destined for the Guyana market below their market-value to offset the environmental tax.” He then goes on to state that “Rudisa absorbed the losses or the equivalent of the environment tax in Suriname before the product arrived in Guyana. They led evidence to establish that they sold similar products in other territories in the Caribbean at a price higher than they sold those same products for to their Guyanese distributor”.

That is not what the judgment states. It states at paragraph [31] that “Rudisa Beverages would invoice goods to CIDI at FOB Suriname prices with Rudisa Beverages bearing the insurance and freight charges.”

Another easily rebuttable evidence from Rudisa, accepted by the court presumably because it was unchallenged by Nandlall, was that Rudisa and its local subsidiary “absorbed the loss occasioned in order to retain their 50% market share”. Yet, if Mr. Nandlall had done minimal research he would have realised that the Guyana subsidiary never had any such market share. He would have learnt too that CIDI did not commence operation in Guyana until July 2007, the company having been incorporated three years earlier. He might even have argued that the tax was incidental to the company’s carefully planned strategy and that Rudisa/CIDI opted for a market penetration price to earn rather than to retain market share.

It is probable but speculative that Guyana could have successfully defended the action by Rudisa/CIDI. Clearly Mr. Nandlall’s preparation and advocacy of the case was seriously deficient, and cost the country heavily. How the consequence of that poor performance will impact on the present case is a $2 billion dollar question.

Straw man fallacy

Please permit me to comment on a letter by Mr Ruel Johnson (SN January 6, 2016: ‘It is good to show we are capable of clemency but first we must show we can deliver justice’).

That letter was partly in response to a letter by me in Stabroek News January 5, 2016 ‘Treatment of Sattaur by persons from the GRA is not acceptable’.

My letter addressing four main points spoke for itself. I believe therefore that Mr. Johnson was engaging in the classic straw man fallacy of creating, in order to refute, a point not made in my letter.

I will not pursue any further correspondence or argumentation on this matter.