Nakumatt Holdings had lent its directors more than $100 million in interest-free soft loans by the time it was placed under administration on January 22, 2018, according to a review of the company’s financial statements.
The related party transactions were recently disclosed in a report for the year ended February 2018 by Parker Randall Eastern Africa, the retailer’s independent auditor.
The auditor did not specify which individuals owe the company money, underlining the weak governance in the board of the former giant retail chain that owes banks, landlords and suppliers as much as $20 million.
Nakumatt’s founder and former chief executive Atul Shah was one of the two individuals listed as directors of the company as of the report date.
The amounts owed by insiders, which did not attract interest charges, had dropped to $9.48 million as of February 2018, the period for which the latest financial records are available.
“Significant in this net balance is $9.48 million due from the directors. These receivables are not supportable based on the available evidence,” says the report.
“The amounts due from a director are interest-free. They relate to short-term advances through a current account.”
The loans to the company’s directors are among a series of related party transactions amounting to $28 million, which are unlikely to be recovered.
Others include amounts claimed from subsidiaries in Uganda, Rwanda and Tanzania, which ceased operations.
The administrator has written off $15 million or 53 per cent of the receivables, leaving a balance of $13 million.
“There are no repayment plans for these balances; the companies frequently lend and borrow funds from each other,” the auditor said.
The report paints a picture of relatively loose governance at Nakumatt relative to other firms such as banks where insider dealings are more closely regulated.
There is a limit on the size of loans directors and employees of a bank can take in aggregate.
The loans also typically attract interest charges, though sometimes at below market rates.
Revelations of Nakumatt’s insider loans come at a time when the retailer is closing most of its remaining branches, making compensation for creditors even less likely.
Mr Shah faces investigations over the loss of $180 million worth of stock.
Nakumatt administrator Peter Kahi said a forensic investigator will probe why Mr Shah wrote off stock worth $180 million in May 2018, before the company ground to a halt.
The High Court granted Nakumatt Supermarkets protection from its creditors, allowing the retailer to go into voluntary administration. The company sought protection using Kenya’s newly enacted company laws, which provide a path for distressed firms to avoid complete collapse.
At its height, the company, which began life as Nakuru Mattresses, had more than 60 outlets across Kenya, Uganda, Tanzania and Rwanda.
But its financial problems led to empty shelves and store closures, opening the way for foreign retailers like Carrefour and local rival, Naivas, to take over space it vacated.
In April 2017, Nakumatt closed its main branch and head office in Kampala.
The following day, the supermarket closed all its regional operations in Rwanda, Uganda and Tanzania.
Only a handful of branches remained closed in Kenya.
The company then said they were trying to cut down losses generated by regional operations and focus would then shift to their parent market in Kenya.