Mercantile Bank sued for R350m over fraud conspiracy claims

Cape Town – Mercantile Bank has been taken to court over allegations that it conspired with an alleged fraudster in illegal asset stripping worth hundreds of millions of rand.

The bombshell litigation could not have come at a worse time, as the Portuguese-owned and South African-based bank is up for sale.

Alert Steel is seeking damages of R351m caused by Rayhaan Hassim, Mercantile Bank and West Lake Trade and Investments following what it believes was an illegal liquidation process in 2014. ArcelorMittal South Africa has joined Alert Steel as a second plaintiff in the matter.

Alert Steel’s counsel, Wim Trengove SC and Emmanuel Limberis SC, filed papers in the Johannesburg high court on Friday and included the Master of the Court as a defendant, as the court finalised the liquidation.

Portuguese bank Caixa Geral de Depósitos is in the process of selling Mercantile Bank, which has a balance sheet of R12.2bn and R2.2bn in capital.

Mercantile Bank told Fin24 on Monday that it “intends to rigorously defend the matter” as it believes the case is “fraught with factual inaccuracies”.

July 12 Update: Hassim said he would also defend himself and agreed that the case was "fraught with inaccuracies".

The alleged conspiracy

Detailing the conspiracy, Trengove and Limberis explain how Hassim, Mercantile Bank and others “conspired to devise and implement a scheme, to transfer the plaintiff's business and all its assets to a new company held by Mr Hassim (West Lake); to pay the plaintiff's loan liability to Mercantile Bank in full; and to put the plaintiff in liquidation”.

“The purpose of the scheme was to appropriate all the plaintiff's assets for the benefit of Mr Hassim and Mercantile Bank at the expense of the plaintiff's other creditors.”

As part of the conspiracy, they accuse Mercantile Bank of sending a letter to the plaintiff dated May 9 2014, “by which it unlawfully purported to cancel their loan agreement and demanded that the plaintiff immediately repay the full outstanding balance of the loan in an amount of R104m”.

The eventual sale of the liquidated assets to West Lake “was in fact only to the benefit of Mercantile Bank and highly prejudicial to all the plaintiff's other creditors”, explain Trengove and Limberis.

After the sale, West Lake “acquired and continued to carry on the plaintiff's erstwhile business. The parties to the conspiracy thus realised its purposes,” the plaintiffs argue.

They argue that the perfection agreement struck was a collusive transaction, transgressing the Insolvency Act. “The plaintiff entered into the perfection agreement in collusion with Mr Hassim and Mercantile Bank, before liquidation”, they argue.

Alert Steel wants the perfection agreement set aside, and wants the court to order Hassim and Mercantile Bank to repay it R251m plus interest.

Furthermore, Alert Steel – which is still alive as a firm – wants Mercantile Bank to forfeit its claim against Alert Steel and wants the bank to repay it R100m plus interest.

Mercantile Bank responds

Mercantile Bank CEO Karl Kumbier told Fin24 that it received the summons on Monday morning.

“Bearing in mind the timing and that this matter is sub judice, we cannot respond in detail to the allegations contained in the summons save to state that the allegations of conspiracy are rejected with contempt and that the other claims have no basis in law.

“We believe the summons is fraught with factual inaccuracies.

“We can confirm that Mercantile lent Alert R104m in the normal course of business. As any prudent lender would have done, the bank was entitled, and within its rights, to call in that loan when Alert breached the terms and conditions attached to it.

“That said, the bank worked with the business rescue practitioner for around two months to find a buyer for the whole or a part of the Alert business and, while a few well-known industry players showed interest, none proceeded with any offers to purchase the business or even part thereof.

“When the bank was advised of Alert’s imminent liquidation, external legal advice was sought and we perfected our general notarial bond. On Alert’s liquidation, six liquidators were appointed.

“The liquidators sourced the buyer after employing a sworn appraiser to value Alert’s assets (which were eventually sold at values in excess of those provided by the appraiser) and, on application by the liquidators, the Master of the High Court approved the sale of the assets.

“The bank did not recover all the money that it was owed by Alert.”

Wednesday update: Rayhaan Hassim responds

Hassim told Fin24 on Wednesday he believes the claim is based on unfounded allegations. "Alert Steel’s assets were purchased by West Lake after the company was liquidated in 2014," it said.

“I intend to vigorously defend this action,” said Hassim in a statement on Wednesday, stating he believes  the case to be fraught with inaccuracies.

"As the matter is sub judice, he is unable to respond in detail to the allegations made in a summons received on the 11 July 2017," his statement read. "Hassim denies colluding with Mercantile Bank."

"Hassim, who was a shareholder (through a registered company) in Alert Steel at the time the company was liquidated, suffered financial losses as a result. As he was neither a director nor a member of the board, he was not involved in any of the decision-making related to the liquidation of the company or the sale of its assets."

“We have sought counsel from a team of senior advocates in this matter," said Hassim. "They advise us that not only is the summons defective but that same is seemingly baseless.”  

Further information on the matter will be released as it becomes available, he said.

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