Can AfroCentric pay out R1bn?

MOUNTING: LIABILITY CLAIMED AGAINST SUBSIDIARY

Provision is for R1.8m as it believes it won’t have to pay.

Initially NHA sued Medscheme, but the parties later agreed to arbitration. The details are not in the public domain, since the arbitration is confidential. For a number of reasons this arbitration has still not begun. The provision therefore remains on AfroCentric’s balance sheet.

Medscheme has twice gone to court to have issues around the arbitration resolved. In its court application, Medscheme quantified the size of the claim it faces. Far more than the R8.35 million provided for on AfroCentric’s balance sheet.

“The capital amount claimed has over time grown from some R70 million to R390 409 910 plus interest and legal costs. If NHA were to be wholly successful, Medscheme’s liability would near one billion rands.”

If Medscheme is facing a liability of this size, shareholders might ask why the provision on AfroCentric’s balance sheet has not increased. The group’s latest results, to December 31, 2017, show AfroCentric has assets of R871 million, which means it would be insolvent if it had to pay R1 billion.

But, Billy Mokale, head of legal, governance risk and compliance for AfroCentric, said the provision was sufficient. “We believe we have raised the appropriate provision, determined by using the maximum loss and probability theory. Our view is that the NHA claim will not materialise hence the provision raised is more from a prudency perspective.”

In other words, AfroCentric believes it will end up paying nothing. The company stated in its annual report the claim has increased to R390.4 million, but this did not change its merits. One might ask if AfroCentric is telling the court one thing and its shareholders something else.

In court papers, Medscheme said its final legal bill is likely to be “at least R100 million”. NHA’s original claim was for R70 million, so if Medscheme had settled then, it would have cost shareholders less.