Hilton realities exposed by Nihal

By Nihal Sri Ameresekera

I refer to the lead story in the Daily FT of 19 December 2011 under the headline ‘Thiru trims Hilton!’

With no undermining of the efforts of or offence to Thiru Nadesan, I am compelled to disclose the salient facts, since such publication ought not camouflage and draw a ‘smokescreen,’ as an endeavour to justify the hasty and secretive enactment of perverse legislation, the constitutional validity of which, I have put in issue before the Supreme Court, which has ordered the issuance of Notices on the Respondents. Copies of relevant documents have been forwarded in proof of these facts.

When Hilton Hotel was originally mooted, the management agreement entered into on January 19, 1980 had provided for management fees of 25% of gross operating profit (GOP), after providing for refurbishment, and before charging rates and taxes on the property and long-term loan interest.

Management fees prevalent in the hotel industry then was 3% of the turn-over with 15% of GOP, or 4% of turn-over with 12% of GOP, or 5% of turn-over with 10% of GOP. Hilton management agreement was reconfirmed by a new management agreement entered into on January 31, 1984, with the Government becoming a party to the project.

After Hilton Hotel was restored, consequent to the damage caused by the bomb explosion in 1997, it was discovered that Hilton International was charging group services and benefits, including regional office and central marketing expenses, which exceeded the 25% management fee on gross operating profit, as defined. It was discovered that charges made by Hilton International had ranged from 31.2% to 34.9% in the years 2001 and 2004.

In these circumstances, then Chairman HDL, Ajith Dias, in 2003 sought the assistance of specialist UK Consultants, PK International Hotel Property Services to troubleshoot. Further, it was discovered that Hilton Hotel was not achieving the expected GOP of over 40% (expected to be 42%-45%), giving rise also to questions on average room rates and occupancy, which were relevant factors.

Consequently, the following heads of terms of a proposed management agreement was reached, which comprised - management fees of 2% of revenue + incentive fees of 7% of the adjusted GOP (AGOP), with rates and insurance also deducted, if AGOP exceeds Rs. 400 m, to be increased with an annual indexation, and 2% of revenue in respect of group services and benefits. 4% of turn-over would amount to 10% of GOP, where the GOP is 40%. The refurbishment provision was to be 5% of revenue.

The initial term was 10 years, with option to extend for two further five-year periods, upon mutual agreement; with provision for termination, if the Hotel’s ‘RevPar’ (a combination of average occupancy and room rates) in two consecutive years does not exceed its competitors. Hilton was not to operate another hotel within the Municipal limits of Colombo, excluding the existing Hilton Residency.

Hilton expressed interest to develop a 350 room luxury resort in the east-coast or the south-coast for which it sought a suitable and acceptable site from the Government, which was a separate matter. As per the heads of terms, an agreement was drawn up to be signed, subject to Hilton International’s corporate approval and Government’s approval.

Thereafter, a Cabinet Appointed Negotiating Committee (CANC) appointed to restructure HDL, included the above heads of agreement with Hilton International in their Report dated 11 July 2005, submitted to the Cabinet, and subsequently approved by the Cabinet on 13 October 2005, as per Cabinet Memorandum of 5 October 2005. I resigned as Chairman HDL on November 10, 2005.

Since HDL failed to be restructured, as had been proposed by the CANC, as per the alternative option approved by the Cabinet, I filed on 17 November 2006 the winding-up application DC Colombo Case No. 217/CO to wind-up HDL, in which eventuality, Hilton International would have had to enter into a management agreement with a new company, which as a consequence, would have evolved.

There was a bomb explosion in October 1997, whereby several buildings in the City, including Hilton Hotel, were extensively damaged. Consequently, under a ‘business interruption insurance policy,’ Hilton International negotiated a payment of US$ 10 m, from the overseas insurers for the re-instatement of the Hilton Hotel.

By letter dated 16 January 1998, Hilton International claimed title to such insurance monies of US$ 10 m, paid to HDL for the re-instatement of the hotel. On such hypothesis, Hilton International required additional new shares of HDL to the value of US$ 7 m, to be allotted to Hilton International, and the balance US$ 3 m, to be re-paid over 30 months, as an increase in the subsequent insurance premia, to the Insurer.

I refuted such stance of Hilton International, by my Memo dated 28 March 1998 to the HDL Board, with copies, among others, to Deputy Secretary to the Treasury, P.B. Jayasundera. I successfully established, that such insurance monies of US$ 10 m, paid to HDL, rightfully and lawfully, belonged to HDL, and not to Hilton International.

Had it not been for such defiant stance, the US Dollar at that time being equivalent to SL Rs. 61, for an amount of US$ 7 m, Hilton International would have got additional new shares of HDL to the value of Rs. 427 m, against the nominal share capital of HDL of Rs. 452.3 m, thereby increasing the nominal share capital of HDL to Rs. 879.3 m. Had Hilton International been given additional new shares, as had been required, to the value of 427 m, this would have vested in Hilton International an ownership of 48.5% of the increased new nominal share capital of HDL.

The foregoing endeavour by Hilton International to acquire a 48.5% of the increased new nominal share capital of HDL, together with the shareholdings of the Japanese, as a consequence reduced to 14.2%, would have given a total ‘controlling’ shareholding of 62.7% in HDL to Hilton International and the Japanese, compared with Government’s shareholding being reduced to 33.4%! This was successfully averted.

As at 31 March 2006, HDL’s accumulated losses stood at Rs. 5,994 m, with a deficit of Rs. 5,323 m. Long-term loans stood at Rs. 8,067 m. The Winding-up Application, DC Colombo Case No. 217/CO was instituted by me on 17 November 2006, which was opposed by the HDL Board, controlled by the Government. This was in blatant and flagrant violation of the provisions of the Companies Act No. 7 of 2007, which in the given facts and circumstances statutorily mandated winding-up of HDL.

Consequently, as at 31 March 2010, the accumulated losses of HDL had increased to Rs. 10,302 m, with a deficit of Rs. 4,773 m, even after having re-valued the fixed assets. The long-term loans had increased to Rs. 11,725 m. By 31 March 2011 such position would have further deteriorated. The Government claimed Rs. 12,098 m from HDL on 10 May 2011, demanding repayment be made within a period of two years, on the capital advanced by the Government of Rs. 4,435 m, the balance of Rs. 7,663 m being interest. Civil Law Ordinance Section 5 stipulates that the interest shall not exceed capital.

Furthermore, in terms of Section 364, read with Section 277 of the Companies Act No. 7 of 2007, no interest is payable by and/or chargeable from HDL, after the Petition for winding-up had been presented on 17 November 2006. In terms of Section 277 of the Companies Act No. 7 of 2007, the winding-up of a Company shall be deemed to have commenced at the time of presentation of the Petition for winding-up.

In the given facts and circumstances of HDL, Section 219 of the Companies Act No. 7 of 2007, which came into force on 3 May 2007 mandated the winding-up of HDL, and made the Directors personally liable for the debts of HDL, for having opposed the winding-up of HDL. In addition, Section 375 of the Companies Act No. 7 of 2007 prohibits the fraudulent trading by a Company, making Directors personally liable for its debts. Section 382 of the Companies Act No. 7 of 2007 empowers the Attorney General to criminally prosecute Directors of a Company in such circumstances.

Recently, by Order dated 15 November 2011 in HC (Civil) WP Case No. 16/2007/CO, re – the matter of Lanka Supermarkets Company Ltd., the Commercial High Court held that the Directors of the company are personally liable for the debts in excess of the assets of the company.

As per the definition of Directors specified in Section 529 of the Companies Act No. 7 of 2007, in respect of certain specific provisions therein, particularly Sections 187, 188, 189, 190, 197, 374, 375, including also Sections 191 to 195, persons in accordance with whose directions or instructions, Directors of a Company would act, are also deemed to be Directors of a Company.

In circumstances of serious loss of capital, where 50% of the Share Capital of a Company is eroded, in terms of Section 220 of the Companies Act No. 7 of 2007, the Directors are bounden in duty to call for an Extra-ordinary General Meeting, to inter-alia explain the extent of losses, causes therefor, and steps being taken to recoup the losses. In the case of HDL, the entire Share Capital had been eroded, but nevertheless its Directors had dismally failed to comply with the mandatory provisions of Section 220 of the Companies Act No. 7 of 2007, since May 2007.

Section 187 to 190 of the Companies Act No. 7 of 2007 stipulates the ‘Duties of Directors’ and Section 188 thereof prohibits a Director from acting or agreeing to act in contravention of any provisions of the said Act.

Hence, the Government Directors of HDL, appointed by the Minister of Finance, who exercised the management control of the HDL Board, with the Government being a 64% Shareholder of HDL, and who opposed the Winding-up of HDL and acted in blatant and flagrant violation of the Companies Act No. 7 of 2007 stood and stand personally liable for the debts in excess of the assets of HDL, which is to the Government i.e. the public.

Such Directors who have transgressed the law and have caused the foregoing losses to the Government i.e. the public, ought be held accountable and responsible. How can one expect ordinary citizens to comply with the statutorily law, when the Government, itself, brazenly violates the same? Ought not the Government enforce the statutory law against all those concerned, without any apprehensions or favour, regardless of whoever they are, inasmuch as political opponents are expeditiously prosecuted?