Justice Alfred Mabeya has torn through the convoluted structure of Cytonn Investments, exposing the very complexities that Chief Executive Edwin Dande had hoped to hide behind.
In the major ruling that will finally provide relief to thousands of investors, Justice Mabeya summed all the entities involved as “Cytonns”, ripping through multiple layers of control that made it difficult for aggrieved investors seeking recourse.
The Judge ruled that the investors were hugely prejudiced in the arrangement, even raising the possibility that they may actually have been in a long con game all along.
“What if the SPVs were being used to defraud the investors?… Will it be just to tell the Creditors, sorry, your money was lent to SPVs who are independent and they should be allowed to continue to freely deal with the assets that was acquired by your money, but you can’t touch them?,” Justice Mabeya posed.
Dande argues that Cytonn’s only assets are the loans it had extended to separate entities and that any investor claims would only go as far as the loans and not the actual projects where the money was invested.
Essentially, the proposition suggests that the investors had no claim whatsoever on the –worth of real estate that the company was developing through related entities including the proposed 18-unit Applewood Court in Karen where a home is selling for Sh120 million.
Cytonn Real Estate Project Notes LLP (CPN) will now be liquidated, following the January 6 ruling, with proceeds from the sale to be applied to repay sh14 billion owed to investors.
But CPN had claimed in court documents that it was also owed a cumulative sum of Sh3.7 billion by five entities it owns, as part of it argument in seeking bankruptcy protection.
Taraji Heights project on Limuru Road has an outstanding loan worth over Sh1.6 billion, the Ridge on the Northern Bypass near Runda owes Sh862 million, Riverrun Estate is Ruiru Sh120 million, Applewood Sh178 million while the Alma is indebted some Sh562,000.
Mabeya ruled that these projects should be liquidated to recover investors’ monies, upsetting Dande’s argument about their supposed existence as separate legal entities.
It is a landmark ruling considering that the Cytonn was engaging investors in a wild goose chase in holding that the firm had no direct interest in the individual projects spread around Nairobi.
CPN was opposed to handing the said projects in custody of the official receiver after the investors successfully petition for the firm to be placed under administration, arguing it was just a collection basket for funds.
Excluding the investments from the administration only means that the investors’s claim would go as far as recovery of the loans extended to the projects, and not the investments themselves.
In any case, a dispute between CPN and the special purpose vehicles such as the Alma, and Applewood would only help in further isolating the investors from their funds.
“It is not disputed that the CPN was a collection company. Members of the public totaling 886 were lured into investing monies in CPN. CPN would then lend the said monies to SPVs associated with CPN or its promoters which amount was assigned to certain projects. From the proceeds of sale of those projects, the loan would then be paid back to CPN which would in turn repay the invested sum with some returns,” the court documents read.
In the arrangement, therefore, it is clear that Dande would pocket the profits from the construction and sale of the homes, while investors would at best make returns from interest realized from lending their money to the housing projects.
Worse even for investors, the court learnt that “there are no securities held by way of charges for what the investors sunk in CPN who in turn sunk the same into these projects”.
Justice Mabeya was convinced that the 886 members who invested in CPN were exposed and would likely whose theit entire Sh4 billion in Dande’s scheme should the assets be sold but the SPVs refuse to repay the loans.
“This would be so because, the so called SPVs may dispose of those projects to the extreme prejudice of the creditors whose monies was used to acquire the same.”