Companies

Court battle exposes troubles of Njenga Karume empire

KARUME

Njenga Karume rose from selling charcoal to owning and running enterprises worth billions of shillings by the time of his death in February 2012. PHOTO | FILE

The multi-billion-shilling business empire that Kiambu businessman and politician James Njenga Karume left behind was already saddled with a heavy load of debt and mismanagement at the time of his death, an audit report shows.

The report shows that the business empire — perhaps Kenya’s best known grass-to-grace story — was already in decline, having been crippled by bad book keeping, insider lending and irregular property transfers.

Mr Karume, who was known to many as an astute businessman, rose from selling charcoal to owning and running enterprises worth billions of shillings by the time of his death three years ago.

The report, filed in court as part of the evidence in the ongoing battle involving Mr Karume’s children and the managers of a trust in which he left the wealth, also reveals for the first time the extent of the business empire he left behind upon his death in February 2012.

The Njenga Karume Trust, formed only nine months before his death, is an empire of nine firms that are managed through three holding companies — Jacaranda Holdings (hospitality interests), Karume Holdings (for the real estate interests) and Cianda Holdings for agribusiness.

Mr Karume’s hospitality empire includes Jacaranda Hotels in Nairobi and Mombasa, Lake Elementaita Lodge and the Village Inn.

Karume Investments operates Cianda House in Nairobi and several apartments in Nairobi, Limuru and Kiambu. Cianda Holdings runs the Cianda and Kachoraba farms.

The September 2012 audit by PriceWaterhouseCoopers (PwC) shows that Karume’s nine companies with assets worth billions of shillings made a paltry Sh5 million profit between 2008 and 2012 and that the business magnate’s enterprises mainly survived on borrowed funds and asset sales during the audit period.

“The trading performance across the group can be broadly described as being a mix of entities consistently posting small profits and others posting small losses. For the entire period from June 30, 2008 to May 2012, aggregate net profit was reportedly around Sh5 million,” the report says.

Trustees of the Njenga Karume Trust filed the audit report in court to counter allegations by three of the late Karume’s children — Lucy, Samuel and Albert Karume — that they have run down the companies since taking control in 2012. The children are seeking to oust the trustees.

Margaret Nduta Kamithi, the late tycoon’s sister and one of the trustees, has in response said that the court case is part of a coup the children are executing to overthrow the will of their father and take full control of his billions.

READ: Trustees of Karume empire fight removal from estate

The audit indicates that in the five-year period covered by the PwC investigation, Mr Karume’s companies only managed to stay afloat by borrowing money and selling some of its assets, most notably a parcel of land sold to the Kenya University Staff Retirement Benefits Scheme (KUSRBS) for Sh1.1 billion in 2012.

The report also shows that some of the insider loans the Karume firms extended to one another were neither repaid nor accounted for, something the auditors warned was a point of concern.

In some instances, Mr Karume himself loaned the companies money, with some shareholders also chipping in.

The intercompany loans account held a total of Sh360 million, mostly advanced to the farming and real estate arms of his vast business empire.

The amount was loaned to Cianda Estates Limited, which owns Cianda Farm, and to Karume Investments Limited, which owns owns several rental properties in Limuru and Kiambu.

“We have not seen any loan documentation regarding this lending. Around two-thirds of this lending appears to be connected and we are advised has been provided directly by Mr Karume as an individual on an interest free basis,” the report says.

Jacaranda Hotel, for example, had not collected 21 per cent of debts that sister companies owed it and had not received any money from employees it had loaned money.

The audit report shows that by 2008, the nine Karume companies were indebted to the tune of Sh1.1 billion, a figure that rose to Sh1.2 billion and Sh1.3 billion in 2009 and 2010 respectively.

Between 2010 and 2012, shareholders lent the businesses a total of Sh1.8 billion besides the amount Mr Karume had already pumped in.

Mr Karume, after selling the Sh1.1 billion parcel of land to KUSRBS, used Sh423 million to offset part of the debt, leaving a Sh892 milliondeficit.

The trustees say renovations to Jacaranda Indian Ocean Beach Resort, which reopened last week, and the planned refurbishment of Pizza Garden in Westlands were initiated by Mr Karume to boost the revenue-earning potential of his real estate empire.

Lucy, Samuel and Albert Karume last month secured temporary court orders stopping any interference with Pizza Garden after telling the court that the trustees were running down the property.

Ms Kamithi holds that the trust dedicated Sh163 million of the Sh338 million in its hands between 2012 and 2013 to the late business magnate’s children and grandchildren.

“The trust fund is not endowed with unlimited resources to meet all the needs of the beneficiaries, especially due to unprecedented harsh business conditions for the hotels, funds allocated to refurbishment projects and loss of income due to project disruption and sabotage by the children,” she says.

She, however, disclosed that for the nine months before Mr Karume’s death, the billionaire did not provide any medical, schooling or living allowances, and that it is the trustees that facilitated the funds for the said allowances.

The intercompany lending is, however, just the tip of the iceberg, as the PwC report has revealed that the book keeping at Mr Karume’s enterprises was highly questionable.

This, the report adds, has made it difficult to establish the true financial standing of Mr Karume’s empire.

There have been wildly conflicting estimates of its size from the parties involved in the dispute, ranging from Sh40 billion to Sh100 billion.

Karume’s will only mentions the acreage of two land holdings — the 508-acre Cianda Farm and the 27.3-acre Lynton Farm — leaving questions about the size and value of six pieces of land in Kiambaa, a parcel of land in Gilgil, three parcels in Laikipia, Limuru, two parcels in Molo, a plot in Nakuru and two parcels in Ruiru.

PwC says it encountered several challenges in obtaining data to compile the report, as some documents relevant for verifying the empire’s true financial standing were missing while others were highly conflicting.

“In the financial year 2010, for example, crop expenses per the management accounts for Kachoraba Limited is Sh27 million whereas the audited accounts show a figure of Sh48 million against the same cost category,” the auditors added.

The dodgy book keeping has in turn cast doubt on the group’s compliance with the taxman’s dues, as it is difficult to establish what amount of money is owed or has been remitted to the Kenya Revenue Authority.

An external auditor previously engaged by Mr Karume to investigate his firms’ books, however, held that the Njenga Karume Trust is tax compliant. The external auditor is only identified as Mr Muigai.

Mr Muigai, however, declined to give any documents to PwC for verification when they were carrying out their audit, arguing that the companies had not yet paid him for the work he had done on their books.

PwC also noted the retention of three senior accounting officials who are not qualified in the profession. Two of them have also been previously been cited for altering records.

James Kihara (Jacaranda Nairobi accountant), his assistant David Kisovi and Sammy Kioko (Jacaranda Nairobi head cashier) were noted to have no accounting education despite holding the positions.

Mr Kihara was cited for altering documents in 2006, while Mr Kioko was cited several times in 2003, 2006, 2008 and 2009 for the same offence.

The audit indicates that while Mr Karume’s empire was not well managed, salvaging it is still greatly possible, as it had started showing signs of improvement at the time of the billionaire’s death.