Tuesday, December 7, 2010

Sharemax investors seek judicial management

Sharemax investors seek judicial management
Julius Cobbett
07 December 2010

Court papers argue that the statutory managers are not doing enough to protect investors.

JOHANNESBURG - A group of Sharemax investors want to place certain Sharemax syndications under judicial management. If their court application is successful, it could have a big impact on all investors. Virtually all companies placed under judicial management are eventually liquidated. And the liquidation of investment schemes usually has disastrous results for investors.

The investor group, represented by attorney Chris de Beer, has applied to the North Gauteng High Court for permission to apply for the judicial management of seven Sharemax syndications. The syndications are: The Villa, Zambezi Mall, Waterglen, Rivonia Square, Stonewood, Nelspruit Hyper and Sharemax Waterfall.

De Beer acknowledges that judicial management seldom has a successful outcome for investors. But he argues that the Sharemax situation is so severe, judicial management is the best method of preserving value for investors and protecting them from further harm. De Beer says it's his hope that liquidation can be prevented.

De Beer says that the statutory managers appointed by the Reserve Bank do not have the powers they require to properly protect investors' funds.

At the time of writing, neither Sharemax nor its statutory managers had responded to Realestateweb's requests for comment.

The application will be heard in court this Friday. If it is successful, De Beer will ask the court to appoint Sharemax's current statutory managers, Neels Alant and Jaco Spies, as judicial managers, together with Elizabeth Prinsloo, Ettienne Naude and Jayant Pema, all of whom are liquidators.

In his argument for judicial management, De Beer focuses primarily on Zambezi Mall, Sharemax's second-largest syndication.

The amount invested in Zambezi is estimated at between R750m and R1bn. The shopping centre is complete, tenants have moved in and are trading. However, Sharemax investors do not own the centre and they are not receiving income.

Zambezi Mall is still owned by its developer, Capicol. Sharemax and Capicol are in dispute over how much money is owed for the shopping centre. The matter recently went to arbitration. Capicol claims the arbitrator ruled in its favour, and that Sharemax indeed owes it millions of rands.

But De Beer argues that the arbitration is flawed, because both Sharemax and Capicol want the same thing: a high price for Zambezi. This would allow them to maximise their own profits on the development.

Thus, argues De Beer, there will be no incentive for anyone involved in the arbitration to raise issues that are very relevant to investors. He identifies these issues as follows:

The relationship between Sharemax and Capicol. De Beer says there is no arm's length relationship between Sharemax and Capicol. As an example, he points to an option granted to Fine Asset Investments 119, which allows it to purchase Zambezi at a predetermined price. "Therefore if the property development is extremely successful, Fine Asset Investments 119 (Pty) Ltd will be able to purchase the business, so as to obtain such benefit rather than the investors, who actually put up the capital for the business to become a successful concern," says De Beer. He reveals that the shareholders of Fine Asset Investments are Sharemax Growth and Capicol director Paul Kyriacou.

De Beer reveals that he has been informed that former Sharemax MD Willem Botha recently visited Cyprus together with Kyriacou. This "business" trip apparently took place about a month ago, after Sharemax's problems surfaced. "There is on the probabilities, no reason why they would have done that, except to secure funds channelled away from these developments into offshore bank accounts in Cyprus," claims De Beer.

Furthermore, De Beer notes that Capicol director David Pieterse is the son of Sharemax national purchasing manager Bertie Pieterse.

Inflated rental income. The Zambezi prospectus states that the eventual selling price of the Mall will be determined by the income earned in its first month of operation. However, De Beer questions whether the rental income figures can be trusted. He says he's been informed that various tenants in the mall are owned or controlled by Capicol, including Me: It's All About You, Maxi Cine Plex, Get More and Eve's Evening Dresses. It is alleged that these tenants are charged an inflated rent, which in certain instances exceeds R500 per square meter per month.

The court papers also reveal that Sharemax has "withdrawn" millions of rand from its syndication companies. Realestateweb has previously discussed loan accounts between Sharemax and its syndication companies. The loans helped subsidised interest payments to investors.

De Beer says that the payments made by the syndication companies to Sharemax means that it is preferred over other creditors. He claims that the statutory managers have been made aware of these payments but have allegedly taken no steps to curb them. De Beer is seeking an interdict to prevent the shifting of funds between Sharemax and its syndication companies.

Another point of concern raised in the court papers is a "rescue plan" that is allegedly being orchestrated by former Sharemax directors through an entity called FA-Assist, which was created in September this year.

An FA-Assist letter dated November 5 2010, states that R750m should be obtained before November 30 2010 to save The Villa. It calculates that 9 000 investors should each contribute R84 000 and 600 brokers each R1.25m to yield R756m. Thereafter a further R750m would be required before September 30 2011.

"The only conclusion that can be made from the aforegoing is that Sharemax is again attempting to obtain further funds from innocent investors to pay for investments that cannot be profitable and in respect of which [it] again intends to earn unjustified returns," says De Beer. "It is extremely disconcerting that the statutory managers, with knowledge of the steps Sharemax is again taking by targeting investors again to put further funds into the developments, are not taking any action."

Write to Julius Cobbett: julius@moneyweb.co.za

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