Sharemax - operating legally?

Sharemax - operating legally?
13 Apr 2011

A committee within the Law Society of the Northern Provinces will be expected to rule next month on a claim of R200k lodged with the Society’s fidelity fund.

The claim relates to the allegedly illegal release of funds from the trust account of Sharemax Investments’ attorneys, Weavind & Weavind.

The legal firms claims that the government prohibition on releasing investors funds for a property syndication prior to transferring the property does not apply to the firm.

The claim against Weavind & Weavind has been lodged by Pierre Hough, managing director of Chase International on behalf of Johanna Bosman, one of his clients.

According to the Law Society’s Jaco Fourie the matter will be placed before a committee of the society and that committee will decide how to deal with it. Weavind & Weavind had responded to the claim lodged with the Law Society.

The legal firm points out that various clauses in the prospectuses made it clear that investors’ funds would not be paid out until the properties had been transferred.

Meanwhile, existing board of directors of Sharemax is seeking permission from the High Court to allow a scheme of arrangement to be reached to resolve the difficulties facing the company.

However, in terms of a government notice on property syndications, money deposited by prospective investors into Weavind & Weavind’s trust account must be repaid if the syndication does not proceed.

Weavind & Weavind appears to have ignored or disregarded this mandatory government notice. Moreover, at an arbitration hearing last year, Sharemax was ordered to pay R64-million to its creditor, Capicol but in March this year it said it was unable to do so.

This failure may mean that the company is technically insolvent and may imply that the scheme of arrangement being structured by the board could be illegal or could imply levels of reckless trading by the existing board.

The directors say that the scheme of arrangement is intended to protect more than 40 000 investors in the fund who have invested a combined R4,5-billion in the syndications.

Moreover, the Financial Services Board found that Sharemax’s funding model – for The Villa and Zambezi Retail Park – contravened the Bank’s Act.

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( property 24 )

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Edited by Peter DeIonno. With contributions by Roy Cokayne, Peter DeIonno and Ann Crotty.

•Legal battles involving Sharemax far from over
The legal minefields surrounding the collapse of property syndication company Sharemax Investments are growing. Sharemax’s attorneys, Weavind & Weavind, and Capicol, the developers of the Zambezi Retail Park and The Villa, have both launched independent defamation and damages cases.

||| The legal minefields surrounding the collapse of property syndication company Sharemax Investments are growing. Sharemax’s attorneys, Weavind & Weavind, and Capicol, the developers of the Zambezi Retail Park and The Villa, have both launched independent defamation and damages cases.

A criminal case has been lodged against Weavind & Weavind related to the alleged illegal release of Sharemax investor funds from its trust account before the transfer of properties to the syndication vehicles.

A demand for repayment has been issued to Weavind & Weavind on behalf of 11 investors in terms of a section of the Companies Act that is normally a precursor to a liquidation application.

Claims have been submitted to the fidelity fund of the Law Society of the Northern Provinces and Attorneys Insurance Indemnity Fund, both also related to the release of funds by Weavind & Weavind.

Lurking behind the scenes is the finding by an investigation conducted for the registrar of banks that Sharemax’s funding model contravened the Banks Act. Surely at some stage someone is going to be prosecuted for this contravention?

The new board of the Sharemax group of companies also plans to seek permission from the high court for an offer of compromise in terms of the Companies Act to creditors in schemes promoted and marketed by the company.

However, it has been claimed that this planned offer was seeking to legalise an illegal act and was prejudicial to the rights of “prospective investors”.

In fact, doubts have been expressed about whether the Zambezi Retail Park or The Villa schemes had any investors or shareholders because a suspensive condition had not been fulfilled: the transfer of the properties into the syndication vehicle mentioned in the prospectuses for both of these schemes.

But can such a scheme of arrangement be applicable to investors and shareholders in the company or only creditors?

In terms of a government notice on property syndications, the money deposited by prospective investors into the trust account of Weavind & Weavind must be repaid if the syndication does not proceed.

Weavind & Weavind maintains the government prohibition on the release of investor funds for a property syndication prior to the transfer of the property is not applicable to the firm and various clauses in the prospectuses made it “abundantly clear” it was not the intention that investors funds would only be paid out of trust once the property had been transferred. However, the prospectuses also specifically state that investors funds will not be released from its trust account prior to the transfer of the property.

What then gives Weavind & Weavind the right to ignore or disregard a mandatory government notice related to property syndications?

The share and debenture certificates issued by Sharemax to prospective investors also specifically state that their “investment” would be deposited into Weavind & Weavind’s trust account and “kept there until the investment amount is processed and the property is transferred”.

Finally, an arbitration last year concluded Sharemax must pay R64 million, excluding damages, to Capicol.

This amount was due for payment by no later than March 7, but the Sharemax board has admitted it is unable to pay it. Does this not mean Sharemax is insolvent?

If so, does the rescue plan being hatched by the new Sharemax board mean the company is still trading and the directors of the company could be held liable for reckless trading?

It is obvious this saga, involving about 40 000 shareholders who have invested about R4.5 billion in property syndications promoted and marketed by Sharemax, will probably take years to resolve. page 20