CIPC concerned about Nova’s ability to repay debenture holders_ ( SHAREMAX)

CIPC concerned about Nova’s ability to repay debenture holders Commission doesn’t believe Nova has the authority to postpone payments to after January 20, 2022. By Ryk van Niekerk 24 Nov 2021  00:01 The Companies and Intellectual Property Commission (CIPC) is concerned the Nova Property Group is not in a financial position to repay former Sharemax investors, and also questions whether the company has the mandate to repay investors after the deadline of January 20, 2022, as stipulated in the original Schemes of Arrangement (SoA) and the Nova Debenture Trust Deed. The CIPC also believes Nova did not disclose that it has the discretion to postpone repayments post this deadline properly to debenture holders – despite Nova’s assertion to the contrary. Moneyweb Insider Gold. Read: Sharemax rescue vehicle faces CIPC shutdown CIPC asks Nova to explain why it should not be closed down Auditor flags Nova’s ability to continue as a going concern for 3rd year in a row Nova has sold more than half of its investment properties This is evident from the two compliance notices the commission issued to Nova in February and October this year. Moneyweb obtained copies of the two notices, as well as Nova’s response to the first notice and a CIPC inspector’s report, after submitting a request in terms of the Promotion of Access to Information Act to the CIPC. The documentation reveals that the CIPC rejected the bulk of Nova’s response to the first compliance notice, in which the company claimed it was solvent and had the authority to postpone the repayment of debentures. The commission has now given Nova a final opportunity to prove it is solvent and has the cash to repay its liabilities when they become due. According to Moneyweb’s calculations, Nova needs to submit a response on or before December 20, 2021. If Nova fails to convince the CIPC, the commission may shut the company’s operations down. This will result in the Sharemax rescue vehicle being placed under administration, into business rescue or even into liquidation. Read: Moneyweb editor physically and forcefully denied entry to Nova’s AGM How former Sharemax investors ‘saved’ Connie Myburgh Compliance notices The CIPC issued the first compliance notice to Nova on February 4, 2021. It was a CoR 19.1 compliance notice issued in terms of Section 22 of the Companies Act, which prohibits a company from trading recklessly, negligently, fraudulently, or under insolvent circumstances. In the notice, the CIPC demands that Nova submit its annual financial statements (AFS) for its 2020 financial year. The commission needs the AFS to gauge whether the company’s financial position had improved from the previous year when the external auditors qualified the financial statements and expressed concern as to whether Nova could continue to operate as a going concern. The CIPC also disputed a note in the 2019 AFS that stated Nova has the option to delay the repayment of debentures beyond the 10-year deadline specified in the SoA. “The commission is of a different view in light of the contents of the debenture trust deed, in that it believes the debentures must be settled by no later than 20 January 2022,” the notice reads. The notice demanded that Nova submit a resolution in which it commits to repay debentures before the deadline and to prove it has the financial resources to do so. The commission also requested that Nova provide proof that debenture holders agree with the Nova board’s position that it has the discretion to repay debentures after the deadline. Nova’s formal response Nova formally submitted its response on March 3. In the response, Dominique Haese, Nova’s CEO, denied Nova was in contravention of Section 22 of the Companies Act and that it was operating “recklessly, with gross negligence, with the intent to defraud a person, or to have a fraudulent purpose, or that it is unable to pay its debt as they become due in the ordinary course of business”. Nova CEO Dominique Haese. Image: Nova website Haese said the CIPC did not refer to any specific conduct to justify such an assertion. She also stated repeatedly that Nova was factually and commercially solvent, that the company’s assets exceed its liabilities and that the company is able to repay its debts when they become due and payable. Regarding the qualified audit opinion of the 2019 AFS, Haese said: “The content of the 2020 AFS demonstrates that the auditors’ concerns, as expressed in the 2019 AFS, proved to be without merit and that the Nova Group, during the financial year ending 28 February 2020 not only managed to trade in solvent circumstances but generated a profit of R1.9 million (increased to R21.4 million having regard to certain adjustments).” However, neither the CIPC nor Nova refer to developments disclosed in Nova’s 2019 AFS that may be regarded as reckless behaviour. The first is the auditor’s warning that Nova used the proceeds of the sale of investment properties to fund operational expenses. The second is that the company borrowed nearly R40 million from a bridging finance provider at the astronomical interest rate of 1% per week, as it could not secure funding from commercial banks. Nor did either the CIPC or Nova refer to Nova’s qualified 2018 AFS, in which the auditor also expressed its concern that Nova could not continue to operate as a going concern. It would be a contravention of Section 22 of the Companies Act to operate insolvently. Payment of debenture holders Of particular importance was Haese’s assertion that Nova has the option to postpone the repayment of debentures beyond January 20 next year. In the CoR 19.1 notice, the CIPC expressed a view that Nova needs to settle the debentures before the deadline and doesn’t have the option to postpone payments. However, Haese said the debenture trust deed explicitly gives the company the option to postpone payment. Haese quoted several clauses from the trust deed to validate its position. The most pertinent is paragraph 6.3.1.2, which states that debentures shall be redeemable on “any date on which the company elects with the receivers and the trustee’s written approval to redeem some or all of the debentures”. Haese said “it is appreciated that the CIPC holds a different view but this is essentially a matter of differing legal opinion”. She continued: “Even if the company’s view in regard to the due date for repayment of debentures is found to be incorrect, its view is nonetheless held bona vide [sic] and should not be conflated with recklessness, gross negligence or fraud.” Haese also said Nova does not have to prove that debenture holders share this view, as the CIPC requested. “The terms of the debentures are objectively ascertainable. Those terms prevail whether the individual debenture holders understand that to be the case, or not.” Former Sharemax shareholders mingle after a shareholders’ meeting. Image: Moneyweb CIPC rejected Nova’s response However, the CIPC rejected virtually all of Nova’s explanations and issued the second compliance notice in October. It was a CoR 139.1 notice which was issued in terms of Section 71 of the Companies Act. Cuma Zwane, an investigator for corporate disclosure and compliance regulation at the CIPC, stated in an inspector’s report that there are discrepancies in Nova’s disclosure of the conditions tied to the debentures. In April 2021, Nova sent a communique to debenture holders in which it said that although the “board has the discretion to postpone the payment of Debentures, beyond the projected 10-year Scheme of Arrangement period, the Board, in February 2021, made the decision to commence Debenture payment during 2021”. But the inspector’s report refers to the fact that Nova did not disclose in its 2017 and 2018 AFS that repayments may be postponed, while stating in all of its other AFS between February 2014 and February 2020, that the period it had to repay the debentures could be extended. According to the report, these discrepancies in the AFS, read in conjunction with the SoA and Debenture Trust Deed, raised a concern. “There is no express provision in neither the Schemes of Arrangement nor the Debenture Trust Deed that gives the directors the exclusive discretion to postpone the repayment period without the receivers and the trustee’s written approval,” the report states. Zwane also highlighted that the trustee of the trust resigned in 2019 and Nova never followed the prescribed process to have him replaced. “As such, debenture holders have no representation in the company and are unable to or have limited capacity to exercise their rights as outlined in the debenture trust deed.” The receivers are Hans Klopper, business rescue practitioner of the Highveld Syndication Companies and head of restructuring at BDO in South Africa, and Connie Myburgh. Myburgh is also chair of Nova and a major shareholder in the company. Read: Findings against Nova chair referred to the NPA Highveld Syndication BRP and Nova chair sued for R110m The dark underbelly of the business rescue industry Connie Myburgh, chair and shareholder of Nova (left), and Hans Klopper, business rescue practitioner of the Highveld Syndication Companies and head of restructuring at BDO in South Africa, are the receivers of the Nova Debenture Trust. They need to approve any postponement of the repayment of debentures to after January 20, 2020. Image: Moneyweb The CIPC also rejected Nova’s claims that it is solvent and has the cash to pay liabilities when they become due. This stems mostly from Nova’s failure to publish its 2020 AFS before August 2020. This was in contravention of the Companies Act, which prescribes that it must be published within six months after its year-end. Nova eventually published the 2020 AFS on February 26, 2021, nearly six months late. Zwane wrote that the absence of the 2020 AFS made it impossible for the commission to ascertain whether Nova is in a solvent financial position and could repay creditors for its financial year to the end of February 2022. The CIPC demands that Nova submit the following documents in response to its CoR 139.1 notice: A signed board resolution where Nova commits to repaying debenture holders as it undertook to do in a communique sent to debenture holders in April. In this communique, referred to above, the board indicated it would start to repay debentures in 2021. Nova’s AFS for its 2021 financial year, which was due to be published before the end of August. The CIPC states it wants to confirm the amount of current liabilities due at the end of February 2022 and whether Nova is solvent. Confirmation from the trustee of the Nova Debenture Trust that the Nova board “may postpone” the repayment debentures after January 20, 2022, as projected by the SoA. If Nova cannot submit such confirmation from the trustee, then “substantive proof” that the company is solvent and has sufficient liquid assets to ensure the company can meet its current liabilities in its 2022 financial year. The threat of legal action It is conceivable that this case could head to court, especially as Nova has already threatened the CIPC with legal action. Nova’s response to the first compliance notice was accompanied by a covering letter from Nova’s attorney Diaan Ellis of the law firm Faber Goertz Ellis Austen. In this letter Ellis proposed that should the CIPC reject Nova’s response, Nova is afforded an opportunity to approach the High Court for a declaratory order. Ellis threatened that should the CIPC not agree to such a course of action, Nova would apply for an interdict preventing the commission from validating the compliance notice pending the outcome of a declaratory process. Zwane confirmed to Moneyweb that the CIPC did not expressly agree to such a course of action, but that Nova did not take such a course of action. Download: The CoR19.1 Compliance Notice the CIPC issued to Nova in February 2021 Nova’s response to the CIPC CoR19.1 Compliance Notice CIPC inspector’s report in response to Nova’s response The CoR139.1 Compliance Notice the CIPC issued to Nova in October 2021 AUTHOR PROFILE Ryk van Niekerk Ryk is an award-winning financial journalist with over 20 years' experience. He is Moneyweb’s editor and hosts the Market Commentator podcast and RSG Geldsake, covering the markets, and financial and investment content, joined by CEOs, entrepreneurs, policymakers and others. Ryk is a renowned public speaker and facilitator, and a regular political and economic commentator on local media platforms. He has an MBL and M.Phil in Journalism – both achieved cum laude. Comments CIPC has no power over Sharemax rescue By Roy Cokayne Time of article published Sep 25, 2014 SHARE THIS ARTICLE: Roy Cokayne THE COURTS are the correct forum to review the conduct of the business rescue practitioner appointed to run Sharemax Investments, according to the Companies and Intellectual Property Commission (CIPC). Astrid Ludin, the CIPC commissioner, said this week that the provisions of the law did not impose an obligation on the commission to monitor business rescue practitioners. Ludin’s comments follow claims by the SA Revenue Service (Sars) that Sharemax’s business rescue practitioner, Liebenberg van der Merwe, had been appointed on December 7, 2011, but to date had not published a business rescue plan for the company. The Companies Act requires a business rescue plan to be published within 25 business days after the date on which the business rescue practitioner was appointed. Any extension had to be approved in court or the holders of a majority of the creditors’ voting interest. Sars has applied for the setting aside and termination of Sharemax’s business rescue and its liquidation because of the company’s alleged inability to pay R15.7 million in outstanding taxes. Ludin said business rescue practitioners were officers of the court and the CIPC currently licensed practitioners for each rescue process. The CIPC was also responsible for receiving the initial business rescue notice, status updates and the termination notices. “The purpose is to provide creditors and members of the public [with] information about the status of the enterprise. The status report provides us with an indication of whether the process is ongoing,” she said. Ludin stressed that progress had to be reported to the shareholders and creditors by the practitioner and the CIPC was not in a position to monitor compliance because it did not have the power to do so. “The CIPC only has powers to revoke conditional licences issued to business rescue practitioners. We did not issue a conditional licence in this case and, therefore, cannot revoke the licence,” she said. “We have no other powers related to business rescue. The court is the correct forum to review matters of compliance. Attempts to obtain comment from Van der Merwe about Sharemax were unsuccessful. However, Elle-Sarah Rossato, a Sars official, said that in an affidavit in support of Sars’s application, Van der Merwe claimed in October last year that a business rescue plan for Sharemax could not be finalised until quantification of Sars’s claim was finalised and finality was achieved on the complaints adjudicated by the ombud for financial services providers. This referred to the determination by the ombud between Gerbrecht Siegrist and Sharemax group companies, including Sharemax Investments, in terms of which all of these companies were held jointly and severally liable for the payment of R580 000 to Siegrist. Rossato said using the quantification of Sars’s claim to delay matters was “disingenuous and incorrect” because the correctness of the tax debt was confirmed at a meeting in September last year. Van der Merwe’s assertion that the business rescue plan could not be finalised until finality was achieved on the Siegrist determination was “equally disingenuous”, because the decision was handed down on January 29 last year. Rossato said it appeared the reason for placing Sharemax Investments into business rescue was to obtain a moratorium against payments of debts, as afforded by the Companies Act. “The inescapable inference is that creditors of the first respondent [Sharemax] were misled with a promise that R40 million would be coming their way, while the controllers of the first respondent [Sharemax] had already decided to abuse the Companies Act’s business rescue provisions.” About 33 000 investors invested about R4.5 billion in Sharemax’s various schemes. Sharemax was placed under statutory management by the registrar of banks in 2010 when it defaulted on monthly payments to investors “Justice delayed is justice denied” Edited to add: Article from IOL. -------------------------------------------------------------------- Madmax 9 months ago Sharemax chronicles continue: ‘Old people die, the fat cats laugh’ Phillip De Wet 2 Dec 2016 Empty promises: Glynnis Morris has not seen any return from her investment. Empty promises: Glynnis Morris has not seen any return from her investment. Every few months 70-year-old Glynnis Morris receives a letter from Frontier Asset Management. In broad strokes the letter tells her how well everything is going with Frontier’s sibling company, Nova Property, into which her entire R300 000 pension was forcibly invested. She no longer reads the letters. She goes straight back to figuring out how to get by on her R1 500-a-month government old-age grant. “It’s always the same letter, only the dates change,” she says. She has not seen a single cent from her investment for many years now, Morris says, no hint of the R3 125 monthly income — plus maybe some capital growth if the property market did well — she thought she was buying when she invested in the ill-fated Sharemax property syndication scheme in 2009. Instead she has seen many promises from the directors of Nova, which stepped in as the rescuers when Sharemax collapsed and took over Sharemax’s assets. In return for delivering that service to Morris and others, the directors of Nova each paid themselves an average of R4.9‑million in the past financial year. Morris has it better than most. She lives in a granny flat attached to the home of one of her daughters, and her two other daughters help her out with food “when I run out, which is often”. When the Mail & Guardian this week traced two other former Sharemax and now Nova investors, we found that one had died in March and the other had recently slipped into a coma. “This is what happens all the time,” said a relative of the latter. “These old people had their money taken. Now they don’t eat properly, then they get ill and they die, while the fat cats are laughing all the way.” The Nova directors — Dominique Haese, Rudi Badenhorst, Dirk Koekemoer and Connie Myburgh — deny they are anything other than businesspeople who work hard to manage the assets in which Sharemax participants had invested. But the difference between their rewards and those of the original investors is stark. This week, specialist financial website Moneyweb calculated that the four Nova directors’ combined R15.1‑million cash salaries in the past financial year were more than double the average earned by executives at most property management companies. Those cash salaries, Moneyweb said, represented 17% of Nova’s total cash receipts for the financial year. The four directors have near total control over how the company spends its money. After a legal battle stretching over several years to obtain the technically public register of Nova shareholders, Moneyweb last week revealed that the directors own 87.1% of the company, and have even greater voting rights thanks to a structure that reduces debenture holders to recipients of money and information as and when the four directors see fit. The directors value their shareholding, which in effect they received for free, at more than R1‑billion. Nova chief executive Haese played a pivotal role at Sharemax before it collapsed, and fellow director Koekemoer was also a director of Sharemax for several years. It is clear that directors pay themselves first from the company’s proceeds before any payments to the debenture holders they are responsible for, Moneyweb said. As a result, averaged over the past two financial years, Nova directors paid themselves out R3.6‑million each a year. The 31 000 debenture holders whose money they manage were paid an average of just less than R400 each. Average payments to debenture holders are a poor metric, because often the Nova directors do not see fit to provide. In the last communication Morris received, Nova was self-congratulatory about a 2013 decision “to reduce and/or cease projected monthly return payments” to debenture holders in favour of using the cash to refurbish shopping centres. Morris did not get any real say in the decision to pay her no interest, just as she was never really consulted when Sharemax morphed into Nova, or even on how her pension would be invested in the first place. In fact, she did not understand the mechanism of the investment. But then, nor did her investment adviser. Morris thought she was putting her money into The Villa, a large shopping centre to be built east of Pretoria. That sort of bricks-and-mortar investment suited her risk appetite — extremely low — as it did many pensioners, which seems to be the main reason Sharemax drew so many of their ilk. What her savings were actually buying, later perusal of a prospectus would reveal, was “an unsecured subordinated interest rate acknowledgment of debt linked to a share”. In the rush to get her money invested, that went over Morris’s head. Her investment adviser had been “hounding” her about when she would receive her pension lump sum, she recalls. The very morning it landed in her bank account he accompanied her to the bank, explained to the teller what she wanted, took the resulting cheque from the teller and had Morris sign some forms. Interrogation of the mechanism of the investment was limited. “I said to him: ‘Are you absolutely positive that I’m not being conned here?’ and he said: ‘No,’” she recounts of the 20-minute transaction. Investment advisers were notoriously keen on Sharemax, which paid very large upfront commissions: like the current Nova directors, advisers got paid regardless of whether the risk their clients were taking paid off. And some, like Morris’s adviser, had no understanding of that risk, the office of the ombud for financial services providers, known as the FAIS ombud, has consistently ruled. “It is apparent from [Morris’s advisor’s] version that he had no idea just what the investment was about and, as such, could not appreciate that the complainant was lending money to an entity, which entity would in turn lend the funds to a developer, leaving investors with no form of security whatsoever,” ombud Noluntu Bam ruled in Morris’s case this August. There was also the small detail that the shopping centre Morris was supposedly investing in had not yet been built and could therefore not generate rental income to pay her 12.5% interest — the promised payments could only come from the investments of other people. Although Sharemax has never been found by a court to have been one, that is the common structure of all Ponzi schemes. The FAIS ombud ordered Morris’s adviser to repay her investment in full, under rules that make advisers liable for losses incurred because of their negligence. For a short while it looked as if she would get back her savings. Then she was notified that her adviser had appealed against the ruling. That leaves only the chance that the four well-paid directors of Nova will see fit to direct some money her way. But she is not overly optimistic, and she is not alone. “The investors who complain to this office have received no credible information as to the steps that are being taken to repay their investment,” Bam wrote in May about another Sharemax-related complaint. “Most investors see incomplete and ghost buildings all around, with no suggestion that they will ever recover their money.” But in a June letter the Nova board told Morris that the various hurdles to cashing in on her partially built shopping centre were “constantly being addressed by the board” — just as it has been telling her since at least 2014. Nova did not answer detailed questions. Earlier this week, chief executive Haese told Moneyweb she would no longer provide information because it “will be twisted and used out of context for the purpose of further negative reporting”. Subscribe to the M&G These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever. The Mail & News report …..2016