Nova board may not have ‘capacity or intent’ to repay former Sharemax investors

The Companies and Intellectual Property Commission (CIPC) believes the board of the Nova Property Group may not have the capacity or intent to repay former Sharemax investors.

The CIPC further believes the board, under the leadership of chair Connie Myburgh and CEO Dominique Haese, are indirectly winding the company up through the aggressive selloff of the former Sharemax properties.

This is evident from the Inspector Report on which the CIPC based its recent instruction that Nova may not sell any additional immovable assets.

Moneyweb obtained a copy of the report after applying to the CIPC in terms of the Promotion of Access to Information Act.

Read the full report here.

The 26-page report, penned by CIPC inspector Cuma Zwane, states that: “reasonable doubt exists on the board’s intention and capacity to fully implement the Schemes of Arrangements”.

“As such, the company should not be permitted to continue trading under the current board’s control and should therefore be subjected to some form of supervision or administration, pending the outcome of the recommended inter-regulator deliberations.”

Read:
CIPC orders Nova to stop selling properties
Nova continues to flog properties
Nova may be a bigger failure than Sharemax

The CIPC has already initiated this inter-regulatory process which will include several regulators, among them the South African Reserve Bank (Sarb), the Hawks, the Financial Intelligence Centre, and the Financial Sector Conduct Authority.

The process is aimed at producing an accurate account of Nova’s execution of the Section 311 Schemes of Arrangement (SoA), which tasked it to repay investors within 10 years after Sharemax’s implosion, and the roles various regulators played in this outcome.

This CIPC-driven process is the first official investigation into why Sharemax and Nova failed and whether regulators, such as the Sarb, could be held accountable for its failures.

The outcome may offer some answers for the 18 600 investors who invested R4.6 billion in Sharemax, most of whom were not repaid in terms of the SoA. It may also offer them potential recourse if it is found that the regulators failed in their duties.

Read: No prosecution for Sharemax implosion – NPA

‘Flawed in many respects’

Nova’s board has already stated the compliance notice is “flawed in many respects” and has applied to the Companies Tribunal to take it on review.

In response to questions regarding the content of the inspector’s report, Haese says that since the review process has started and is subject to legal proceedings, “it would not be appropriate to debate the content of the compliance notice or the report with you, and we refrain from doing so at this time”.

Read Haese’s full response here.

Read: Nova to take the CIPC’s ban on its ability to sell properties on review

Nova board’s claim of authority to postpone repayments means ‘it can do as it pleases‘

A key theme of the report is the CIPC’s view that the SoA did not allow the Nova board to postpone the redemption of debentures beyond the “clearly articulated” 10-year repayment period, which ended in January this year.

Read:
Sharemax rescue vehicle makes a U-turn on payments to investors
‘Sharemax investors screwed twice’

The report states that the board’s view implies that it “was given autonomy to do as it pleases without accountability to neither the debenture holders nor the Sarb, or even the commission …”

“If autonomy is the case, then the SoA has proven to be a vain and ineffective instrument in governing and administering the repayment plan and rendered the withdrawal of the Sarb directives futile, potentially making the alleged illegality of the former Sharemax companies’ business prevalent in the form of Nova.

“All that would have happened is a transfer of Sharemax’s assets into another entity, a change of the management’s composition and undue alteration of ownership and equity; the legal implications of which are astronomic, not only for Sarb and the commission, but for every regulator, juristic person and natural person that was party to the actions taken which led to the restructuring of the Sharemax companies.”

(The Sarb issued the directives ordering the repayment of investors after it found Sharemax contravened the Banks Act. After the SoA was adopted, it withdrew the directives.)

Nova chair Connie Myburgh (left) and CEO Dominique Haese. Image: Supplied

Financial analysis

The report includes a detailed analysis of the extent of the board’s failure to repay investors and the deterioration of the company’s financial position.

It found Nova only repaid R176.7 million worth of debentures over the prescribed 10-year period, representing “a meagre 12.12%” of the total sum of cash Nova received from its customers, borrowings and the sale of properties.

It also highlights that only 30% of the R590.2 million proceeds it received from the sale of properties before 28 February last year was returned to debenture holders.

“[This] doesn’t even come close to what ought to have been paid, save for the disbursement made in the 2013/2014 financial year.”

The table below appears in the report and compares the actual repayments with the projected repayments.

Source: CIPC Final Inspector Report on Nova Propgrow Group Holdings Ltd

The liquidation scenario was better than SoA outcome

The report also states investors would have been better off had Sharemax been liquidated in 2012.

The SoA explanatory documentation avowed investors would lose as much as 70% of their investments in a liquidation scenario and that the SoA would yield much better returns.

“Ten years later, investors are in a far worse position than what was presented to them,” Zwane writes.

According to Moneyweb’s calculations, Nova has sold 19 of the 28 properties it inherited from Sharemax.

Read:
Nova has sold more than half of its investment properties
Nova continues to flog properties

“Not only has Nova not been able to meet its obligations per the SoA, it has relied heavily on the disposal of immovable property to meet its financial obligations and supplement its operational expenses, which has eroded a significant part of its capital structure,” the report reads.

It adds that “the continued disposal of its immovable properties constitutes an indirect winding-up of the company, without the Nova board formally pronouncing it as such or classifying its actions as a voluntary liquidation or winding-up in terms of sections 79 and 80 of the Act.”

Nova has, on numerous occasions, denied that it is trading insolvently.

Directors to benefit if repayment is postponed

However, the report doesn’t analyse how much Nova’s directors, especially Myburgh and Haese, have earned since the scheme’s inception.

Moneyweb calculated that between 2011 and 2021, Myburgh and Haese earned R36 million and R37 million in salaries and bonuses respectively.

Since Nova has not published its 2022 annual financial statements (AFS), it is not evident how much they earned during the subsequent 18 months to the end of August.

However, supposing they continued to receive their respective salaries of around R364 000 per month for the 2022 financial year and the subsequent six months to the end of August, their total remuneration since 2012 would jump to R42.5 million and R43.5 million respectively.

Based on this assumption, Myburgh and Haese have collectively earned approximately R86 million, representing 49% of the R176.7 million debentures that have been redeemed.

(In addition, Myburgh was paid R20 million for penning the SoA, and R10 million as repayment of a loan account, linked to Nova’s acquisition of Cold Creek.)

Read: How former Sharemax investors ‘saved’ Connie Myburgh

If the scheme is extended, they may continue to reap significant financial benefits.

‘Canvass with the trustee‘

The report is also highly critical of the Nova board’s view that it has the authority to postpone repayments and the conduct of Jean-Pierre Tromp, the newly-elected trustee of the Nova Debenture Trust (NDT).

The CIPC believes Nova could only postpone the redemption of debentures beyond 10 years if the trustee and debenture holders approve it. The Nova board disagrees and says the board has the discretion and doesn’t need the approval of the trustee or debenture holders.

However, in previous correspondence with the CIPC, Nova stated that it would “canvass” the CIPC’s view with the trustee regarding his “attitude” towards the postponement.

Zwane took exception to this: “It is alarmingly shocking and grievously concerning that the board’s view on this matter was relegated to a mere ‘attitude’ on the part of the trustee when the required approval ought to have been informed by a resolution or equivalent consent by the debenture holders (on behalf of whom the trustee should be acting),” Zwane writes.

Quick decision

Tromp was appointed as the trustee on 18 January this year.

Read: ‘We invited whom we could’

He immediately approved the postponement and informed the CIPC of his decision a day later, but without first obtaining a mandate from debenture holders to do so, as was required by the CIPC.

“This raises grave concerns as to whether Mr Tromp represents debenture holders or himself, or some other stakeholder(s),” the report reads.

“If the trustee has absolute discretion to make decisions that affect debenture holders without their approval, then the debenture holders are still without representation in terms of exercising their rights as per the trust deed.”

In response to Moneyweb questions, Haese says the CIPC stated that the compliance notice indicated “the trustee could assent to debentures being repaid after ten years”.

She adds: “Nova disagrees with the CIPC’s view but the issue was canvassed with Mr Tromp nevertheless and he, accepting for present purposes the correctness of the CIPC’s view, agreed to the extension.”

Tromp’s decision to postpone

However, it seems that Tromp approved the postponement without adequately studying the SoA, the trust deed or other relevant documentation.

On 20 January, two days after his appointment and a day after he informed the CIPC of his decision, Moneyweb invited Tromp to be interviewed on radio. (At the time, Moneyweb was unaware that he had already approved the postponement.)

In a WhatsApp message, Tromp declined to be interviewed as he was “meeting the management and legal representatives regarding the extension of the ten-year period and the best solutions ahead”.

He added: “For what it is worth, I have ten years of AFS to go through, CIPC documents and literally hundreds of documents regarding the schemes of arrangement.”

It is clear Tromp approved the extension without considering the relevant documentation.

Tromp declined to comment when Moneyweb questioned him about approving the postponement without properly studying the documentation.

Asked whether the Nova board canvassed Tromp before he took the decision, Haese says: “We do not intend to debate with you our engagements with Mr Tromp, but suffice it to say that Mr Tromp was properly briefed in a timeous fashion; he has, at all material times, acted independently and without any coercion.”

Contravention of the Companies Act

The report also states that Nova’s board contravened the Companies Act by submitting misleading annual financial statements that were not a fair reflection of the company’s financial position.

It further states that Nova did not publish its AFS within the prescribed six months after its year-end on seven of the past 10 financial periods.

Nova also failed to publish its most recent AFS – for the financial year to the end of February, which were due at the end of last month (six months after year-end) – which makes it eight out of 11 financial years.

Read: Nova board sidesteps disclosure obligations