The Companies and Intellectual Property Commission (CIPC) has issued a notice to the Nova Property Group asking it to show why it should be allowed to continue trading as a going concern. If Nova fails to convince the CIPC of this, the commission could issue a compliance notice to shut its operations down.
It is understood that Nova has already responded to the CIPC notice and the commission is currently considering the matter, with no final decision having yet been made.
The Nova Property Group is the failed Sharemax investment scheme’s rescue vehicle and was established to repay an estimated R4.6 billion to 17 800 former Sharemax investors.
If the company is shut down, it could have dire consequences for these investors; they may never get to see the repayment of the full or even a portion of their original investments.
Moneyweb can confirm that the CIPC issued the CoR 19.1 notice to Nova earlier this year. It was issued in terms of Section 22 of the Companies Act, which prohibits a company from trading recklessly, negligently, fraudulently, or under insolvent circumstances.
Once the notice is issued, the company is expected to submit documentation to the CIPC to justify why it should continue trading and remain in business. If this response does not convince the CIPC, it may issue a notice to shut the company’s operations down.
In response to Moneyweb’s questions, Nova CEO Dominique Haese said Nova responded to the CIPC notice. “The Group [Nova] is and has always been solvent and liquid. The CIPC has received the latest AFS [annual financial statements] supporting this. The CIPC Notice has been comprehensively and adequately dealt with.” (Haese’s full response to Moneyweb’s questions can be seen here.)
The latest AFS Nova submitted to the CIPC are for the financial year to the end of February 2020.
The AFS show that Mkiva, Nova’s new auditors, not only qualified the statements but also expressed its concern that “material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern”.
This is the third consecutive year in which Nova’s auditors have expressed such a concern: Nova’s previous auditors, Nexia SAB&T, expressed similar views for the 2018 and 2019 financial years. It is also the third consecutive year in which Nova’s auditors have qualified its financial statements.
In response, Haese stated 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 group, during the financial year ended February 2020 not only traded in solvent circumstances, but generated a profit of R1.9 million (increased to R21.4 million having regard to certain adjustments).
“One year on, from the auditors’ report to the 2020 AFS, the group is still able to operate as a going concern for the year going forward, again demonstrating the auditors’ concerns proving to be without merit.”
Interestingly, Nova issued a communique to debenture holders on April 9, addressing the auditors’ findings. The communique, however, did not mention the CoR notice.
CoR 19.1 notices
The CIPC does not issue many CoR 19.1 notices, only around three such notices every year.
The process starts when a ‘concerned stakeholder’ submits a complaint to the commission, or if the commission itself looks into the company’s conduct.
The CIPC then makes initial enquiries with the company and requests financial information. The commission will then analyse the information and decide whether to issue a CoR 19.1 notice. The company is then obligated to make a formal submission to the CIPC to justify why it should remain in business.
The CIPC then analyses the company’s submission and makes a final decision on whether or not it should issue a notice to close the business down.
While this may be a drastic measure to take, the commission will have weighed the economic impact of such a decision, considering the potential implications on employees, creditors, shareholders and suppliers.
In Nova’s case, based on the latest AFS, the stakeholders with the highest vested interest are debenture holders, lenders, financiers and suppliers.
There isn’t a set timeline for the CIPC to make a final decision. However, the CIPC confirmed to Moneyweb that “timelines are informed, inter alia, by the merits of the matter, taking into account the potential legal processes (e.g. court appeal) that may unfold post-response by the company from which a CoR 19.1 was issued”.
The maximum sanction the CIPC can impose if a company is deemed to be trading recklessly and or insolvently is to issue a compliance notice, forcing the business to stop operating.