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.
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.
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”.
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 18.104.22.168, 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.”
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.
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.