Former Sharemax investors may have ‘saved’ Connie Myburgh, chair of the Nova Property Group, from a significant personal financial liability within months after Nova was mandated in terms of a court-sanctioned scheme of arrangement (SoA) to save their Sharemax investments.
The case dates back to 2012 when Nova bought a company named Convey Assist, of which Myburgh was a director and shareholder. The company was facing liquidation and Myburgh (and its other directors), who signed unlimited surety on a previous loan from Rand Merchant Bank (RMB), could have been held liable to repay millions of rands to the bank. However, Nova stepped in and acquired the company for the amount due to RMB. Nova did not disclose the actual transaction amount, but Moneyweb has been informed that it was in excess of R43 million.
As Myburgh was a director of both companies, it was a related-party transaction, which had to be disclosed as such in Nova’s 2013 annual financial statements (AFS). However, according to several chartered accountants and auditors who Moneyweb asked to analyse Nova’s disclosure of the transaction, the disclosure was inadequate and suggests that Nova may have tried to hide it. One even described the disclosure as a “disgrace” and “aimed to mislead investors”. (See below.)
In response, Nova CEO Dominique Haese vehemently denied any impropriety and said the assumption that Myburgh was “saved” is incorrect and entirely without substance. She said Convey Assist was acquired solely because it was a good development at a discounted price. She also stated Nova properly disclosed the transaction in terms of accounting standards. (See her complete responses further down).
In 2012, Convey Assist owned a 67-hectare piece of undeveloped land on the outskirts of Polokwane in the upmarket suburb of Bendor. It is within walking distance of the Mall of the North. Several individuals Moneyweb spoke to said it was a prime piece of land and ideal for a multi-billion-rand mixed-use development.
However, at the time, Convey Assist was in financial difficulty. Its main creditor was RMB, which brought a liquidation application in February 2012 against the company and claimed it was due more than R48 million.
Myburgh was one of four Convey Assist directors who had signed unlimited surety for the original R40 million loan RMB granted to acquire and develop the property. If Convoy Assist couldn’t repay RMB, Myburgh and the other guarantors may have faced dire financial consequences.
However, Nova came to their rescue when it acquired Convey Assist for the exact amount due to RMB, absolving Myburgh and his fellow directors of being held liable.
The bank withdrew the liquidation application after the transaction.
Nova also took over Myburgh’s Convey Assist credit loan account, which means Nova took over the responsibility to repay Myburgh all monies Convey Assist owed him.
The timing of the transaction and Myburgh’s conflict
The transaction must have represented a significant conflict for Myburgh, as he held several key positions in Nova.
The transaction was concluded less than a year after the high court approved the SoA in December 2011, which mandated Nova to repay the 18 700 former Sharemax investors (the majority becoming debenture holders in Nova) the R5 billion they invested in the failed scheme.
Myburgh was intimately involved with the process, as he conceptualised and wrote the rescue plan. The court also appointed Myburgh as a receiver of the Nova Debenture Trust, which was set up to ensure the proper implementation of the rescue scheme. Myburgh was also appointed as chair of Nova on January 20, 2012, three weeks before RMB filed its liquidation application in respect of Convey Assist, and he was a significant shareholder in Nova.
In this context, Myburgh was critical to the rescue process to recover the R5 billion the 18 700 investors put into Sharemax. In fact, he was probably the spearhead of the rescue efforts and should have committed the board to adhere to the highest possible corporate governance and disclosure standards.
Sadly, based on Nova’s handling of this transaction, it appears that he did not.
Moneyweb put detailed questions to Myburgh and the Nova board regarding Convey Assist, but Myburgh referred them to Haese.
In response, Haese denied any impropriety and said Convey Assist “was acquired solely because it was perceived to be a good acquisition at a significantly discounted price and for no other reason whatsoever”.
She denied the assumption that the transaction “saved” Myburgh and stated that it “is incorrect and is completely without substance”.
Haese acknowledged that Myburgh informed Nova of the development but said he did not propose that Nova should acquire it.
“Nova elected, without any provocation from Mr Myburgh, to investigate, of its own volition, whether the acquisition of the development was a viable commercial proposition so as to add value to Nova’s balance sheet to the benefit of Nova’s stakeholders.
“Nova, following its investigations, discerned that the development could be acquired for an amount being equivalent to the amount owed to RMB and that the acquisition cost was at a substantial discount to the actual value of the development.
“It was on the aforegoing basis that the Nova board, to the exclusion of Mr Myburgh, who recused himself from the process, made an offer to acquire the development at the acquisition cost, which offers was subsequently accepted and the development was acquired on this basis.
“Whilst it may be so that Mr Myburgh had signed surety pertaining to the moneys owed to RMB, at no stage, to Nova’s knowledge, did RMB make any demand on Mr Myburgh in terms of his suretyship obligations and certainly Mr Myburgh’s personal position did not feature in any discussion, at board level or otherwise, in the debates around the possible acquisition of the development.”
Regarding the taking over of Myburgh’s loan account, Haese said: “Nova bought the shares in the Cold Creek company (Nova renamed Convey Assist to Cold Creek Developments), in other words, inclusive of all its assets and liabilities. This included a historic loan account to a number of parties and Mr Myburgh. Mr Myburgh’s extant Nova loan account has nothing to do with the Cold Creek transaction. All Related Party balances and transactions are fully disclosed in the Annual Financial Statements.” (Links to Nova’s full responses to Moneyweb questions are available at the bottom of the article.)
Lack of proper disclosure
Although Haese insists that the transaction may have offered value to Nova, the board’s disclosure of the transaction and Myburgh’s involvement in the 2013 AFS needs further scrutiny.
The disclosure of related-party transactions is governed by IAS 24, a subsection of the International Financial Reporting Standards (IFRS). It is a set of accounting rules to make the financial statements of public companies such as Nova transparent and consistent.
IAS 24 prescribes minimum disclosure requirements, but its intention is to require a company to disclose the nature of any related-party relationship clearly and comprehensively. The disclosure should include sufficient information to allow stakeholders to understand the effect of the transaction on the company’s financial position.
Moneyweb sent Nova’s 2013 AFS, which was signed off without any qualifications by auditors BDO, to several chartered accountants, auditors and corporate governance experts. They were asked to analyse Nova’s disclosure and whether it adhered to the letter and spirit of IAS 24.
All of these experts said Nova failed dismally in this regard and questioned the motives thereof.
But first, let’s look at what Nova actually disclosed or, more importantly, what the company did not disclose.
Firstly, Nova did not disclose that Myburgh was a director of Convey Assist, or even that Nova acquired Convey Assist during the period. Nova also did not disclose the rationale for the transaction or any details regarding the impact it had on the company’s financial position.
The directors’ report, which offers an ideal platform for the board to inform stakeholders of developments in a company, does not even mention the transaction at all.
The only reference to the transaction appears in the ‘highlights’ section, but this reference does not mention Convey Assist by name or Myburgh’s related-party status.
It merely states as a bullet-pointed highlight: “Acquisition of new investment and development zoned property, adding net capital value in excess of R120 Million to Group assets, prior to development activities commencing.”
The AFS does not disclose any details about this “net capital value”.
Under the section dealing with related parties, the AFS discloses that Myburgh was party to a related-party transaction. But the apparent transaction relates to Myburgh being a director of Nova and a company called Cold Creek Investments 144 (reg: 2006/026427/07). No information is disclosed about this company and it is unclear how it is relevant to the transaction, as Convey Assist owned the actual property development.
It is extremely confusing as Nova changed the name of Convey Assist to Cold Creek Developments (reg: 2002/024839/7), which is a totally different company from Cold Creek Investments 144.
However, Moneyweb has been informed that Cold Creek Investments 144 was the project management company tasked to develop the Polokwane property which Convey Assist owned.
Very few people would have had the knowledge to link any of the Cold Creek companies or Myburgh’s benefit with the Convey Assist transaction.
In response to questions regarding the apparent lack of disclosure, Haese stated that there “had been full compliance with the necessary disclosure requirements”.
“The Related Party Note discloses all and any directors’ relationship vis a vis related companies, including the fact that Mr Myburgh is a director of Cold Creek Investments.(the old Convey Assist: name changed some 9 years ago). Again, there is no requirement ito any act or regulations that previous directors’ relationships should be disclosed,” she said.
From this comment, it seems as if Haese is also confused. Convey Assist’s name changed to Cold Creek Developments and not Cold Creek Investments 144.
As said previously, Moneyweb sent the AFS to several chartered accountants, auditors and corporate governance experts to ascertain whether they believe Nova’s disclosure adhered to the letter and spirit of IAS 24.
Charl Kocks, Principal of Ratings Afrika, the governance ratings agency, said: “On the basis of the information presented as well as what I have seen disclosed by Nova, I regard the Convey Assist purchase as most definitely reportable as a related-party transaction. The intention behind providing more information to all stakeholders in such cases, is that if the transaction itself is not wholly in the interests of the company doing the reporting, stakeholders can hold directors to account,” he said.
“If such information were to be withheld or to be vague or incomplete, it raises serious questions. Transparent reporting is the sunlight that avoids misunderstanding and ensures sound governance.
“This anecdote seems to indicate the presence of the exact opposite,” Kocks said.
André Prakke, an independent forensic auditor, didn’t mince his words: “The transaction represents gross misconduct, and it was aimed to mislead investors through poor disclosure.”
Prakke said the level of disclosure of the transaction was a “disgrace”. “You have to be an expert and have the required background knowledge to piece together the nature of the transaction and Myburgh’s involvement, as well as impact on Nova’s financial position.”
He added that “although the level of disclosure in terms of IFRS was at an absolute minimum, it was totally inadequate in terms of the SoA which sets out how investors funds should be utilised.”
Prakke also said the SoA does not provide for the procurement of external properties, and the board certainly could not use the proceeds of the sale of a former Sharemax property to fund such a transaction.
In response to a question as to why auditors BDO did not flag the transaction in its unqualified audit, Prakke said it seems as if the auditors did not understand the SoA. “Nowhere in the statements does BDO state it acquired a legal opinion regarding the proper implementation of the SoA. Strangely, the auditor did not have the property independently valued. It is common practice and should have been done as the board revalued the property and the materiality of the transaction on Nova’s financial position. If the transaction were not consolidated in the statements, the company would have been insolvent.”
Moneyweb approached Dirk Koekemoer and Rudi Badenhorst, who were on the Nova board at the time, for comment, but they declined the opportunity.
Nova gives debenture holders the cold shoulder on Cold Creek
The Nova Property Group’s poor disclosure of the transaction extended beyond the disclosure in the financial statements. Nova also did not directly inform its debenture holders, former Sharemax investors, about the transaction and the benefit that accrued to Myburgh.
Moneyweb also analysed all formal communication in its possession, which Nova had sent to debenture holders between 2012 to 2021, but could not find any reference, disclosure of Myburgh’s benefit, or even a progress report on the Polokwane development.
This is despite Nova offering detailed annual feedback on the performance of all the former Sharemax properties.
Nova’s 2015 AGM
However, Moneyweb obtained a recording of Nova’s 2015 AGM where Myburgh referred to the Polokwane development. During the meeting, he claimed the development was a huge success and said it added “net capital value” of more than R300 million to the group without adding any gearing.
A recording of the comments Myburgh’s made during the 2015 AGM related to Cold Creek.
Myburgh said: “What is interesting is if you look at the group and you analyse what we have done.
“Without external funding, without capital, we were able to, just on one project, which is a project that we bought in, add R300 million to the balance sheet of net asset value. That is a project in Polokwane that is in its infancy. The net worth of the project today is over R300 million. It is a fantastic project that is running extremely well. There is a very big school currently active on the property. Some 3 000 children.
‘There is a creche being built, hostels are being built, a hospital is being built, and residential properties are being built, to complement the school. It is a massive project. It is a multi-billion project. As I have said, currently the value is in excess of R300 million, with no gearing and we have sufficient funds on our borrowing that we just succeeded in doing, to grow this …” (sic)
It is unclear how Myburgh came to this R300 million number, as an analysis of Nova’s financial statements between 2013 and 2020 does not reflect this. It is also unclear why Myburgh could claim that a creche, hostels, a hospital and residential units were under construction, and the property remains undeveloped to this day.
The valuation of the property
In the 2013 AFS, Nova stated that the Convey Assist valuation was R178 million. This was not an independent valuation, but one by the Nova board. Nova states it was based on an independent valuation performed by DDP Valuers in April 2011, two years earlier and before Nova acquired the development. This valuation amounted to R122.4 million.
Nova’s valuation of the property since its acquisition is also very peculiar. The 2013 valuation of R178 million increased by more than 50% to nearly R270 million in 2015, without much, if any, development taking place.
It is also apparent that Nova never included an independent valuation in its annual financial statements. Moneyweb analysed Nova’s financial statements from 2013 to 2020, and during this period the board assumed the responsibility to value the property. This is in contrast with Nova’s stated policy (as disclosed in the 2014 AFS) to have all properties independently valued every three years.
However, Nova did have the property independently valued in 2017 before the company’s proposed listing on the JSE. Nova appointed Amanda Bruyns to value the properties for the company’s prospectus. Bruyns’s valuation was R199 919 802.
However, the Nova board decided not to use this independent valuation in its 2018 AFS. On the contrary, Nova’s board valued the property at R91.5 million, nearly R180 million less than a year before and R110 million less than Bruyns’s independent valuation.
The valuation was further reduced to R56 million in the 2019 and 2020 financial years.
Haese did not provide any insights into the valuation of the property.
Sale of Cold Creek
Nova seemed to have closed the chapter on the development as it claimed it was sold last year. However, Nova has now confirmed to Moneyweb that the property was actually not sold. Haese did not offer an explanation as to why the property was not sold.
Despite a lack of proper disclosure of the transaction, several other questions remain:
- Nova never disclosed how the transaction was financed. However, several individuals Moneyweb spoke to claim the transaction was funded with existing cash in the business, including proceeds of the sale of one of the former Sharemax properties, Rivonia Square. Rivonia Square was the first former Sharemax property Nova disposed of. It was sold in May 2012 for R115 million.
- Nova acquired Convey Assist without commissioning an independent valuation, which would have indicated appropriate corporate governance. Although several previous valuations of the property put the value at R100 million or more, RMB’s liquidation application contains an independent valuation which put the liquidation value of the property at only R18 million. If Nova waited and bought the property at the auction, it could have paid significantly less. If this happened, RMB could have held Myburgh and his fellow directors liable for the outstanding balance.
Did Nova have a mandate?
Another controversial element to the transaction – and possibly one of the most critical elements that need further investigation – is whether Nova could actually acquire additional properties to those it inherited from Sharemax, as the SoA does not explicitly allow for such transactions.
In response to questions, Haese said the SoA does provide for such transactions but did not indicate which paragraph in the document states this.