Nova may be a bigger failure than Sharemax

Auditor slaps Nova with an adverse audit opinion.
Debenture holders and other stakeholders should regard the adverse audit opinion as a giant red flag. Image: Moneyweb

In 2011, anxious Sharemax investors were advised to vote for an elaborate rescue scheme if they wanted their money back.

The approximate 18 700 investors consequently approved the scheme and started the decade-long wait to be repaid the R4.6 billion they invested in South Africa’s largest failed property syndication scheme.

The Section 311 Scheme of Arrangement (SoA) tasked the Nova Property Group to take ownership of the former Sharemax properties and to manage them in such a way as to repay the investors by 2022.

However, Nova’s financial position has deteriorated to such an extent over the past few years that it is doubtful that investors will see their money, or a portion thereof, anytime soon.

Nova’s latest annual financial statements (AFS) reveal a company in a desperate financial position. The company has a dire cash flow shortfall and only survives by using the proceeds of the sale of properties – funds that should be used to repay investors – to fund operational expenses and the lavish salaries of directors.

Nova has already sold more than half of its investment properties and is in the process of selling more. It is in no financial position to start repaying investors in terms of the SoA.

In fact, Nova may be a bigger failure than Sharemax due to Nova’s aggressive selloff of properties without repaying debenture holders, and the fact that it has no plans to start repaying in the near future.

Adverse audit opinion

Nova’s latest AFS covered the year to the end of February 2021, and for a fourth consecutive year, the group’s auditors expressed “significant doubt” as to whether or not Nova can continue as a going concern.

Current auditor Mkiva went even further, expressing an adverse audit opinion on the AFS.

Debenture and other stakeholders should regard this as a giant red flag.

An auditor only issues an adverse audit opinion if it believes the AFS contain material misstatements and do not reflect the company’s actual financial position.

This represents a severe indictment of the Nova board, led by chairman Connie Myburgh and CEO Dominique Haese.

Mkiva’s audit report shows it believes several properties are overvalued and that Nova continues to use the proceeds of the sale of properties to pay operating expenses.

The 2021 AFS shows Nova’s operating activities utilised R10 million of cash, which was funded by the sale of properties to the value of R13 million. In fact, according to Moneyweb’s calculations, Nova has never shown a positive cash flow from operating activities.

Nova’s income statement shows a profit of R15.4 million. The profit includes non-cash fair value adjustments of R29 million. This stems from higher valuation of properties – valuations Mkiva, in its adverse audit opinion, believes are inflated. If these adjustments were excluded, Nova would suffer a substantial loss.

However, the Nova board states in the AFS that it believes the company is in a “sound financial position”.

Repayment of debentures

Mkiva’s biggest concern is that Nova cannot repay debenture holders before February 2022 in terms of its interpretation of the original SoA. Mkiva also believes Nova’s board does not have the authority or discretion to postpone the repayment beyond this date.

The firm expresses this view by demanding that Nova should have included the total R2.2 billion of debentures as a current liability on its balance sheet. This would have meant that Nova should repay the debentures before the end of February next year, the end of its current financial period.

However, Nova is not financially able to do so, and the inclusion of debentures as a current liability would render Nova bankrupt.

December communique

Nova’s only solution to stay in business is to postpone the repayment of debentures – and the board issued a communique to stakeholders in December announcing a postponement. It also strongly argued that the board has the authority and mandate to postpone repayments to after the expiry of the 10-year period.

The announcement contradicts an announcement in April 2021 that it would start to repay debentures in 2021 and that it would take “a year or two”.

Read: Sharemax rescue vehicle makes a U-turn on payments to investors

Opinion of when the SoA ends

Mkiva’s interpretation of the original SoA and debenture trust deed, the documents that map out how debenture holders are to be repaid, is shared by the Companies and Intellectual Property Commission (CIPC).

The CIPC recently issued a second compliance notice after Nova, in its response to the first compliance notice, failed to convince the commission that it was not trading recklessly or insolvently.

The CIPC also disputed Nova’s authority to delay the repayment of debentures.

It is also bizarre that, despite the detailed SoA documentation and the debenture trust deed, there could be any misunderstanding about the date of the actual repayment deadline. 

Directors are the only beneficiaries

In all likelihood, the only people who stand to benefit from Nova continuing with its operations and the postponement of the repayment of debenture holders are the directors, and especially Myburgh and Haese.

They have been directors since Nova became the Sharemax rescue vehicle and have been handsomely rewarded.

During the nine years to the end of February this year, they have earned more than R35 million each in salaries and bonuses.

In the 2021 financial year alone and despite the company’s dreadful performance, Haese received a basic salary of R4.369 million (R364 100 a month), while Myburgh received R4.364 million (R363 729 a month).

During the year, Myburgh also received R1.8 million as repayment of a loan account.

Operations director Matthew Osterloh’s salary was R3.231 million (R269 255 a month).

Basic salary, 2021

Per annum Per month Per day
Dominique Haese R4 369 205 R364 100 R11 970
Connie Myburgh R4 364 752 R363 729 R11 958
Matthew Osterloh R3 231 064 R269 255 R8 852
R11 965 021 R997 085 R32 781

According to Moneyweb’s calculations, Nova’s executive directors have collectively received around R122.7 million since 2012 in basic salaries and bonuses. If Nova continues to operate, these directors will continue to receive their remuneration, while the debenture holders are again deferred.

In comparison, since 2012, Nova has only repaid debentures to the value of R176 million.

From Nova’s 2021 AFS and poor cash flows, all future salaries would also be partly funded by the proceeds of the sale of properties. The board seems to be aware of this, and has announced it is in the process of selling the Flora Centre and Amogela Mall properties.

Nova debenture holders have no representation

Unfortunately, debenture holders have no structure with which to hold the directors accountable. Debenture holders are not represented in any of Nova’s structures, and the few former Sharemax investors who elected to receive shares in Nova do not have any voting rights.

Nova’s directors took full ownership of Nova when they acquired a collective 95.7% stake in Nova for free.

This was done through an obscure inclusion of a formula in the original SoA – conceptualised and penned by Myburgh – which gave the shares to the directors if former Sharemax investors elected to rather receive debentures in the company than shares.

The shareholder register was only made public in 2016 after the board tried to keep it a secret, and was only released to Moneyweb after the Supreme Court of Appeal ordered Nova to do so.

Read:
SCA sends Nova packing
Part 1: ‘Corporate capture’ of the Sharemax rescue vehicle
Part 2: Shareholder structure hides how directors acquired 87.1% of Nova shares
SA’s most spectacular case of corporate capture

Myburgh and Haese later acquired 100% of the company’s voting rights. This means Myburgh and Haese have complete control over the company as majority shareholders and have full voting control. They, therefore, have the authority to set their own salaries.

Myburgh’s other roles in Nova are also significant. Myburgh initially conceptualised and wrote the SoA, for which he was handsomely rewarded. He also became a significant shareholder, earning R36 million as chairman since its inception. He is also one of the two receivers of the Nova Debenture Trust.

Given his multiple roles and historic involvement in Nova, Myburgh appears to be the ultimate authority with no accountability.

The other receiver is Hans Klopper, head of business restructuring at BDO.

The receivers’ job is to ensure the proper implementation of the SoA.

Moneyweb sent questions to Myburgh and Klopper in their capacities as receivers to gauge whether they agreed with the Nova board’s decision to postpone repayment and what actions they have taken as receivers after the CIPC issued the two compliance notices. Myburgh did not respond, and Klopper responded that he would not “engage with media around issues relating to professional appointments”.

Nova also failed to replace Derek Cohen as the trustee of the debenture trust when he resigned in 2019. However, and only after Mkiva and the CIPC questioned the board’s failure to do so, the board convened a debenture holders meeting on January 11 2022 to replace him. A group of debenture holders is trying to nominate their own trustee.

Read: Nova debenture holders stand up to the Sharemax rescue vehicle

Harrison and White

It is also relevant to note that Myburgh and Klopper were also involved with another company in which an apparent inevitable liquidation was delayed and where assets were stripped, leaving creditors with crumbs.

In 2017, respected retired judge Eberhardt Bertelsmann conducted a Section 417 investigation into developments that led to the liquidation of a company, Harrison and White. Klopper was the business rescue practitioner, and Myburgh was a legal advisor to the company during this period.

Bertelsmann found that Myburgh “colluded with the company directors and management” to delay an inevitable liquidation application, which allowed sufficient time for the stripping of the company’s assets.

Bertelsmann’s report recommended to the Master of the High Court that Myburgh’s conduct be referred to the National Prosecuting Authority for investigation, which the Master did.

Bertelsmann stated Klopper has been “gravely remiss in the exercise of his functions” as a business rescue practitioner and that he should have been aware the company was insolvent and taken action to liquidate the company to ensure the best outcome for creditors.

At the time, Myburgh and Klopper vehemently denied any wrongdoing and accused Moneyweb of illegally publishing the Section 417 report.

Read:
The dark underbelly of the business rescue industry
“Guilt without trail” – Klopper
Findings against Nova chair referred to NPA

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To get an adverse audit opinion must be the most embarrassing thing ever! But alas, they cannot be held accountable by anyone.

Ryk, one of your previous articles refers to Nova being one of the largest corporate captures ever in SA. You were correct.

Myburgh and Haese have taken full control of the company. If they were working for a company where the board is held accountable, they would be fired for their abysmal performance.

A message to Mr Myburgh and Ms Haese: “Are you not ashamed of yourselves? Anyone with integrity would surely resign and let someone else take over?

This mess needs the authorities to step up to the plate. It is shocking that the innocent are left destitute while the schemers go free for a decade now. Add the Sharemax then some have been getting away for 2 decades now.

Time South Africa realises that crime cannot be seen to pay. (very few people get paid R3 million or so a year and certainly not companies that do not have the cash flow)

Well done Ryk with your over a decade of investigation. thank you for getting the info out.

Property syndications are similar to farming. You can use your balance sheet to buffer your operational inefficiencies for a long time. Problem is, you cannot eat assets. You need positive casflow at some stage.

Some folk here are proving that you can, in fact, eat assets, preferably those belonging to somebody else.

It’s an extreme psychological illness. Similar to what the Guptas suffer from.

End of comments.

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