The receiver of the Orthotouch scheme, Derek Cohen, is on the verge of applying for a court order to compel Zephan, owned by property magnate Nic Georgiou and the financial underwriter of the scheme, to punctually pay investors the monthly interest due to them.
Cohen said in an interview with Moneyweb this week he has no alternative but to turn to the courts after Zephan did not pay interest due to around 4 500 of the investors in July, which is in contravention of the conditions of the scheme.
Cohen said he is aware that the payment of interest was withheld from those investors who haven’t yet completed a form issued either by Orthotouch or Zephan to indicate their support or rejection of the legal challenges against the scheme and Georgiou.
Cohen also revealed that he notified Zephan and Georgiou on numerous occasions since March last year when the monthly interest due to investors was not paid punctually by the 7th of the month as prescribed by the scheme of arrangement. These notifications were via numerous lawyers letters.
Before publication, Moneyweb sent questions related to the non-payment of interest to investors to Nic Georgiou who controls Orthotouch and Zephan. Georgiou responded that he didn’t have sufficient time to answer the questions, but stated that: “I am also concerned that as to the questions asked, in that it would appear as the questions are being posed to achieve some or other stratagem, in support of litigants in the various litigation matters. To be frank, the questions make no sense in the context in which they are being posed.”
Moneyweb offered Georgiou additional time to provide answers to the questions, but he did not respond. Read his full response here.
Months of uncertainty
Cohen, who has a finance and banking background, was nominated to become the receiver by Connie Myburgh, a director of Orthotouch and the chairman of Nova, the rescue vehicle of the failed Sharemax investment scheme. Cohen was appointed as the receiver when investors approved the scheme of arrangement. He is also the trustee of the Nova Debenture Trust. During the interview, Cohen described how his role as receiver became challenging in the extreme.
“It started with the numerous legal actions against the scheme, which if successful, will affect the integrity of the scheme. Added to this has been the issue of late monthly interest payments and more recently when Zephan unilaterally decided to withhold interest payments to investors who, inter alia, support the legal challenges of the Highveld Syndication Action Group (HSAG) and advocate Louis Bolt.”
(The HSAG is seeking certification for a class action and the rescission of the scheme, while Bolt applied for the liquidation of Zephan. This application follows several default judgments, which compelled Zephan to repay the capital and interest to individual investors in terms of their original Highveld Syndication investment contracts.)
Duties and responsibilities of the receiver
Cohen explained that his role as receiver is simply to ensure the implementation of the scheme, which includes that the monthly payment of interest and the agreed capital repayments due to investors under the scheme are paid and to protect the integrity of the scheme.
“My job is purely administrative. I am not a director of Orthotouch, Zephan or any of the operating companies who must generate cash to pay the investors. I have no insights into their financial position and have no fiduciary duties,” Cohen said.
Flow of funds
In terms of the scheme, Zephan through Orthotouch needs to make monthly interest payments to investors. The directors of Orthotouch are Nic Georgiou, Myburgh, and Hans Klopper, the business rescue practitioner of the HS Syndication companies. Zephan is the underwriter of the scheme. Georgiou owns the company and is the only director.
Late payment of interest
In terms of the scheme of arrangement, payments must be made before the 7th of the month, but since March last year, the majority of payments were made after this date. In some cases, investors only received their interest as late as the 20th of the particular month.
Cohen said this changed his role significantly. “I became a litigator, which I never wanted to be. I have become a policeman because I had to instruct my attorneys to regularly write letters to the responsible parties to place them on terms to try and ensure compliance. Thankfully these letters had the desired effect because until July all interest was paid despite sometimes being late.
“It is a huge dilemma. I have the authority to go to court and ask a judge to collapse the scheme due to the non-compliance by the responsible parties for not meeting the condition to pay the interest by the 7th or capital on due dates. The other option was to use my discretion and wait until the monthly interest was paid. The interest may have been late, but at least it was paid.”
Cohen stated that these actions prove he “always acted independently never acted on behalf of Orthotouch, Zephan or Nic Georgiou. …When HSAG in its latest newsletter claims that I am in cahoots with Nic Georgiou and others, it is unsubstantiated rubbish.”
Non-payment of interest
According to Cohen, the situation changed dramatically in May when Zephan sent a form to investors to complete to formally indicate their support for the HSAG and the actions of Bolt.
Cohen said Zephan made it clear to him that the supporters of the legal challenges would not receive any further monthly interest payments, as it was deemed to be unfair towards the investors who support the scheme and that those who support the legal challenges should not benefit from interest payments.
Cohen said he informed Zephan that the scheme doesn’t allow for interest payments to be withheld, and that the interest due to investors who support the legal challenges should be paid into a trust account under his control subject to an advocate’s opinion. This proposal was accepted and the opinion received.
But in July the situation escalated even further. On July 10, a letter on an Orthotouch letterhead informed investors that interest payments for July would be delayed due to the administrative process involved in verifying which investors supported the legal challenges and which didn’t. It also stated that investors who didn’t complete the form would not receive interest.
However, Orthotouch issued another statement two days later, which bizarrely insisted that the letter of July 10 was “incorrectly and erroneously” distributed on an Orthotouch letterhead. Orthotouch didn’t offer any reason for this or clarify under whose authority the letter was sent. An SMS sent to investors a few days later, apparently from Zephan, confirmed the core message of the July 10 letter.
Cohen said he was not informed beforehand about the letter of July 10 or the SMS. “I was never consulted about this. The delay in the payment of the July interest was an arbitrary decision taken presumably by Orthotouch and or Zephan without my prior approval or knowledge.” He added that this triggered another legal letter in which Cohen put Orthotouch and Zephan “on notice” to pay the outstanding interest in July.
Interest due to investors who did not fill out the form
The situation deteriorated even more when Cohen realised that the interest payments due to investors who did not complete the form were not only withheld but were also not paid into the designated trust account.
“This is an entirely different scenario,” said Cohen. “Before, the interest was just paid late. Now money is being withheld. In addition, my advocates are now drafting papers to obtain a court order to compel Zephan to pay the funds into the trust account.”
It is unknown how many investors did not complete the form. Cohen says it is a number of around 4 500 investors. Cohen confirmed that the July interest due to investors who completed the form in May or June was indeed paid into the trust account.
Jacques Theron of Theron and Partners, who acts on behalf of the HSAG, said the threat to withhold payments is blackmail and that the HSAG will go to court if needed. “Cohen and Orthotouch are obliged to make payments under the scheme of arrangement. They cannot unilaterally change the terms, especially on the excuse that some investors are litigating against them.”
Theron also disputed that the payment of interest into a trust account under Cohen’s control would remedy the situation. “The obligation under the arrangement is to make payment to the investor. To pay the money into a trust account, which Cohen allegedly controls, is not payment to the investor. It is non-payment.”
Theron confirmed that some HSAG members who did not complete the forms received their interest in July.
In response to Cohen’s denial that he is associated with Georgiou and Zephan, Theron said Cohen appears to be assisting Georgiou by applying to set aside the judgments granted against Zephan and Georgiou in several of Bolt’s cases in the High Court in Pretoria. “What real interest does Cohen have in these judgments as Receiver?”
Bolt responded that if interest payment is made subject to the completion of the form, it amounts to blackmail and is “absolutely unacceptable”.
He added that Cohen has no authority to litigate against Georgiou and Zephan. “There is no provision in the Companies Act for the position of a Receiver. He is a position created by Georgiou. Cohen is remunerated by Zephan for his services.”
Bolt said Orthotouch is the party that should litigate against Georgiou and Zephan, as it is compelled to pay interest to investors.” This is however unlikely to happen as Georgiou is Orthotouch’s managing director and such litigation would mean that Georgiou litigates against himself.
Cohen said he has corresponded with Theron to get clarity as to whether the payment of interest into a trust account constitutes payment under the scheme of arrangement.
“I have a legal opinion that says the money can be placed in trust, and Theron has another point of view. I wrote to Theron and asked him to provide a legal opinion on the matter. I told him that if he gave me a contradictory opinion I would consider changing my mind and pay the money to investors. But he refused.”
Cohen says he now wants to bring an interpleader application to have a court provide clarification on the matter and allow Zephan and Theron to argue their opinions.
In response, Theron said the scheme as certified by court order is unambiguous and does not give a discretion to Cohen or Georgiou. “On whose behalf is Cohen now holding the money?”