The Orthotouch and Zephan business rescue processes present a difficult choice for the 18 700 investors who invested nearly R5 billion of their savings in the failed Highveld Syndication (HS) companies.
If the investors vote for the final settlement proposal (for the business rescue plan), they will receive a few cents in the rand and will be able to put the whole saga of the past nine years behind them. However, they will then never know whether any improper conduct contributed to the implosion of Orthotouch and Zephan, as they will cede all their claims to an unknown third party.
On the other hand, if they vote against the plan and Orthotouch and Zephan go into liquidation, it may trigger a Section 417 investigation into the events leading up to the failure of the companies. If the inquiry reveals that any improprieties occurred, it may lead to the investigation and prosecution of those responsible, and possibly the sale of their assets to repay investors. However, this process may take several years.
Having said this, if a Section 417 inquiry reveals no improprieties, investors may receive less than the final settlement offer, and it will take years to be paid out.
The choice facing investors is to take a few cents in the rand now, or vote against the plan and initiate a process that may reveal whether there were any improprieties or not.
Orthotouch offers former HS investors only a few cents in the rand
Business rescue plans
In this context, the Orthotouch and Zephan business rescue plans are critical. (The plans are similar and will henceforth be referred to as the Du Toit plan, as they were penned by the business rescue practitioner Jacques du Toit.)
The Companies Act states in Section 150 (2) that a “business rescue plan must contain all the information reasonably required to facilitate affected persons in deciding whether or not to accept or reject the plan”.
It may, therefore, be reasonable for investors to have expected a comprehensive and transparent overview of why Orthotouch and Zephan fell into financial difficulty and are unable to repay investors as envisaged.
The plan should offer a detailed financial account of what went wrong. Unfortunately Du Toit’s plan fails to do this.
It offers desperately little financial information to provide any investor insights into why the companies failed subsequent to the implementation of the HS business rescue plan and the ensuing Section 155 Scheme of Arrangement.
It is therefore essential to frame the mandate Du Toit had in terms of his investigation.
The mandate starts at the implementation of the HS business rescue plan
Orthotouch became the centre of the rescue efforts of the failed HS companies on December 14, 2011, when investors overwhelmingly approved the HS business rescue plan proposed by the HS business rescue practitioner (BRP), Hans Klopper.
The positive response from investors was not without good reason.
The main attraction was Nic Georgiou. At the time, he was a multibillionaire property magnate from Bloemfontein and widely regarded as one of South Africa’s top property experts. He was seen as the white knight with the financial resources, expertise and ability to execute the ambitious plan and repay investors.
Therefore, with the adoption of Klopper’s plan a line was drawn below the historic (over)valuations of properties, dodgy sales transactions involving various entities such as Bosman & Visser, and the commissions paid to financial advisors.
Orthotouch represented a clean slate from which investors would be repaid in terms of the new business rescue plan. This is where Du Toit’s investigation should have started.
It is therefore peculiar that Du Toit deemed it necessary to revisit events leading up to the HS business rescue process in any detail. It was after all Klopper’s responsibility to scrutinise these developments and report any deemed irregularities, which he did not do.
In this context, Du Toit makes the most peculiar statement in paragraph 66.6 of the plan: “The only conclusion I can draw from the above [his account of events leading up to the failure of the HS companies] is the fact that some of the investor’s money was used to repay interest to investors up to such time that no new investors could be obtained to make payments.”
This is a classic description of a fraudulent Ponzi scheme and should be reported to authorities for investigation.
But apart from not reporting it, Du Toit jumps to the defence of Klopper for not doing so two paragraphs later: “My conclusion is that Hans Klopper only had 43 days to present a Business Rescue Plan to creditors. It was envisaged in terms of the Klopper BR Plan that the HS Investors would be paid in full as was the case in HS Companies 1 to 14. As a result, no further investigations were necessary and were as such conducted by Hans Klopper insofar as the actions of the directors of the HS Companies were concerned.”
As things turned out, investors were not paid in full.
Du Toit’s responsibility
Du Toit’s core responsibility as BRP of Orthotouch and Zephan must surely have been to investigate the events that caused the failure of Orthotouch and Zephan after the implementation of the business rescue plan on December 14, 2011.
Klopper’s 2011 rescue plan promised that properties valued at R2.6 billion (and properties valued at R1.5 billion from Georgiou) would be transferred to Orthotouch. These properties were not only not transferred, but sold off in a fire sale. Today, almost nine years later, Du Toit’s plan shows that the remaining assets in the portfolio amount to R327 million. These assets include a claim against Delta Property Fund of R165 million, which means the actual remaining properties are worth only R162 million.
The only insights related to how the value of the property portfolio shrank appear in a table in paragraph 6.71, which shows that Orthotouch suffered losses of R127.6 million related to the “sale of properties”.
The R127.6 million loss is not reconciled or segmented in any way.
It seems the only ‘significant’ investigation Du Toit undertook was to offer an alternative explanation for the findings of a Moneyweb investigation (based on official title deeds of the properties), which found that Orthotouch suffered losses of around R782 million as a result of the sale of 16 properties in back-to-back transactions via Orthotouch to Accelerate.
Orthotouch: Administrative error led to ‘false perception of impropriety’
Du Toit labelled Moneyweb’s investigation a “desktop investigation” and said his analyses found no improprieties. He revealed that the transferring attorneys had filed incorrect sales prices with the deeds office, which created a “false sense of impropriety”.
It also does not offer any information related to how the proceeds of the properties were used, which is important as the mortgage bonds of some properties were settled with the proceeds.
Du Toit also confirmed to Moneyweb that he did not investigate the sale of 15 properties by entities related to Georgiou via Orthotouch to the Delta Property Fund, which resulted in a loss of R314 million for Orthotouch. In fact, his plan does not refer to these transactions at all.
Du Toit’s plan also does not contain any meaningful information related to the operational performances of Orthotouch and Zephan. The only insights into the operational performance appear in the table in paragraph 6.71 (see below), which refers to cash flows from the properties.
The table shows “running expenses” of an exact amount of R420 million. These expenses apparently include legal fees, salaries, consulting fees and other administrative costs.
Unfortunately, this information is not segmented in any detail. (For example, it would have been critical to see how much Orthotouch spent fighting more than 20 legal cases, and to whom it was paid.)
The source of the information in the table is also not disclosed, which is concerning as Du Toit states that Zephan last published audited statements in 2009 and Orthotouch in 2015.
Critically, Du Toit’s plan omits information related to Orthotouch and Zephan’s rental income, property-related expenses and operational cash flows.
This is telling as the property portfolio, with Georgiou at the helm, could have generated significant rental income. For example, if it is assumed that the R2.6 billion properties, which were set to be transferred to Orthotouch, were managed at an 8% yield, Orthotouch should have received rental income of more than R200 million a year.
Its omission is also curious because it seems Du Toit had access to such information. In a letter Du Toit sent to creditors after the publication of the rescue plans, he discloses another amount related to apparent “trading losses” of R567 million that were incurred in addition to the R420 million.
In the letter Du Toit states that these losses refer to all rental income and property-related expenses.
The very least the Orthotouch and Zephan business rescue plans should have achieved was to offer former HS investors an audited, transparent and detailed accounting of every rand and cent earned and spent by the two companies.
This may also be critical in the context that the overwhelming majority of the properties were sold to third parties prior to 2015. It is therefore conceivable that Orthotouch and Zephan were in severe financial difficulty five years ago, which may suggest that a business rescue or liquidation process should have been initiated much earlier.
With the benefit of hindsight, it is also possible that the business rescue process may not have been the ideal structure through which to try to get to the bottom of what happened with investors’ money.
The remuneration fee structure disclosed in the rescue plans greatly incentivises Du Toit to have the business rescue plans approved. Du Toit is set to receive a “success fee” of 2.5% of the final settlement amounts if creditors approve the plan. This amount may exceed R5 million. This is in addition to the R2 000-an-hour to a maximum of R25 000-a-day fee he has earned since becoming the BRP on November 14, 2019.
Although success fees are lawful and commonly offered during business rescue proceedings, this remains an imperfect system since it clearly does not incentivise a totally impartial decision to investigate potential irregularities, as doing so may influence the BRP’s remuneration.
Based on the limited information in the business rescue plans, it is doubtful whether they enable an investor or other stakeholder to verify Du Toit’s conclusion that there were no improprieties related to the sale of properties, or at an operational level.
It may also be debatable whether Du Toit could come to this conclusion in the absence of up-to-date audited financial statements of Zephan and Orthotouch.
Investors are therefore facing a tough decision: either vote for the plan and receive a few cents in the rand as final settlement, or vote against the plan and possibly trigger a Section 417 investigation to assess whether there were any irregularities.
The latter option will most probably mean they may not receive any final payment for many years, if at all.