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

Nova informs investors it cannot repay debentures within the envisaged 10-year period.
Blow to former Sharemax investors...The Nova Property Group announced it would not repay investors within the ten-year period envisaged in the original rescue plan, despite promising in April to start payments before the end of the year.

The Nova Property Group, the company set up to ‘rescue’ the R4.6 billion that around 18 700 people invested in Sharemax, said this week it would not repay investors within the ten-year period envisaged in the original rescue plan.

The ten-year period expires on January 20, 2022.

The news will be a massive blow for the mostly elderly investors who set their hopes on being repaid in terms of the original Scheme of Arrangement (SoA), which tasked Nova to repay their investments.

The announcement follows after Nova initially informed the investors in April that it would start to repay their debentures before the end of the year.

“Even though 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,” the April statement read.

However, in the lengthy communique sent on December 7, the board justified the sudden about-turn by stating that a formal board decision did not authorise the promise made in April.

The board backtracked and said the April communication was “not a formal resolution” of the Nova Investments board and “cannot and should not be interpreted as a ‘written initiation’, by the board of Nova Investments of redemption of any class of debentures.”

Nova debenture holders attending a meeting. Image: Moneyweb

Nova’s board emphasised throughout the communique that it had the authority and discretion in terms of the SoA and the debenture trust deed, to postpone payments until after the expiry of the ten-year period.

The board blames the impact of Covid-19 on its operations, but it is in contradiction with other sections of the communique where Nova boasts that it is in the best financial position it has been in four years.

The board did not indicate when it may start to repay the debentures.

Read:
Sharemax rescue vehicle faces CIPC shutdown
CIPC concerned about Nova’s ability to repay debenture holders
CIPC asks Nova to explain why it should not be closed down
Moneyweb editor physically and forcefully denied entry to Nova’s AGM

Nova’s ability to continue to operate as a going concern

The about-turn also follows after Nova’s auditors questioned the company’s ability to operate as a going concern for a fourth consecutive year. According to Nova’s December statement, this opinion was expressed in Nova’s annual financial statements (AFS) for the 12 months to the end of February this year. Nova has not published the 2021 AFS on its website, despite stating that it has done so in the communique.

The announcement also follows the Companies and Intellectual Property Commission (CIPC) recently issuing a second compliance notice to Nova that may lead to the shutdown of its operations.

The second notice was issued after Nova had failed to convince the CIPC in response to a first compliance notice that it was not trading recklessly or insolvently. Nova has until December 20 to respond to the second notice.

Interestingly, in the second notice and inspector’s report, the CIPC disputed Nova’s authority 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 January 20 2022,” the notice reads.

The CIPC demanded that Nova submit a resolution in which it commits to repay debentures before the deadline and prove it has the financial resources to do so.

The commission also requested that Nova prove that debenture holders agree with the Nova board’s position that it has the discretion to repay debentures after the deadline.

If Nova’s response fails to satisfy the CIPC, the commission may put the company under administration, business rescue or even into liquidation. It also means a new ‘rescue process’ would have to be conceptualised.

Dominique Haese, Nova Property Group, Nova, CIPC, Sharemax, Hans Klopper, Connie Myburgh

Nova’s head office in Pretoria. It also was the former head office of Sharemax. Image: Moneyweb

Nova says it is in a sound financial position

The Nova board also vehemently denies that it is insolvent and uses several pages of the communique to address this and refute the auditors’ concerns.

Nova included an extract of the directors’ report of the 2021 AFS, where it states that the “board of directors have satisfied themselves that the group is in a sound financial position and that it has access to sufficient resources to meet its foreseeable cash requirements.”

It also states that it is solvent, as the company made a profit of R55 million and earnings before interest and tax amounted to R128.8 million for the year.

Nova includes analyses of its current ratio and Altman Z Score, which ostensibly show its financial performance, especially its solvency ratios, improved significantly over the past five years.

However, the communique does not include a cash flow analysis, and in the absence of the publication of the 2021 AFS, it would be impossible to verify the board’s solvency claims.

Nova has also not made the auditor’s report available to stakeholders.

Read:
Nova has sold more than half of its investment properties
Auditor flags Nova’s ability to continue as a going concern for a 3rd year in a row

The continued sale of properties

Moneyweb has analysed Nova’s financial performance for many years. It is clear that Nova has sold more than half of the former Sharemax properties and used the proceeds to at least partly fund operating expenses. These operating expenses include lavish salaries for directors.

Connie Myburgh and Dominique Haese. Picture: Moneyweb

In the communique, Nova states it has already sold properties to the value of R390 million. However, Moneyweb’s calculations show that from 2012 to the end of the 2020 financial year on February 29, 2020, Nova sold 16 of the original 28 investment properties it inherited from Sharemax for a total of R576 million. During this period, Nova repaid debentures only R176 million.

The communication also states that after its February 28, 2021 year-end, Nova accepted offers for the Amogela Mall and the Flora Centre properties, although the transactions have not been concluded. In the 2020 AFS, Amogela was valued at R26.7 million and the Flora Centre at R188.7 million.

Another example of possible cash flow problems is that Nova borrowed R55 million from a bridging finance company in 2018 at an interest rate of 1% a week after the company could not secure funding from commercial institutions. Nova chairman Connie Myburgh recently admitted in a court case related to Nova’s apparent failure to repay the loan, that some of this money was used to pay for operational expenses.

Appointment of a new trustee

Nova also announced that it had initiated a process to appoint a new trustee for the Nova debenture trust after the company “terminated” the services of the previous trustee, Derek Cohen.

Read: Nova board sidesteps disclosure obligations

Nova also announced that a meeting would be held in January where debenture holders can approve the appointment of a Mr J Tromp as the new trustee. Nova did not disclose any information about Tromp for debenture holders to consider – not even his first name.

Derek Cohen, former trustee of the Nova Debenture Trust. Image: Supplied

This process may see some fierce resistance from some quarters, as the debenture trust deed does not allow the board to fire the trustee.

In addition, Cohen resigned as the trustee in July 2019. At the time, Haese said in response to a Moneyweb question that Cohen’s resignation was unlawful. “Mr Cohen’s purported resignation is unlawful and void and consequently, no action is required to be taken following such unlawful action by Mr Cohen.”

She added that “Nova took legal opinion on the lawfulness of Mr Cohen’s resignation and the opinion received was that Mr Cohen could not resign in accordance with the trust deed as it stands and that his resignation is unlawful in the context of his appointment by the High Court. It was advised, inter alia, that only the High Court can release Mr Cohen of his duties as the debenture holder trustee. No action is due to be taken by Nova in consequence of Mr Cohen’s unlawful resignation.”

Haese did not respond to questions to clarify the board’s apparent about-turn on this matter.

Cohen responded to Moneyweb questions and said he took legal advice from several lawyers before he resigned in terms of paragraph 15.2.1 of the debenture trust deed. “The legal opinions confirmed I had resigned. Some two and half years after my resignation, Nova then decides to ‘terminate’ my trusteeship except in 15.2.3 of the trust deed. The only body entitled to remove a trustee is the debenture holders via a resolution which in this case doesn’t exist.”

According to the trust deed, Nova had to inform debenture holders immediately if the trustee resigned and hold a debenture holders meeting within 90 days after the resignation became effective. At this meeting, debenture holders must approve the appointment of a new trustee.

Response

Herman Lombaard, a Nova Debenture Creditors Action Group committee member, said Nova’s decision to postpone payment is extremely disappointing. “In recent years, the Nova board repeatedly provided peace of mind that they, and no one else, can save the company.

“It is disappointing that investors’ sceptical questioning and mistrust in the board was not unfounded.

“The fact that the board has literally marginalised all stakeholders [has] deepened the mistrust.

“The fact that the board used investor capital to protect Myburgh from a personal financial predicament and obligation to RMB, which is outside the mandate of the SoA, was just as reckless and irresponsible as it was when the board obtained short-term bridging capital from a private lender at the exorbitant interest rate of 1% per week.”

Read: How former Sharemax investors ‘saved’ Connie Myburgh

Lombaard added that “these actions contributed to the depression of stakeholders who were already in financial distress.

“All of this happened while the board approved astronomical compensation packages for themselves. The board treated stakeholders with derogatory contempt, and some have already taken their own lives, as they were too financially stressed to make a living.”

Image: Moneyweb

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Nova was never a rescue vehicle. It is a get-richer scheme for the directors.

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