A recent Section 417 investigation into the events leading up to the liquidation of the Benoni-based crane supplier Harrison and White Investments (H&W) has revealed the extent to which business rescue proceedings can be abused to the detriment of creditors.
The final report flowing from the investigation found that the business rescue process was only carried out to delay an inevitable liquidation and to allow for the looting of the company’s assets. The report also recommended the criminal investigation of some of the individuals who were intimately involved with the company’s affairs during the process.
Two individuals mentioned in the report are well-known business rescue practitioner Hans Klopper and corporate lawyer Connie Myburgh. Klopper was the business rescue practitioner and Myburgh a long-standing legal advisor of H&W.
Klopper and Myburgh have also been closely involved with the rescue efforts of Sharemax and Picvest, two of the biggest failed investment schemes ever in South Africa, for nearly a decade. These rescue efforts have seen significant delays and the selloff of assets.
Section 417 inquiry
It is important to note what a Section 417 inquiry is. It is not a court hearing, and the findings disclosed in the report do not constitute a judgment.
The Master of the Court may order a Section 417 investigation if the liquidation of a company does not realise sufficient funds to repay creditors. The inquiry is aimed at investigating events leading up to the liquidation to ascertain whether any assets were stripped or looted to leave creditors with an empty shell.
The inquiry is chaired by a commissioner who can call any individual to testify under oath. In the case of H&W, the master appointed former judge Eberhard Bertelsmann as commissioner. He is well-respected and experienced, having served for more than 16 years as a high court judge and as an acting judge in the Supreme Court of Appeal before taking retirement in 2016.
Bertelsmann submitted his report and findings to the Master of the Johannesburg High Court in May this year, and it is now up to the master to decide whether to take further action as recommended in the report.
The inquiry and proceedings are regarded as confidential but the courts have on occasion recognised that public interest overrides confidentiality.
Harrison and White Investments
H&W was a Benoni-based company that offered crane hire and repair services to the construction industry. The company formed part of a group of companies controlled by Gavin Zietsman and Michael Ralston.
Zietsman and H&W are probably better known for being found guilty and fined R1 million for insider trading by the Directorate of Market Abuse of the Financial Services Board in 2011.
According to Bertelsmann’s report, the company fell into financial difficulty in 2011 and defaulted on loan repayments to FirstRand. The company owed FirstRand nearly R150 million, and the parties then entered into a debt reduction agreement in 2012.
Unfortunately, the company defaulted on the debt reduction agreement in July 2013, and FirstRand demanded the immediate repayment of all amounts due. The day after FirstRand called up the loan, the directors placed the company into business rescue.
A few days later, Klopper was appointed as the business rescue practitioner.
Business rescue allows the company short-term relief from creditors so that it can get back on its feet. The business rescue period is typically around three months. However, if the company is insolvent and there are no prospects of recovery, it should go straight into liquidation.
Bertelsmann’s report states the company was, in fact, insolvent when it went into business rescue, and should have rather been put into liquidation immediately. The report also states that Klopper, as an experienced business rescue practitioner, should have realised at the onset of the process that the company could not be saved, and the fact that he kept it in business rescue for more than three years was a total abuse of the process.
Bertelsmann’s report articulates that throughout the protracted process, creditors were led to believe that the company was set to receive “imminent” funding from a third party. This funding would allow the company to settle its debts, a claim the report strongly rejects.
“The failure to appreciate, or to accept, or to admit that the so-called funding was no more than a mirage or a pipedream, and the irrational clinging to this excuse for failing to take action and to terminate the ailing existence of the company that was sinking deeper into the morass of insolvency with every day that passed amounts to, at the very least, recklessness on the part of those managing its affairs and those involved in its business rescue…
“It constituted a mala fide abuse of the business rescue process… There can be no doubt whatsoever that as an officer of the court, Mr Klopper was in duty bound to disclose the fact that he knew that the only – illusionary – obstacle between the company and liquidation was the fairy funding godmother.”
Rosek and Viking trusts
The 71-page report describes numerous meetings between representatives of FirstRand, other creditors and Klopper to discuss the various iterations of the proposed business rescue plan. One meeting, held in March 2014, nearly a year after the business rescue process commenced, is of particular importance.
In this meeting FirstRand proposed that the yet unapproved business rescue plan be amended to allow for the sale of assets, over which it held notarial bonds, to settle the bank’s claims.
At the meeting, two trusts (Rosek and Viking) – who only emerged as creditors months after the business rescue process started – were allowed to vote on FirstRand’s proposal.
They voted against the proposal, and the proposed amendment failed. These trusts were represented by Myburgh, who was also on retainer as H&W’s legal representative at the time.
Bertelsmann found that Myburgh “colluded with the company directors and management in obstructing the flow of justice by delaying the finalisation of the liquidation application through the stratagem of the intervention of the trusts, who were to his knowledge by no stretch of the imagination bona fide creditors”.
The report further states that Klopper acknowledged during the Section 417 hearing that “had it not been for the two trusts filing claims based on the agreements that were subjected to unfulfilled conditions precedent, the bank’s proposal would have been accepted“. It added that the voting down of the proposal “left the way open for the company’s assets to be neglected and to be sold by the directors of the company after the liquidation application had been filed”.
FirstRand finally brought a liquidation application in February 2015, nearly three years after the business was put into business rescue. The company’s directors, Klopper and the Rosek and Viking trusts opposed the application. This led to many delays and resulted in the company only being put in provisional liquidation in December 2016, 22 months later.
The report states that “opposition to the liquidation application was raised in bad faith with the sole ulterior motive to delay the proceedings… Apart from dishonestly opposing the liquidation application, the directing minds of the company devised further schemes to delay the process“.
The report also found that Klopper seemed to have lost interest in the company after the application.
Sale of cranes
During this period, the company’s directors sold virtually all of the assets. The most valuable assets were cranes, which served as security for FirstRand’s loans.
The report states that many cranes were sold between August 2015 and when the company went into provisional liquidation. It labelled these acts as “a fraud on the bank” due to the cranes serving as security for FirstRand and considering that the bank did not give permission for the assets to be sold.
Klopper also did not approve the sales, nor did he investigate such transactions even after he was alerted to the fact by FirstRand. He queried the sale with Ralston who informed him that one crane had been sold in the normal course of business. “Surprisingly, Mr Klopper left the matter there and made no further independent enquires at any stage thereafter into the fate of the company’s assets until the final liquidation eventuated,” the report reads.
Looting of assets
The provisional liquidation report published in January 2017 shows that at the time, H&W’s assets were valued at R20 million. However, total claims from creditors amounted to R124 million, which left a shortfall of R104 million before liquidation costs.
This is in stark contrast to the R108 million valuation of assets made at the start of the business rescue process, although Bertelsmann’s report states that this valuation was inflated to mask the company’s insolvency.
The report cites several instances where Klopper allowed “reckless conduct”, such as the procurement of various luxury vehicles and allowing the payment of R120 000 a month to Zietsman in the United States.
Findings and recommendations
The report found that Klopper has been “gravely remiss in the exercise of his functions” as a business rescue practitioner. The report states he should have been aware from the onset that the company was insolvent, but yet allowed the business rescue process to continue for more than three years.
Bertelsmann also found that Klopper failed to comply with the statutory duties such as ensuring the adoption of a business rescue plan and filing reports to the Companies and Intellectual Property Commission.
He recommends that the liquidators recoup “the damage caused by Mr Klopper’s failure to act timeously, decisively and appropriately to terminate a business rescue process that was an abuse of the proceedings from the start”.
The report also recommends that Klopper’s “failure to take the court into his confidence in the liquidation application reflects upon his professional status and consequently it is, unfortunately, necessary that a copy of this report be provided to the legal practice counsel for consideration and action if regarded as appropriate”.
Bertelsmann also questioned Klopper’s “attitude” towards his position as business rescue practitioner.
“Perhaps the most worrying aspect of Mr Klopper’s attitude towards his position as business rescue practitioner is his decision to adopt a hands-off approach after the liquidation application was launched.
“In the AJP inquiry, he explained that his reason for doing so was purely commercial. He had been paid, allegedly in excess of R100 000 per month, until that point in time. Once the liquidation application had been launched any further payment to him would have to be repaid to the liquidators if the company was in fact liquidated eventually,” the report reads.
Bertelsmann found that Myburgh acted in a conflict of interest and that his actions be referred to the “new legal practice counsel for an investigation and appropriate action if so advised”.
Bertelsmann also found Myburgh’s actions “were reckless, if not worse”:
“As the legal practitioner who was on retainer to the entire group… he must have been aware at a very early stage of the financial woes every company in the group was experiencing.
“As legal advisor he was obliged to engage the company directors and management as soon as the red lights of inability to meet financial commitments began to flicker. He did nothing of the sort. He continued collecting retainers while the sham of business rescue proceedings played itself out over a period of about three years.
“He colluded with the company directors and management in obstructing the flow of justice by delaying the finalisation of the liquidation application through the stratagem of the intervention of the trusts, who were to his knowledge by no stretch of the imagination bona fide creditors.
“In his role as legal advisor, he indubitably participated in the management of every one of the companies in the group, including the insolvent company. The actions stipulated above were clearly reckless, if not worse. He is therefore liable to face an application in terms of section 424(1) and to have its actions referred to the Director of Public Prosecution in terms of section 424(3).”
Zietsman and Ralston
Bertelsmann also made stark findings against Zietsman and Ralston. He recommends that both be prosecuted for fraud, the transgression of exchange control regulations and that a copy of the report be sent to the Director of Public Prosecutions.
Sharemax and Picvest
It wasn’t Klopper and Myburgh’s first interaction with each other, as both played and play critical roles in Orthotouch and the Nova Property Group, the rescue schemes of two of South Africa’s biggest failed investment schemes, Sharemax and Picvest.
Klopper is currently the business rescue practitioner of the Highveld Syndication (HS) companies (originally marketed by Picvest) which has been under business rescue since September 2011, nearly eight years ago.
Around 18 000 investors invested about R5 billion in the HS companies.
In terms of the original business rescue plan, all properties syndicated as part of the HS schemes would have been transferred to a single company Orthotouch, but this never happened. Virtually all these properties were subsequently sold to third parties, including the listed entity Accelerate.
Myburgh and Klopper, in addition to his role as business rescue practitioner, served as directors of Orthotouch and would have been involved in the approval of many of the sales transactions.
Klopper and Myburgh are also involved with Nova, which is the rescue vehicle of the failed Sharemax investment scheme.
Myburgh is the executive chairman and significant shareholder of Nova, which is currently suffering financial difficulties. The company is also selling underlying properties to finance operating expenses. Its auditors qualified the company’s previous financial results, and Standard Bank has recently closed the group’s bank accounts.
Nova suspended all payments to debenture holders several years ago.
Klopper and Myburgh are also the two Receivers of the Section 311 Scheme of Arrangement and are responsible for the implementation of the scheme.
Response from Klopper and Myburgh
Attorney Alec Brooks, who is acting on behalf of Klopper, phoned this journalist after Klopper was approached for comment. He strongly emphasised that the report was confidential and that Moneyweb would be in contempt of court if it is published without the permission of the Master of the Court.
Brooks also said Klopper was busy taking steps “to protect his rights”, without providing more information.
Myburgh denied that he had seen the report and consequently could not comment on the contents. “I heard about the report but did not see it. I can, therefore, not comment. The report is a confidential document and could not be used or distributed without the written consent of the Master of the High Court.
“As far as I know, the Master did not provide such consent. I doubt whether you will disclose where you got a copy of the report, but maybe you should? I wonder if you have the necessary consent. My rights are reserved.”