Nova Propgrow Group Holdings Limited says the compliance notice issued by the Companies and Intellectual Property Commission (CIPC) prohibiting Nova from disposing of its immovable properties is flawed, and its legal team is drafting papers to review the notice.
Nova took ownership of the properties formerly held by the now-defunct Sharemax.
On 26 July, the CIPC issued a CoR 139.1 notice requiring Nova to cease business temporarily, although it may continue to discharge its operational and contractual obligations.
The notice applies for 40 business days from the date of issue, subject to Nova exercising its right to apply to the Companies Tribunal, in terms of section 172 of the Companies Act, for an order confirming, modifying, or setting aside all or part of the notice, the CIPC said.
Apart from the prohibition on disposing of immovable property, the CIPC required Nova, within 40 business days from the date of the notice, to submit a copy of its asset register, a copy of its shareholders’ register, and a copy of the list of debenture holders.
Asked why Nova has been directed to cease selling immovable property, the CIPC said:
“In terms of the obligations of and restrictions on the company, the company undertook in favour of the trustee that it would conduct its affairs in a proper and business-like manner and would not, without the prior sanction of a debenture special resolution, alienate the business of the company or the whole or greater part of the assets of the company, per clause 9.6.4 of the Debenture Trust Deed.
“It is understood that the business of the company is investing in commercial and residential property, the letting thereof and development of residential property, as stated in its annual financial statements. It follows then that the company derives income from properties it owns and/or develops. The continued sale of properties without an equal or higher rate of acquisitions or developments would ultimately result in the company not being able to generate any income, putting it out of business.”
The CIPC said Nova’s actions amounted to the alienation of its business because:
- Although Nova has not sold the entirety or greater part of its business in terms of accounting fair value, it has sold the greater part of the income-generating assets (immovable properties) under its control, which impedes and erodes its ability to repay investors in terms of the objectives of the Schemes of Arrangement.
- The continued disposal of its immovable properties constitutes an indirect winding-up of the company, without Nova’s board formally pronouncing it as such or classifying its actions as a voluntary liquidation or winding-up in terms of sections 79 and 80 of the Companies Act.
Nova’s response to the CIPC’s notice
In a statement, Nova said there seemed to be a number of “misunderstandings” about some of its affairs. It said these related to:
- The so-called Schemes of Arrangement 10-year debenture debt payment term. “The 10-year period was a projected period based on circumstances prevailing at the time of the structuring of the Schemes of Arrangement. Payment of debentures may be made at any time, depending on circumstances, in order to achieve payment to the best extent possible,” Nova said.
- The so-called requirement to pay some R4.6 billion. “Nova does not have the obligation to pay the some R4.6bn invested historically by Sharemax investors. Nova has the obligation to pay amounts equating to the fair market value of relevant properties from time to time, the aggregate amount being the fair market value as disclosed in the annual financial statements, provided that the properties are able to be realized at such values.”
- The notion that Nova was created solely as a vehicle to pay debenture debt. “This is not so. Debenture debt is merely a particular class of creditors of Nova. Nova is entitled to do business in the ordinary course, independent of only attending to payment of debenture debt. The Schemes of Arrangement make it clear that Nova has been established to conduct business in the normal course. Nova will continue conducting business post the payment of its debenture debt.”
- The notion that historical investors have lost everything. Nova said debenture holders have “most certainly not lost everything”. It said that, over the past 12 years, Nova “has worked tirelessly in achieving its key objectives”, which are “to unlock optimum value for investors and shareholders and to maximise capital payment of its debenture debt with the resources available to it”.
Click here to download Nova’s full statement.
Nova went to on say that a “most cursory reading” of its annual financial statements supports the availability of assets to secure the capital payment of its debenture debt to its debenture holders.
It said the payment of debenture debt was taking longer than initially planned, mainly because of “various challenges over the past decade”. These included the large restructuring process that Nova took on and its Sharemax-linked history, which brought with it “much criticism and negativity, further fuelled by often unjust, negative and even incorrect media reporting, unfortunately resulting in many funding lines, equity partnerships, including a proposed listing of Nova in 2019 – all key to value enhancement and resultant debenture payments – not coming to fruition”.
Involvement of other regulators
In its media statement announcing the CoR 139.1 notice of 26 July, the CIPC said it has escalated the Nova matter to other regulators.
Asked by Moonstone which other regulatory and enforcement bodies were investigating Nova, the CIPC said: “At this stage, it’s the Prudential Authority under the South African Reserve Bank. The process may include other regulators such as the National Consumer Commission, the FSCA and Financial Intelligence Centre. Depending on the outputs and outcomes of the inter-regulator meetings, the National Prosecuting Authority may also be roped in.”
Asked whether the investigation included other property syndication entities, the CIPC said it was currently limited to Nova.
“However, the outputs and outcomes of the investigation may affect or have a bearing on other property syndication entities against whom litigation measures were enforced.”
What led up to the CIPC’s 26 July notice?
In its statement, the CIPC said that on 21 February 2021 it issued Nova with a “Notice to Show Cause Regarding Reckless Trading or Trading Under Insolvent Circumstances” through Form CoR 19.1, requiring Nova to show why it should be permitted to carry on conducting business.
After the “non-satisfactory response” from Nova, it said the company was issued with a compliance notice on 25 October 2021, “to afford it a final opportunity to prove beyond reasonable doubt that it would not be in a financially distressed position by the end of its financial year (28 February 2022)”.
The CIPC’s said this had been informed by the CIPC’s assessment of Nova’s annual financial statements, taking into account the company’s financial obligations, as informed by the commission’s understanding and interpretation of the Schemes of Arrangement alluded to in the notes to the company’s annual financial statements over the past 10 years.
Asked for clarification of the nature of 21 February notice, the CIPC said the form CoR 139.1 compliance notice required Nova to:
- Submit to the commission a signed resolution of the board’s intention to “exit the debentures”, in order to substantiate the statement made in a communiqué titled “Nova Group Update” of 9 April 2021.
- Submit a copy of the approved audited annual financial statements for the financial year ended 28 February 2021 for the CIPC to evaluate Nova’s current liabilities for the 12 months ending 28 February 2022, to negate the allegation of potential insolvency or financial distress.
- Submit written and signed approval from the Debenture Trustee or his/her proxy (or equivalent) that Nova’s board of directors may postpone the payment of debentures beyond the projected 10-year Scheme of Arrangement period, subject to the board still maintaining the view that it has the discretion to postpone the payment of debentures beyond the projected 10-year Scheme of Arrangement period.
- Subject to the inability to fulfil point (3), provide proof that the company has and will have sufficient liquid assets that can be and/or have been realised into cash and cash equivalents to allow the company to meet its current liabilities for and before the end of the financial year ending 28 February 2022.
The CIPC said that, following its assessment of Nova’s response, received on 15 December 2021, the commission could not arrive at a satisfactory conclusion that the company was not engaging in conduct prohibited by section 22 of the Companies Act.
Sub-section 22(1) prohibits a company from trading recklessly or when it is insolvent.
“Reasonable grounds still exist that the company is in contravention of section 22(1) and section 29 of the Companies Act,” the CIPC said.
Section 29 sets out the requirements for financial statements.
“In keeping with the requirement prescribed in section 22(3) of the Companies Act, a compliance notice was issued to the company on 26 July 2022, requiring it to temporarily cease carrying on its business, with the condition that it may continue meeting its contractual operational obligations, but may not dispose of any immovable property,” the commission said.
Sub-section 22(2) authorises the CIPC to issue a notice to a company for it to show cause why it should be permitted to continue carrying on its business, or to trade, if the commission has reasonable grounds to believe that the company is trading recklessly or when it is insolvent.
In terms of sub-section 22(3), if a company that has been issued with a sub-section (2) notice fails, within 20 business days, to satisfy the CIPC that it is not engaging in conduct prohibited by sub-section (1), the commission may issue a compliance notice requiring the company to cease carrying on its business or trading.
