Property investors challenge directors

R4.6-billion Orthotouch class action claim set for court hearing.

By Donwald Pressly

Just as thousands of investors in a property syndicate prepare for a class action in May to try to claw back R4.6 billion from a company called Orthotouch, a new challenge faces the investors: without notice to them, the company last month obtained a high court order ratifying a new plan – to delay payment to shareholders of their capital investment for 10 years.

Stellenbosch attorneys Theron & Partners, acting for the investors’ property syndication companies, Highveld Syndications (HS), have by now assembled over 7,000 of 18,000 investors, in a class action group, the Highveld Syndication Action Group (HSAG). A court date has been set for 19 May in the South Gauteng High Court, Johannesburg.

Investments in various Highveld Syndications properties were promoted by Pickvest (formerly PIC Syndications), one of many companies under the influence of the Georgiou family. Their patriarch, Nic Georgiou of Bloemfontein, is the Orthotouch MD, under whose umbrella the HS interests fall. Business rescue practitioner Hans Klopper, a director of Orthotouch, appears to manage the HS companies’ affairs.

Georgiou is among the 22 respondents against whom relief is being sought in the class action. The investors argue inter alia that Orthotouch has failed to uphold its interest-payment obligations for the HS companies under the terms of a business rescue plan in 2011, when investors agreed to receive 6% annual interest, paid monthly in the first year, followed by a 0.25%-increase per annum, culminating in a guaranteed return of investors’ original capital invested, on 15 December 2016.

Investors found that their monthly payouts were reduced to a trickle in 2011 and were subsequently sporadic until December last year, when a reduced interest rate regime kicked in.

Ahead of the class action, investors are now trying to overturn an order, obtained ex parte (without prior notice to the other party) by Orthotouch in the Johannesburg high court, that approved another “scheme of arrangement” apparently concluded in November last year.

The suspicious investors believe Orthotouch is intent on ensuring they are stripped of their rights to recourse in getting their money back and are hiding the alleged mismanagement of the properties Orthotouch was to have taken transfer of – those belonging to Highveld Syndications numbers 15 to 22. The new arrangement was “agreed to” at a rowdy investors’ meeting characterised by burly guards protecting those running the meeting.

Jacques Theron of Theron & Partners believes that the high court sanctioned the proposed scheme of arrangements because material information which could have persuaded the court otherwise was withheld. Also, the application was not opposed because notice was not given to the HS applicants, their attorneys, or any other investor. The court’s decision was based on submissions made to it in an affidavit by Derek Pedoe Cohen, who acted as receiver and chairman of the investors’ meeting at which the scheme of arrangement was tabled on 12 November 2014.

“No mention was made in the application of the pending class action by the investors,” said Theron.

He also noted that, though the ex parte application should have been brought in the Pretoria (North Gauteng) High Court, it was made in the South Gauteng High Court in Johannesburg). Theron said they had applied to have the Orthotouch court order set aside, alternatively, for leave to appeal.

The investors who were present describe the scheme of arrangements’ meeting as “murky”. They are not sure which of the three options – or combination of them – was in the end adopted. Theron charged: “No specific option was [formally] adopted.”

The information at his disposal showed only that the scheme of arrangement “as a whole” was adopted – meaning Orthotouch appears bound by all three options, depending on who voted for what.

Investors who attended the meeting had said there were no motions “to adopt anything”, said Theron. “They were merely steamrollered. Many of the HS investors did not receive notice of the meeting; some received notice only afterwards. The majority of our clients did not vote.”

Noseweek asked Hans Klopper, business rescue practitioner undertaking the rescue of the HS companies – who is also a director of Orthotouch – what the purpose of the meeting had been. He said he was too busy to talk to Noseweek, but referred us to an internet circular addressed to trade creditors and Highveld Syndication Investors.

Klopper took issue with a radio interview on Cape Talk about the January Noseweek article on Pickvest/Orthotouch. He said: “You will note that the status of the company [Orthotouch] is ‘in business’ and not, as was stated by you… ‘in deregistration’.

“I trust you will do the necessary to correct the error.”

However, a company called Orthotouch with number M2010004096 was reported by the Companies and Intellectual Property Commission (Cipc) to have been deregistered in 2013.

Klopper wrote to Noseweek saying this information was “two years old, from 2013” and that it had since been re-instated as being “in business”. “Many companies are reflected as being in de-registration from time to time, mostly because of statutory returns not having been filed on time,” wrote Klopper.

He also objected to Noseweek’s assertion that there was a conflict of interest in his being Highveld’s business rescue practitioner as well as a director of Orthotouch: “You will note from the business rescue plan that [it] provided for the assets of the [Highveld] companies to be transferred to Orthotouch Ltd [and] that the Highveld Syndications would nominate two directors (subject to the approval of Orthotouch’s shareholders) to the board of Orthotouch subsequent to the adoption of the business plan on 14 December 2011.”

He said the nomination of Connie Myburgh and himself as directors had been debated and proposed in the draft business rescue documentation of late November 2011 and they were appointed directors of Orthotouch on 9 January 2012.

Klopper also took issue with Noseweek’s suggesting that Pickvest had reinvented itself into Orthotouch. Klopper charged: “Upon conducting your own search on Orthotouch and Cipc you will not find any change of name by Pickvest to Orthotouch as suggested… Orthotouch was the vehicle utilised to implement the restructuring of the businesses of the Highveld Syndication companies in terms of… the Companies Act.”

Investor Henry Smith said Klopper was technically correct that the company didn’t change its name but that Pickvest had been the marketing arm for Highveld investments. The Georgiou family is involved in both companies.

Klopper blamed “detractors” for Orthotouch’s failure to work its magic on the HS companies. He said the detractors included “brokers, accountants, valuers, attorneys, auctioneers, liquidators …some working in concert and others as individuals, but in most instances operating covertly, to bring about the liquidation of the HS Companies to enable the detractors to lay their hands on the assets… and to generate vast possible income for themselves…”

It is not clear exactly what happened at the November meeting but in the absence of the shareholders supporting one of the three options, the first becomes the default option. Smith said that from December, shareholders had been paid 4% interest on their capital. Their capital investment repayment will be delayed for ten years, to 2024. There is only one bright spot in this option – the 4% interest is based on the historical value of the investment of R4.6 billion. So if an investor has R7 million invested – as one pensioner is reported to have – that investor would get R23,333-a-month. Smith said that investors were now all receiving cheques. But the investors had originally been promised 6%, which would have been R35,000 monthly in the case of the pensioner who invested R7m.

The second alternative would have paid out 6% on “the actual aggregate values of the properties” of some R2 billion, which is R2.6bn less than the original investment. That means the R7m pensioner would have had the value of her investment reduced to 43.4% of its value. Her investment would have been reset at R3,010,000. Interest on that at 6% would translate into R15,050-a-month. This option apparently falls away, but it would have paid out the (reduced) capital investment much sooner: on 31 March 2017.

The third option was to set up a new property fund company, the Capital Growth Fund Ltd to be listed on the main board of the JSE Ltd. According to the agreement, the listing of CGF would allow HS investors to convert their historical investment into ordinary shares or a combination of ordinary and secured redeemable preference shares in CGF. This option now also apparently falls away.

When clarity was again sought from Kloppers, he said he would refer further questions to Orthotouch. When it was pointed out that he was a director of Orthotouch, he said the scheme of arrangement had been proposed by Orthotouch, not by him.

All is as clear as mud then.

Publisher: Noseweek Issue #187, 1st May 2015