Ruan Jooste’s Rants and Cents: Court application pending to declare Futuregrowth CIO a delinquent director. But will it stick?
An application has been made to the High Court of South Africa in the Western Cape by a small CIPC-registered private company, called HoldSA, to have well-known money manager Andrew Canter declared a delinquent director.
Canter is currently the Chief Investment Officer at Future Asset Management and is no stranger to local industry and investment players, and has served his time on many boards of directors. Over the years, Futuregrowth has grown into a Fixed-Interest, Responsible Investor, and Developmental Investor management company - with a diverse range of portfolios ranging from infrastructure bonds to agriculture portfolios.
The recent legal action pertains to Canter’s tenure as director of a small farming operation, called Safe Farming Ventures (SFV), which was a producer, wholesaler and distributor of citrus fruit and table grapes. HoldSA was a 50% shareholder, and Old Mutual Life Assurance Company (OMLACSA) owned the other half of the equity. Futuregrowth was managing this specific investment on behalf of OMLACSA, together with various other agricultural ventures.
According to the court documents, Canter was appointed as director of SFV in July 2019 but resigned at the end of January 2021. But in his resignation letter, which Personal Finance, has a copy of, Canter stated that “at the date of this notice based on the information presented to me I understand [SFV] not to be in financial distress, that it is trading in solvent circumstances (both factually, in that its liabilities do not exceed its assets, and commercially, in that it is able to pay its debts to creditors as and when they fall due)”.
And this is where the plaintiff claims of director delinquency begins, and where it will end is still for the courts to decide. But in the interim, the legal action does not bode well for Canter’s reputation and has the potential to expel him from an industry, he spent many years of his life investing in.
Now, in the context of South African corporate law, a “delinquent director” refers to a director of a company who has been found to have engaged in misconduct or negligent behaviour that has caused harm to the company, its shareholders, or its creditors. The term “delinquent director” is provided for in the Companies Act, 2008.
A very recent, and well-published example of its application, was when Dudu Myeni, former chairman of SAA, was declared a delinquent director by the Pretoria High Court, and subsequently banned from holding any directorship position for life in May 2020. Judge Tolmay said at the time, that she was a director gone rogue and that she did not have the slightest consideration for her fiduciary duty to SAA.
Under the Companies Act, a director can be declared a delinquent director by a court if they have been found guilty of certain specified acts, such as reckless trading, when a director allows a company to trade in a manner that is likely to result in significant financial loss to creditors, shareholders, or other stakeholders. Fraudulent conduct is another transgression stipulated in law and refers to any fraudulent or dishonest actions taken by a director that result in harm to the company or its stakeholders. A director may also be declared delinquent if they have shown a high degree of negligence in their duties, leading to significant harm to the company.
The consequences of being declared a delinquent director can include disqualification from serving as a director of a company for a specified period, potential fines, and other legal penalties.
It's important to note that the process of declaring a director as delinquent involves legal proceedings and a court decision. It is a mechanism in place to ensure that company directors act in the best interests of the company and its stakeholders and to hold them accountable for misconduct or negligence.
In the SFV scenario, HoldSA stated that the Canter’s conduct and each of the acts of mismanagement, which I will try and unpack shortly, were in breach of the defendant's legal duties as director of the SFV and of Futuregrowth, and caused significant harm to SFV and the plaintiff.
According to Section 76 of the Companies Act, a director of a company must exercise the powers and perform the functions of a director, as stipulated, do so in good faith and be in the best interest of the company and execute with the degree of care skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company as those carried out by the director. Furthermore, section 22 of the Act prohibits a company from carrying on its business recklessly, with gross negligence and with the intent to defraud any person or for any fraudulent purpose.
The defendant had duties to ensure that the company did not act contrary to these sections, the plaintiff claimed in the court papers. It stated at the time of Canter’s resignation he should reasonably have been aware, that SFV was in fact “in financial distress, was trading insolvent circumstances and was factually and/or commercially insolvent,” and not in the position stated in his resignation letter.
Now this is where it gets complicated, and involves a lot of moving parts, but I’m going to try to lay out the course of events as simply as possible so that the crux of the matter does not get lost in the detail. And I’ll start with what Canter told me.
As background, Canter said that Futuregrowth bought into SFV around 2009 with the view of gaining exposure to farmland earning a base yield from crops plus long-term gains from land values. The management of the farms and marketing of crops was outsourced to SAFE, a related party to SFV, with Futuregrowth’s clients being given a guaranteed base return by the business went along for quite some time until the drought 2017 to 2019 and subsequently faced difficulties in recovering. During this time, Canter said the director who represented Futuregrowth on the board retired, and Canter stepped in as a Non-Executive Director, representing Futuregrowth’s clients’ equity stake from July 2019 until his resignation from that Board in January 2021. He said “my job at that point, and it's well documented, was to make sure that in that particular difficult financial situation, the company didn't do anything that breached the Company's Act,” he said, “such as not trading insolvently or to favour a particular creditor over another.”
He stated that it was purely an oversight role and that operational and financial matters were reported on by his co-director, who was also the Chief Financial Officer. As time passed, he said he realised he was “bumping into his limitations in his understanding of the agricultural industry”, and that the job he was there to do was done. “I confirmed with the financial director repeatedly in writing and models that the company was liquid and solvent and hadn't compromised any creditors” when he tendered his resignation from the Board in early 2021.
Canter said that the SAFE and its shareholders had defaulted contractual guarantees to deliver a minimum return on the production, export and marketing of the produce harvested from the SFV farms, which was equally owned by both shareholders. Underwriting this guarantee of negotiated returns were the remaining 50% of the shares not owned by OM – those shares were held as security by Futuregrowth’s investors.
So due to unfortunate circumstances, which was a severe drought, SAFE breached the agreements of guaranteed returns, and Canter said that they were within their legal right to perfect security over the equity of other shareholders. “They, of course, interdicted us, and we have been involved in an adversarial negotiation and hostile legal action with the other shareholders on this matter since then,” he said.
The legal actions have included a court application has been made against Futuregrowth and OMLACSA to prevent the taking of the shares as security. Further, Canter said, “The ‘delinquency’ charge was only laid over 2 years later, and is part of the same aggressive legal strategy by SAFE’s shareholders to obstruct the process. Futuregrowth has undertaken a full investigation of the facts and documents, and our legal team has rebutted the delinquency charges through the court process”.
A separate court application has been made against Futuregrowth and OMLACSA in this regard by HoldSA.
But Canter said the two court cases are related in the fact that the application to declare him delinquent director is just an effort to discredit him and by extension Futuregrowth and OMLACSA, in an attempt by HoldSA to get their way and hold on to their shares.
Paul Rackstraw, Futuregrowth’s CEO said, “Acting as a fiduciary in clients’ interests will, inevitably, lead to legal disputes and conflicts when investee businesses are in difficulty, particularly when recovery rights must be pursued for investors. Aggressive legal strategies are not uncommon. Futuregrowth expects such actions from counterparties and we deal with them in their context.”
He went on to add, “Futuregrowth has, for the purposes of transparency and accountability to our clients, undertaken an internal legal review and investigation into Canter’s conduct and communication and uncovered no evidence in support of delinquency. In light of this, Futuregrowth has taken no action against Canter as there are no grounds to do so.”
There's a financial and legal process that has to be followed, Canter said, “and we see this all the time when we deal with adversarial counterparties. They play a variety of tricks to make their own case. “In this case, it's more of a public relations exercise. Futuregrowth and its investment team will not be intimidated by spurious claims, and will continue to act vigorously to protect our clients’ rights and interests.”
However, the counterparties in both cases involving SVF and Futuregrowth, which is OMLACSA designated fixed-income investment manager, stated in the court papers that they were aware that OMLACSA or Futuregrowth would call in the extensive warranties, in relation to the solvency and liquidity of SFV, if no internal restructuring took place or additional capital was raised.
But they say that SFV’s financial distress was contributed to as a result of financial support by SFV of farming operations on farms owned by Futuregrowth related Propco’s, where losses were made. While the Propco’s did acknowledge this and presented “Deal Sheets” which envisaged internal and debt restructuring for SFV Futuregrowth months later after, SFV had invested more money into the Propco’s farms refused to sign off on the initial internal rescue plan. In the absence of such a restructuring exercise, SFV was not be able to continue to trade.
The applicants feel that by Canter’s resignation, and his failure to appraise HoldSA, and other related parties, of relevant facts and the intentions and requirements of OMLACSA and Futuregrowth in aforesaid circumstances, he misrepresented the true financial position of SFV and implied that the planned restructuring arrangement was still a viable option.
With transactional details and legalities and paper trails going on for light years, and nowhere near resolution, I’ll pause this evolving story there for now. But what I can tell you is that the company was eventually placed into Business Rescue and the assets within SFV were sold off to different bidders, to settle its debts as the joint Business Rescue Practioner (BRP), Liam Royce, confirmed to Personal Finance, address all the employee benefit obligations of the three farms workers in question. Unfortunately, according to a notice sent out by the BRP - Engaged Business Turnaround - all workers had to be retrenched during the process, however, Royce informed Personal Finance that alternative employment arrangements were made for around 98% of the workers involved to allow for their continued employment.
The Business Rescue process has also left the minority shareholders in both HoldSA and related companies with nothing to show for their initial investment or the additional capital they provided to finance the alleged internal turnaround plan. For now, we will have to wait and see how the court proceedings further unfold.
As SFV moved through the Business Rescue Process, the BRP and creditors determined the best action was to sell off the remaining farm assets. As a result, Futuregrowth actually bought one of the farms from the SFV portfolio - Skilderkrans – for R30.5 million. Canter said the farm was bought through an open auction facilitated by the BRP, and the additional investment was made by the same investors in Futuregrowth funds who were originally holders of SFV. “It was a public auction with information available to all bidders -- we didn't know anything that someone else couldn't know or didn't know,” he added, “and our bid included an immediate liquidity line for the farm so that workers could remain employed and the farm could remain in operation.”
Royce confirmed that it was an independent process, ultimately under the auspices of the principal creditor (ABSA).
*UPDATE: Futuregrowth and Old Mutual Life Assurance Company have filed a notice to withdraw its opposition to HoldSA court application to retain the possession of their shares in Safe Farm Ventures.
PERSONAL FINANCE