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[2019] ZAFSHC 240
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Social Housing Regulatory Authority v Free State Social Housing Company and Others (1751/2019) [2019] ZAFSHC 240 (17 December 2019)
IN
THE HIGH COURT OF SOUTH AFRICA,
FREE
STATE DIVISION, BLOEMFONTEIN
Case No:
1751/2019
In
the matter between:-
SOCIAL
HOUSING REGULATORY
AUTHORITY
Applicant
and
FREE
STATE SOCIAL HOUSING
COMPANY
1
st
Respondent
NATIONAL
HOUSING FINANCE CORPORATION
SOC
LTD
2
nd
Respondent
MANGAUNG
METROPOLITAN
MUNICIPALITY
3
rd
Respondent
DEPARTMENT
OF HUMAN SETTLEMENT, FREE STATE
PROVINCIAL
GOVERNMENT
4
th
Respondent
CORAM
:
MBHELE J
HEARD
ON
:
12 SEPTEMBER 2019
DELIVERED
ON
:
17 DECEMBER 2019
[1]
The applicant approached this court on an urgent basis on 18 April
2019 for an order in the following terms:
1. That these
proceedings:
1.1 be heard as a matter
of urgency;
1.2 that any failure to
adhere to the Rule of the above Honourable Court relating to
form, time, periods, service be condoned;
and
1.3 that new shortened
timeframes be imposed for the filing of all future process and heads
of arguments and the setting down for
the hearing of this matter on
an expedited basis.
2. That the First
Respondent be placed under administration of the Applicant in terms
of
section 12
of the
Social Housing Act No. 16 of 2008
, with the
following powers and duties:
2.1 the Applicant taking
immediate control of, and in the place of, the Board of Directors of
the First Respondent, manage the business
and operations of and
concerning the First Respondent, together with all assets and
interests relating to the business of the First
Respondent;
2.2 the Applicant taking
control of the cash, cash investments, shares and other security as
well as all other assets owned, held
or administered by or on behalf
of the First Respondent, acknowledging the rights, claims and
securities of the Second Respondent
in the process, reference to
securities being specifically the securities the latter holds in
respect of the First Respondent (‘the
Second Respondent’s
Securities”);
2.3 the Applicant
incurring such reasonable expenses and costs as may be necessary or
expedient for the administration and control
of the business and
operations of the First Respondent and to pay same as and when they
fall due from the assets owned, administered
or held by or on behalf
of the First Respondent;
2.4 the Applicant being
permitted to engage such assistance of a legal, accounting,
actuarial, administrative or other professional
nature, as the
Applicant may deem necessary, and to defray reasonable expenses and
charges and expenses thus incurred from the
assets owned,
administered or held by or on behalf of the First Respondent;
2.5 the Applicant will
provide to the Second Respondent on a monthly basis commencing on 31
May 2019and for so long as the administration
endures, a statement of
income and expenditure in respect of the First Respondent and, upon
reasonable written request from the
Second Respondent and any other
creditor of the First Respondent, to provide specified supporting
documents in respect thereof;
2.6 the Applicant is
authorised to institute or prosecute any legal proceedings on behalf
of the First Respondent and to defend
any action against the First
Respondent;
2.7 the Applicant is
authorised to investigate allegations of financial, governance and
management failures and to implement appropriate
action to address
same, and to take action against any person who may be guilty of
misconduct or a crime in terms of the
Social Housing Act and
or any
other applicable law;
2.8 the Applicant is
authorized and empowered to approach the Master of
this Above Honourable Court to request
for the convening of an
enquiry, the issuing of subpoenas requiring production of
documentation including loan applications, suretyships,
financial
statements, lease agreements and property valuations involving
certain corporate entities, trusts, individuals in their
capacity as
shareholders or directors in the corporate entities and individuals
as trustees and individuals as business persons
and obtaining
of oral evidence in order to comply with the order sought in2.7;
2.9
authorising the Applicant to take such
further steps as may be necessary in terms of the Act and or any
other applicable law, during
the administration of the First
Respondent, to achieve the First Respondent’s restoration to
viability.
3.
The Applicant may approach the above
Honourable Court on these papers, as may be amplified, for any
further powers that may
be necessary for this order to be given
effect;
4.
The Applicant is ordered by no later than
31 July 2019 to report to the above Honourable Court concerning
–
4.1
the business and operations of the First
Respondent inclusive of information relating to the assets and
liabilities and income and
expenditure relating to the business of
the First Respondent;
4.2
whether the Applicant remains of the view
that that the First Respondent can be restored to viability as
contemplated in
section 12(10)
of the SHA and if so, the timeframe
within the Applicant believes such restoration can be achieved;
5
In the event that this application is
opposed, ordering the party or parties so opposing to pay
the costs of this application
including those of two counsel;
6
Further and/or alternative relief.
My
sister, Naidoo, J postponed the matter to a further date and granted
parties leave to file papers within a specified period.
The matter
came before me, with the parties having fully exchanged affidavits
and supplementary reports having been filed. The
issues have been
fully ventilated by the parties. Third respondent did not oppose the
application while 2
nd
and 4
th
respondents abide
by the decision of this Court.
[2]
The Applicant is an entity of the National Department of Human
Settlements (DHS), established in accordance with the provisions
of
Section 7 of the Social Housing Act 16 of 2008 ( the Act).
[3]
The first respondent is a non-profit company registered and
incorporated in terms of the company laws of this country. It is
classified as a Social Housing Institution (SHI).
[4]
The applicant was established in terms of the Act with the mandate to
accredit, capacitate, and invest in Social Housing Institutions
(SHI)
as well as to regulate the Social Housing Sector.
[5]
The Social Housing Regulatory Authority (SHRA) was established to
advance the DHS’s broader mandate of promoting the achievement
of a non-racial, integrated society through the development of
sustainable human settlements and quality housing.
[6]
The first respondent, like other SHIs, was established with a purpose
of developing housing rental stock, using the institutional
subsidy
administered through SHRA together with loan funding from the
National Housing Finance Corporation SOC LTD (NHFC).
[7]
A provisional winding up order was granted by this court against the
respondent in favour of one of its creditors, CALGRO on
15 November
2018.
[8]
The SHRA was granted leave to intervene in the CALGRO application on
21/02/2019. On 15 March the NHFC brought an application
where it,
inter alia,
sought leave to intervene in the CALGRO
Application, the provisional winding up to the first respondent and
the convening of the
enquiry into the affairs of the first
respondent, as envisaged in section 417 of the 1973 Companies’
Act.
[9]
The basis for NHFC application was that the first respondent failed
to honour monthly instalments for monies advanced to it
in terms of
two facility agreements entered into in 2011 and 2012. This is common
cause.
[10]
The NHFC was of the view that the first respondent has plunged into
maladministration and its status necessitated a formal
inquiry into
the affairs of the first respondent as envisaged in the Companies
Act.
[11]
As Security for the monies owed to it by the first respondent, the
NHFC registered first and second covering mortgage bonds
over the
rights of the First Respondent as lessee of the property under
notarial agreement of lease K119/ 2011S and rights over
rental income
by the first respondent was ceded to NHFC.
[12]
The SHRA employed the services of a management consultant firm
(Letsema) to undertake an investigation into the first respondent’s
affairs and to determine whether prospects exist for the turnaround
of the first respondent’s business.
[13]
It is the diagnostic report prepared by Letsema that led the
applicant to move this application. Letsema’s report painted
a
picture of an ailing institution with no prospects of turning its
fortunes around.
The
SHRA settled the liability of the first respondent to CALGRO and
CALGRO withdrew its liquidation application as a result.
[14]
Central to this application is the alleged maladministration of the
affairs of the First Respondent. The first respondent took
issue with
the report prepared by Letsema stating that its author is not an
auditor as envisaged in section 12 of the Act.
[15]
My brother Loubser, J ordered the applicant to appoint an auditor to
perform forensic investigation in compliance with section
12 of the
Act and further granted the parties leave to supplement their
affidavits. Consequently, the applicant appointed Ligwa
Advisory
Services, a firm of public accountants and auditors to conduct the
forensic investigation into the affairs of the first
respondent.
[16]
CONTENTIONS BY THE PARTIES
Ms.
Nkosi Thomas, on behalf of the applicant, submits that the applicant
has established maladministration as required by Section
12 of the
Act. She contended further that the objective evidence in the form of
forensic audit report shows that the first respondent
is in a state
indicating substantial financial governance or management failure.
She submitted, further, that if the situation
that the first
respondent finds itself in is allowed to deteriorate further, it will
defeat the purpose for which the first respondent
was created. She
contended further that maladministration is evident from the fact
that the first respondent was placed under provisional
liquidation by
CALGRO, that its indebtedness to the NHFC in the amount of
R31 611 889. 50 resulted in the NHFC commencing
liquidation
proceedings against it, and further that the report of the
provisional liquidator concluded that the first respondent’s
liabilities exceed its assets by R 38 778 886. 00.
Mr.
Mukhari, on behalf of the first respondent, submitted that failure by
the applicant to obtain the forensic report as required
by the Act is
bad in law and fatal to the applicant’s case. He submitted
further that the report by Ligwa does not present
objective facts. He
contended that the applicant sought to stranglehold first respondent
by withholding the grant to the first
respondent. In his view, the
applicant cannot benefit from its unlawfulness.
[17]
The forensic audit scope of Ligwa was set out as follows:
1. Whether the first
respondent used the grant funding from SHRA for its operational
expenses in contravention of the agreement
with SHRA and the Free
State Provincial Givernment;
2. Whether the first
respondent failed to pay its service providers in accordance with
the relevant and applicable contractual
terms;
3. Whether the selection
and appointment of Motif to render services relating to
accreditation, reporting and assisting the CEO
of the first
respondent with administrative work was lawful;
4. Whether the failure by
the first respondent to repay the loan provided by the National
Housing Finance Corporation ( NHFC ),
being the second respondent in
this matter was as a result of maladministration;
5. Whether the Board of
Directors of the first respondent was supine; and
6. Whether the Board of
the first respondent and its management were guilty of non-compliance
with internal policies which led to
internal control deficiencies.
[18]
Ligwa found that there was evidence of maladministration and lack of
oversight by the Board at the first respondent and based
its findings
on the following:
1. That the first
respondent Failed to pay its service providers resulting in
litigation proceedings by Likakapa and CALGRO.
2. Failure to make
payment to NHFC resulting in an amount of R32,9 million owing to
NHFC.
3. Approval by CEO of his
incentive amounting to R34 321.76 during December 2017 without
the approval of the Board.
4. Appointment of Motif
without following a tender process;
5. Payments to Motif
amounting to a total of R2 884 762, 28 during the period 17
February 2015 to 7 November 2017 which
were not supported by any
written contract , appointment letter and/ or deliverables;
6. Failure to make
payments to VBV for services rendered resulting in the amount of
R713 316 , 39 owing to VBV;
7. Failure by the Board
of the first respondent to hold the minimum number of meetings as
prescribed by the Board Charter;
8. Failure by the Board
to commence business rescue proceedings as soon as the first
respondent was financially distressed as prescribed
in its Board
Charter;
9. Failure by the Board
to ensure that the First respondent has an effective and independent
audit committee as the Board Charter
prescribes.
[19]
The First Respondent disputes that the appointment of Motif was in
contravention with its own procurement policies. It submits
that the
policy does provide for deviation from the tender process in
situation where early delivery is of critical importance
and where
the invitation of tenders is impossible or impracticable.
[20]
The relevant clause of the procurement policy provides as follows:
A
tender or quotation for products and services other than the lowest
quotation shall not be accepted, unless there is a written
report
from the Corporate Services Manager or CEO, stating all the reasons
for such a recommendation.
The
following will be issued and circulated to managers by the Corporate
Services Manager:
· Internal
procurement directives.
· Prescripts on
tender procedures.
· Evaluation and
awarding of tenders.
Supplies
and / or services may be procured without inviting comparative
tenders in cases where early delivery is of critical importance
and
where the invitation of tenders in terms of the prescribed manner is
either impossible or impracticable. In such cases, the
reasons for
the urgency and the losses or consequences that will follow if
timeous action is not taken must be certified in writing
by the
Corporate Services Manager for approval by the Board.
In
the case of a limited number of suppliers, the requirements to
advertise shall fall away. The identified potential suppliers
shall
directly be provided with tender invitations. The requirements from
such suppliers shall be advertised annually in order
to explore the
market for new products and to ensure that all suppliers are indeed
known and on record. This will be possible with
the approval of the
Board.
Period
contracts, defined as contracts entered into for the supply of
repetitive goods, the rendering of services or the disposal
of
movable property over a specified period of time, may be arranged by
the Corporate Services Manager, with approval from the
Board.’
[21]
It is the first respondent’s case that the services of Mr.
Naidoo, the director of Motif were of a specialised nature
and that
his previous history with the first respondent justified his
appointment without following tender processes.
[22]
The policy requires that reasons for urgency be certified in writing
by the Corporate services Manager for approval of the
Board. There is
no indication that such reasons were advanced as no document exists
in support thereof. There is no document showing
why and how Motif
was appointed. It is apparent from the above that the first
respondent’s procurement policy was not followed
in the
appointment of Motif.
[23]
The first respondent assails the forensic report further and alleges
that the investigator ignored the information that the
first
respondent entered into payment arrangements with its creditors. The
document termed ‘payment arrangement’ with
VBV which is
attached to the first respondent’s supplementary answering
affidavit is undated and unsigned. It is not clear
from the document
when was the payment arrangement entered into and with whom.
[24]
The first respondent attached the minutes of the Board meeting dated
05 October 2017 to its supplementary affidavit to counter
the finding
by Ligwa that the CEO‘s incentive bonus was paid without the
approval of the Board. The minutes of the
meeting of the 05
th
October 2017 were not part of the minutes reviewed by Ligwa. This
meeting seems to have been held just six days after the meeting
of 29
September 2017 which according to Ligwa was the last meeting for the
year 2017. The next meeting was held in February 2018.
[25]
The report by Ligwa shows that there were only 8 meetings held by the
Board of the first respondent in a period of 4 years
between 2015 and
2018. This was not disputed by the first respondent. If there was a
meeting held on of 05 October 2017 the number
would have risen to 9.
The minutes of 05 October were not brought to the attention of
the investigators. It is clear that
this set of minutes was prepared
to counter the finding that the payment of incentives was not
approved by the Board.
The
argument by Mr. Mukhari that Ligwa’s report was tailored to
suit the outcome desired by the applicant is without basis.
The
available evidence does not support this assertion.
[26]
Legal Principles applicable
Section
12
of the
Social Housing Act provides
as follows:
12 Powers of
intervention of Regulatory Authority
(1) If the Regulatory
Authority is satisfied on reasonable grounds that there has been
maladministration by a social housing institution,
the Regulatory
Authority must
(a)
prepare a report to that effect;
(b)
provide the social housing institution with a written notice of
the Regulatory Authority's intention to intervene, and must specify
in that notice what remedial action must be taken by the social
housing institution;
(c)
instruct the social housing institution to take the remedial
action specified in the notice, and may request the institution to
obtain specified support in order to rectify such maladministration.
(2) The Regulatory
Authority may make available funds through the social housing
investment plan to assist in meeting the costs
of any such support.
(3) Should the social
housing institution continue to resist the intervention of the
Regulatory Authority or if there is no improvement
in performance in
respect of the matters which necessitated the intervention, the
Regulatory Authority may authorise a forensic
investigation into the
institution's affairs and appoint a public accountant and auditor
registered in terms of the Public Accountants'
and Auditors' Act,
1991 (Act 80 of 1991), to undertake such investigation.
(4) The Regulatory
Authority may, after consultation with the providers of any debt
finance to the institution and upon notice to
affected parties,
including the providers of finance to the institution
(a)
apply to the High Court for the suspension of the chairperson,
members of the board, manager or executive or senior staff of the
institution for the period of the investigation; and
(b)
appoint suitably qualified persons to manage the institution's
affairs in their place pending the findings of the forensic audit
report.
(5) The forensic audit
report must make a finding on whether the social housing institution
has been managed in a manner which constitutes
maladministration.
(6) If the forensic audit
report does not make a finding of maladministration, the suspended
persons are automatically reinstated
as from the date of such report
and the Regulatory Authority must review its previous instructions to
the institution.
(7) If the forensic audit
finds maladministration, the Regulatory Authority must request the
members of the social housing institution
to replace any suspended
person or person associated with the maladministration with a person
acceptable to or recommended by the
Regulatory Authority.
(8) If the Regulatory
Authority, based on the forensic audit report, does not believe that
the institution is sustainable in its
current form, or if the social
housing institution refuses to take the steps required under
subsection (8), the Regulatory Authority
may, after consultation with
the providers of debt finance to the institution and upon notice to
affected parties, including the
providers of finance to the
institution, apply to the High Court for an order placing the
institution under the administration
of the Regulatory Authority.
(9) If the High Court
grants an order placing the institution under the administration of
the Regulatory Authority, the Regulatory
Authority
(a)
must manage the institution effectively and efficiently;
(b)
may remove the accreditation of the social housing institution;
(c)
may transfer the housing stock or rights of the social housing
institution to another social housing institution prepared to accept
such
transfer on such terms and conditions as may be agreed at the time;
or
(d)
where appropriate, institute legal proceedings for the winding up
of the institution.
(10) Where the Regulatory
Authority succeeds in restoring the viability of the institution or
any part thereof, it may apply to
High Court for
(a)
the administration order to be lifted; and
(b)
for an order authorising the Regulatory Authority to appoint
suitable persons as directors and office bearers of the institution.
(11) A social housing
institution or any person directly affected by a decision of the
Regulatory Authority, may exercise
(a)
any rights to internal review to the Regulatory Authority in
accordance with the prescribed procedures;
(b)
any other rights according to law.
(12) Where the Regulatory
Authority succeeds in restoring the viability of the institution or
any part thereof, it may apply to
High Court for
(a)
the administration order to be lifted; and
(b)
for an order authorising the Regulatory Authority to appoint
suitable persons as directors and office bearers of the institution.
(13) A social housing
institution or any person directly affected by a decision of the
Regulatory Authority, may exercise
(a)
any rights to internal review to the Regulatory Authority in
accordance with the prescribed procedures;
(b)
any other rights according to law.
(14) A social housing
institution for purposes of any inspection under this Act must,
subject to the provisions of any applicable
law and subject to such
limitations as may be prescribed by the Minister, allow the
Regulatory Authority
(a)
access to its premises or any property developed, constructed or
managed by it;
(b)
access to its records and documentation; and
(c)
the seizure and photocopying of such records and documentation as
may be required for investigation.
[27]
The evidence before me shows that the first respondent is ailing and
requires urgent intervention to restore it to normal.
It is evident
from the report of the provisional liquidator that its liabilities
far exceed its assets. The applicant is required
by law to intervene
in the affairs of the SHIs where it is satisfied on reasonable ground
that there is evidence of maladministration.
[28]
The argument by the first respondent that the application must be
dismissed for failure to secure a forensic audit report prior
to its
institution seeks to elevate form over substance. The order of
10 May 2019 by Loubser, J had an effect of condoning
the applicant’s
failure to file the forensic audit before instituting this
application. Loubser, J further granted parties
leave to supplement
their papers to respond to the findings of the forensic report. Even
though there was no forensic report
the Letsema report gave the
applicant the basis upon which it had to intervene in the affairs of
the first respondent. The findings
by Letsema were confirmed by the
forensic audit report.
[29]
In
Dengetenge Holdings PTY (Ltd) v Southern Sphere Mining &
Development Co Ltd and Others
2014 (5) SA 138
at 135-136
the
following was said:
“
It is apparent
from the special circumstances of this case, set out fully in the
main judgment, that if Southern Sphere had applied
for exemption, in
all probability the high court would have granted it. In these
circumstances to remit the matter to the high
court for an
application for an exemption to be made would be tantamount to
placing form above substance. This is so because Dengetenge
has
conceded on the merits that the rights were granted to it unlawfully
and in contravention of an interdict. Therefore, on the
present
facts, a remittal to the high court would serve no purpose other than
granting an exemption which is already justified
on record.
Accordingly, I hold that a remittal solely for that purpose is
neither justified nor warranted. Ordering a remittal
here would
constitute a waste of time and resources. Scarce judicial resources
must not be spent on mere formalities which are
not dispositive of a
real dispute in particular litigation.”
[30]
It is clear from the above dictum that courts are less likely to give
primacy to form over substance. The issues raised in
the current
matter are central to the state’s obligation to fulfil its
constitutional mandate as set out in Section 26 of
the Constitution.
The evidence shows that the first respondent is factually insolvent.
The fact that it was placed under provisional
liquidation is an
indication that it needs to be rescued. The manner in which the first
respondent carried out its business threatens
the state’s
ability to fulfil its constitutional mandate of providing housing to
its inhabitants.
[31]
I am not of the view that the people who are currently at the helm of
the first respondent have the capacity to take the respondent
out of
the mess it finds itself in. The first respondent failed to meet the
requirements for its accreditation. It is unfathomable
how the Board
could have approved incentive bonus for a CEO who is steering a
sinking ship. It is not clear what was the Board
rewarding
when he got his incentive bonus. This is a clear indication that the
Board is not in touch with the affairs of
the organisation it is
overseeing. I am satisfied that the applicant has established
maladministration in the first respondent
and that the first
respondent must be placed under administration.
[32]
Consequently, the following order is made:
ORDER:
The
First Respondent is placed under administration of the Applicant in
terms of
section 12
of the
Social Housing Act No. 16 of 2008
, with
the following powers and duties:
2.1 The Applicant shall
take immediate control of the First Respondent; manage its business
and operations together with all assets
and interests relating to the
business of the First Respondent;
2.2 The Applicant shall
take control of the cash, cash investments, shares and other security
as well as all other assets owned,
held or administered by or on
behalf of the First Respondent, acknowledging the rights, claims and
securities of the Second Respondent
in the process, reference to
securities being specifically the securities the latter holds in
respect of the First Respondent (‘the
Second Respondent’s
Securities”);
2.3 The Applicant to
incur such reasonable expenses and costs as may be necessary or
expedient for the administration
and control of the business and
operations of the First Respondent and to pay same as and when they
fall due from the assets owned,
administered or held by or on behalf
of the First Respondent;
2.4 The Applicant is
permitted to engage such assistance of a legal, accounting,
actuarial, administrative or other professional
nature, as the
Applicant may deem necessary, and to defray reasonable expenses and
charges and expenses thus incurred from the
assets owned,
administered or held by or on behalf of the First Respondent;
2.5 The Applicant will
provide to the Second Respondent on a monthly basis commencing on 31
January 2020 and for so long as the
administration endures, a
statement of income and expenditure in respect of the First
Respondent and, upon reasonable written request
from the Second
Respondent and any other creditor of the First Respondent, to provide
specified supporting documents in respect
thereof;
2.6 The Applicant is
authorised to institute or prosecute any legal proceedings on behalf
of the First Respondent and to defend
any action against the First
Respondent;
2.7 The Applicant is
authorised to investigate allegations of financial, governance and
management failures and to implement appropriate
action to address
same, and to take action against any person who may be guilty of
misconduct or a crime in terms of the
Social Housing Act and
or any
other applicable law;
2.8 The Applicant is
authorized and empowered to approach the Master of this Court to
request for the convening of an enquiry, the
issuing of subpoenas
requiring production of documentation including loan applications,
suretyships, financial statements, lease
agreements and property
valuations involving certain corporate entities, trusts, individuals
in their capacity as shareholders
or directors in the corporate
entities and individuals as trustees and individuals as
business persons and obtaining of oral
evidence in order to comply
with the order in 2.7;
2.9
The Applicant is authorized to take such
further steps as may be necessary in terms of the Act and or any
other applicable law,
during the administration of the First
Respondent, to achieve the First Respondent’s restoration to
viability.
4. The Applicant may
approach this Court on these papers, as may be amplified, for any
further powers that may be necessary for
this order to be given
effect to;
5.
Costs shall be costs in the administration.
_____________
NM
MBHELE, J
On
behalf of the Applicant:
Adv L.J Nkosi-Thomas
Instructed
by:
Matsepes Inc
BLOEMFONTEIN
On
behalf of the 1
st
Respondent: Adv Mkhari SC
Instructed
by:
Moroka Attorneys
BLOEMFONTEIN
On
behalf of the 2
nd
Respondent: Adv J Vermas
Instructed
by:
Honey
Attorneys
BLOEMFONTEIN
On
behalf of the 4
th
Respondent: Adv
Jonas
Instructed
by:
State Attorney
BLOEMFONTEIN