JSE-listed ConvergeNet is being sued for R37 million for pulling out of an 11th-hour deal to rescue the now defunct Choice Technologies about two years ago.
The lawsuit, filed by Choice's joint liquidators, has taken over 12 months to prepare and is expected to take several years to wrap up.
The liquidators are going after ConvergeNet, as they believe the agreement was a done deal and Choice would have been saved if ConvergeNet had not pulled out. ConvergeNet is defending the action and has filed an exception, arguing it has no legal basis. The exception will be heard on 21 September.
The company is in turn threatening to sue the liquidators over money it pumped into Choice to keep it afloat, after it was put into liquidation towards the end of 2008.
The liquidators - Deon Botha, of Corporate Liquidators; Enver Motala, from Syferts Board of Trustees; and insolvency practitioner Adel McQuarrie - have filed summons in the North Gauteng High Court. They are claiming an amount of R37 million for losses Choice incurred, as it kept operating on the basis that it would be bailed out, and for liquidators' fees.
Choice was put into provisional liquidation in 2008, after technology and infrastructure company Square One Solutions Group applied for it to be declared insolvent, claiming Choice owed it money. The application was filed through Square One's subsidiary, Structured Infrastructure Solutions.
It is understood the dispute between the companies arose from an attempt by Square One to take over a 49% stake in Choice, held by the National Empowerment Fund, as well as the remainder of the interest, held by the Choice Group.
Choice owed about R100 million to various creditors before it folded. Square One, a JSE-listed company, has also since been put into liquidation.
Legal wrangling
According to court papers, a copy of which are in ITWeb's possession, Choice and ConvergeNet created a joint venture company called Nectere Networks, which was formed to benefit from a State IT Agency (SITA) contract.
network equipment for local and wide-area networks for the agency and its clients. The tender has since been withdrawn, according to SITA's Web site.
The liquidators' summons argues that ConvergeNet agreed, in July 2008, to fund Nectere by providing a loan facility of up to R10 million. ConvergeNet also had the “additional discretion” to provide payment guarantees to suppliers.
ConvergeNet also agreed to indemnify the liquidators from any losses at the time Choice was liquidated, but continued to operate. The agreement was signed in March 2009.
As a result of ConvergeNet's agreement to bail out Choice and continue funding it, the liquidators continued to run the company “to the benefit of creditors and employees of Choice”, the summons says.
However, ConvergeNet pulled out of the deal on 9 June 2009, a few days before Choice's creditors were meant to sanction the arrangement on 15 June 2009, argues the summons.
Choice's liquidators are claiming R3.12 million in liquidators' fees, R10 million in “operational accruals,” as well as R24.5 million in trading losses incurred between August 2008 and June 2009. The parties are also claiming interest at a rate of 15.5% from June 2009.
According to the court papers, ConvergeNet is in breach of its deal to cover the trading losses and pay the liquidators' fees. The summons argues that ConvergeNet acted “fraudulently” and misled the liquidators as to its intentions.
Johan van Greunen, a partner at law firm Van Greunen & Associates, confirms that summons were issued against ConvergeNet, totalling R37 million. He expects the litigation to drag on for several years.
'Black art'
ConvergeNet's lawyers, Brook & Brand, have filed an exception to the claim, arguing it has no legal basis, while the company has also indicated it will defend the claim. The exception filing argues that the conditions of ConvergeNet taking over the company were never met.
ConvergeNet CEO Pieter Bouwer argues the claim is “frivolous” and without merit. Bouwer explains the exception has been filed to prevent unnecessary litigation.
The deal to bailout Choice was never finalised, he says, so ConvergeNet cannot be held liable for its losses. He argues that ConvergeNet cannot be held to terms under an agreement that was never completed.
In turn, ConvergeNet will sue the liquidators for the capital it pumped into the business to keep it going, which cost the JSE-listed company about R11 million, says Bouwer. ConvergeNet's lawyers are set to shortly issue summons.
Bouwer explains that the cash his company put into Choice allowed the latter to pay for orders, as suppliers would not deliver items on credit terms. He argues the money should have been returned to ConvergeNet when cash came in, but was not. “This is our first exposure to the black art of liquidation in this country.”
Last year alone, almost 100 IT companies closed, including Faritec's largest unit, Square One, Dialogue SA, Eclipse Networks, Masana Technologies, Music for Pleasure and Goal Technology Solutions.
So far, none of these collapsed companies seem to have been bailed out, although Eclipse's liquidator, Botha, was on the verge of signing a deal last April, which also collapsed.
Van Greunen says any claim against the liquidators will be against Nectere, which has since been liquidated. He says no claim has yet been filled.
ConvergeNet turned over R496.6 million in the six months to February and had cash on hand of R45 million at the half year.
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