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[2016] ZASCA 75
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Registrar of Medical Schemes and Another v Genesis Medical Scheme (238/2015) [2016] ZASCA 75; [2016] 3 All SA 449 (SCA); 2016 (6) SA 472 (SCA) (27 May 2016)
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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 238/2015
In
the matter between:
THE
REGISTRAR OF MEDICAL
SCHEMES
FIRST APPELLANT
THE
COUNCIL FOR MEDICAL SCHEMES
SECOND
APPELLANT
and
GENESIS
MEDICAL SCHEME
RESPONDENT
Neutral
citation:
Registrar
of Medical Schemes v Genesis Medical Scheme
(238/2015)
[2016] ZASCA 75
(27 May 2016)
Coram:
Cachalia,
Seriti, Willis and Dambuza JJA and Tsoka AJA
Heard:
11 May
2016
Delivered:
27 May
2016
Summary:
Medical
Schemes Act 131 of 1998
– members’ funds allocated to
members’ savings accounts are ‘trust property’ in
terms of the
Financial Institutions (Protection of Funds) Act 28 of
2001
and are to be accounted for separately in terms of
ss 4(4)
and
(5) of that Act, read together with
s 35(9)
(c)
of the
Medical Schemes Act 131 of 1998
.
ORDER
On
appeal from:
Western
Cape Division of the High Court, Cape Town (Davis J sitting as court
of first instance), judgment reported sub nom as
Genesis
Medical Scheme v Registrar of Medical Schemes & another
2015 (4) SA 91
(WCC):
1
The
appeal is upheld with costs.
2
The
order of the court a quo is set aside and replaced with the
following:
‘
The
application is dismissed with costs.’
JUDGMENT
Cachalia
JA (dissenting with Dambuza JA)
[1]
This is an appeal from the Western Cape Division of the High Court,
Cape Town (Davis J), upholding a review by Genesis Medical
Scheme
(the respondent) against a decision of the Registrar of Medical
Schemes, the first appellant, to reject its Annual
Financial
Statement (AFS) for the year 2012. The Registrar did so for the
reason that the respondent had reflected the funds in
its members’
personal medical saving accounts (PMSAs) as its own assets, instead
of treating them as funds held in trust
on behalf of its members.
[2]
In a now reported judgment the court a quo upheld the respondent’s
contention that PMSA funds were correctly reflected
as its own
assets, and that in rejecting its AFS the registrar had erred in
law.
[1]
The Registrar appeals
this finding with leave of that court. The second appellant, the
Council of Medical Schemes, is cited as
the organ of state
responsible for the functioning of medical schemes.
[2]
[3]
On 19 June 2013 the Registrar informed the respondent that he had
rejected its 2012 AFS because of the manner in which it had
reported
the funds in the PMSAs. The respondent then instituted review
proceedings under
s 6(2)
(d)
of the
Promotion of Administrative Justice Act 3 of 2000
on the
grounds that the registrar’s decision was materially influenced
by an error of law.
[4]
The source of this error, it contended and still contends, was the
incorrect construction placed on the relevant provisions
of the
Medical Schemes Act 131 of 1998 (the MSA), its regulations and the
Financial Institutions (Protection of Funds) Act 28 of
2001 (the FI
Act) in the judgment of
Registrar
of Medical Schemes v Ledwaba NO (Omnihealth).
[3]
The judgment pertained to a medical scheme known as Omnihealth
Medical Aid Scheme (Omnihealth) that was liquidated. The liquidators
contended that PMSA funds were the assets of Omnihealth and fell into
the insolvent estate. The court disagreed, holding that these
funds
constituted trust property of the members as contemplated in s 4(5)
of the FI Act and therefore did not fall into the scheme’s
insolvent estate.
[5]
A few years after the
Omnihealth
judgment the Council and the
Registrar issued several circulars prescribing the form in which PMSA
funds were henceforth to be reported
in the AFS of medical schemes.
In summary the circulars provided that: Contributions received by
medical schemes from their members
must be retained in a trust
account separate from any of its other bank accounts; interest and
other income earned on PMSA funds
are to accrue to the members’
PMSA balances; and PMSA funds are no longer to be reflected in the
balance sheets and income
statements of the AFS.
[6]
The respondent’s 2012 AFS and returns did not comply with these
prescriptions. The Registrar accordingly rejected them.
It is however
common ground that these circulars are not themselves legally
binding. Based as they are on the
Omnihealth
judgment, they only have the force of law if the judgment reflects
the correct legal position.
[7]
In the court a quo the respondent contended that the incorrect
way in which the
Omnihealth
judgment interpreted the relevant provisions of the MSA in particular
leads to what this court has described as ‘insensible
or
unbusinesslike’ results.
[4]
The court a quo upheld this contention, which then gave rise to
conflicting interpretations in two provincial divisions. The
Registrar
supports the construction in
Omnihealth
,
and the respondent that of the court a quo.
[8]
The MSA and the regulations
[5]
promulgated thereunder (the regulations) govern the conduct of
medical schemes by providing for their rules, finances and for the
Registrar’s regulatory powers. Section 29 of the MSA lists a
number of specific matters for which their rules must provide,
while
s 30 enumerates the general provisions for which their rules may
provide.
[9]
An important feature of the MSA and the regulations is their
treatment of a medical scheme’s finances. In particular,
the
legislative scheme aims to ensure that the scheme’s finances
are properly maintained and effectively scrutinised. This
is
important because a medical scheme is in essence a mutual aid society
funded by members’ contributions. It has no source
of revenue
other than these contributions (and the returns on the investment of
any surplus after the benefits have been paid)
from which benefits
are paid to or on behalf of members. These contributions include
those made to PMSAs the purpose of which is
to provide members with
an optional facility to cover health care costs not covered by the
scheme.
[10]
Section 26(1)
(c)
specifies that members’ contributions, including any other
amounts such as interest, are to be received into a bank account
the
medical scheme must establish and control. Such contributions
evidently become assets of the scheme. Section 26(2) is emphatic
that
‘[n]o person shall have any claim on the assets or rights or be
responsible for any liabilities or obligations of a
medical scheme,
except in so far as the claim has arisen or the responsibility has
been incurred in connection with transactions
relating to the
business of the medical scheme’.
[11]
Against this background, s 35 of the MSA provides that a medical
scheme shall ‘at all times maintain its business in
a
financially sound condition’. The medical scheme must achieve
this by:
(i)
having assets, the aggregate value of which, on any day, is not less
than the
aggregate of (a) the aggregate value on that day of its
liabilities and (b) the nett assets as may be prescribed (s 35(1)
(a)
read with s 35(3));
(ii)
providing for its liabilities (s 35(1)
(b)
); and
(iii)
generally conducting its business so as to be in a position to meet
its liabilities at
all times (s 35(1)
(c)
).
[12]
Section 35(7) provides that a medical scheme may invest its funds in
any manner provided for by its rules.
[13]
Section 35(9)
(c)
,
which lies at the heart of this appeal, says that the amounts
standing to the credit of members’ PMSAs constitute
‘liabilities
of a medical scheme’ for the purposes of the
MSA. These funds must accordingly be taken into account for purposes
of the
calculations as set out in s 35(3) and must be provided for as
required by s 35(1)
(b)
and
(c)
.
[14]
Section 37 deals with a medical scheme’s AFSs. Sections
37(2)
(a)
,
(b)
and
(c)
require a balance sheet, income statement and cash flow statement.
Section 37(4)
(a)
specifies that the AFS must be prepared in accordance with general
accepted accounting practice. This means simply that they should
present the state of affairs of the scheme fairly.
[6]
[15]
Section 38 gives the registrar the power reject the annual financial
statements of a medical scheme if he is of the opinion
that they do
not comply with any of the provisions of the MSA or do not ‘correctly
reflect the revenue and expenditure or
financial position’ of
the medical scheme. The Registrar purported to act under this
provision in rejecting the respondent’s
AFS.
[16]
The relevant rules of the respondent, with which we are concerned,
are rules 14.5 and rule 1.1 of Appendix 2. The former provides
that
the balance standing to the credit of a member in a PMSA ‘shall,
at all times remain the property of the member’,
subject to the
provisions dealing with savings accounts; the latter that the PMSAs
in certain benefit options shall be available
‘for the
exclusive purpose of paying benefits for the member of his or her
dependants’.
[17]
Regulation 10(1) limits the amount a medical scheme may allocate to a
PMSA to 25 per cent of the members’ total gross
contribution.
[18]
Regulations 10(3) and 10(4) prescribe the manner in which the funds
deposited in a PMSA are to be dealt with. Regulation 10(3)
says that
these ‘shall be available for the exclusive benefit of the
member and his or her dependants’, subject however
to the
proviso that the medical scheme may use those funds ‘to offset
debt owed by the member to the medical scheme following
that member’s
termination of membership of the medical scheme’. Regulation
10(4) provides for the transfer of credit
balances in a member’s
PMSA (as envisaged in s 35(9)
(c)
)
to another medical scheme or to a different benefit option with a
PMSA, as the case may be, when the member changes medical schemes
or
benefit options.
[19]
The financial matters of medical schemes are further regulated by the
FI Act, because a medical scheme is a ‘financial
institution’
as defined in s 1 of the FI Act. I consider its provisions later.
[20]
The central dispute between the parties lies in the proper
construction given to s 35(9) of the MSA. In
Omnihealth
the
liquidators contended that because the liabilities of a medical
scheme include the amount standing to the credit of a member’s
PMSA, as s 35(9)
(c)
requires, the funds in this account had to be an asset of the scheme.
This was for the simple reason that from an accounting point
view,
the financial records of a scheme cannot show a liability without
also showing a corresponding asset. PMSA funds were therefore
not
trust property as defined in s 1 of the FI Act.
[7]
The court rejected this contention. It found that the legislative
framework and Omnihealth’s rules required the credit balances
in the PMSA’s to be treated as trust property and that any
accounting difficulties this may cause cannot alter the substantive
law.
[8]
I consider the court’s
reasoning later in this judgment.
[21]
Mr Brett has represented the Registrar in both provincial divisions,
and now appears before us. For his main contention –
that funds
in the PMSAs are trust assets and not the assets of the respondent –
he relies heavily on regs 10(1) and 10(3),
and also rules 14.5 and
1.1 of Appendix 2. He submits that the fact that these regulations
provide that a portion of members’
contributions are allocated
to an account in the name of a member, held separately, and are
available for the exclusive benefit
of the member are strong indicia
that these funds are trust property. This is buttressed by the rules
providing that the funds
are ‘the property’ of members to
be used for their exclusive benefit. He submits that the rules comply
with reg 10.
[22]
Section 30(1)
(e)
permits a scheme to make provision in its rules for the allocation of
funds to a member’s PMSA ‘
within
the limit and in the manner prescribed
. . . to be used to pay for any relevant health service’.
(Emphasis added.) However, neither the rules, which regulate the
relationship between a medical scheme and its members, nor the
regulations determining the limits of funds to be allocated to PMSAs,
and the manner in which they are to be dealt with, have any bearing
on the question whether the funds in a PMSA constitute trust
property. The nature of these funds can only be determined by
examining the relevant provisions of the MSA. The content of the
rules and the regulations cannot be used as an aid to the
construction of the MSA.
[9]
[23]
I therefore turn to the relevant provisions of the MSA. It is evident
that the MSA does not treat PMSA funds as trust property.
If the
lawmakers intended PMSAs to be treated as such one would have
expected specific language indicating as much.
[10]
There is none. And Mr Brett relied on none. The MSA simply does not
contemplate medical schemes holding any trust property. The
only
mention of ‘assets held in trust’ is in s 26(3), which
refers to assets held
for
the
medical scheme by another person, not
by
a
scheme on behalf of another person.
[24]
The MSA treats members’ contributions in the following manner.
All contributions are deposited into the bank account
established and
controlled by the medical scheme as required by s 26(1)
(c)
.
Once this happens the member loses ownership of these funds; they
become the property of the bank and are the assets of the scheme,
regardless of whether a proportion of the funds are allocated to a
PMSA afterwards. Members do not deposit earmarked funds with
their
medical scheme for a PMSA. Contributions are deposited into the
scheme’s bank account, and the scheme allocates a portion
of
this amount to the member’s PMSA. Any payments of members’
benefits, payable under the rules, will be debited to
this bank
account, as s 26 (4) specifies.
[25]
It is apposite to refer to a simple example to explain what happens
in the process. If the amount contributed is R100, this
will be what
is represented in the medical scheme’s books as an asset. Of
this amount let’s say the scheme allocates
R25 to the PMSA,
which is 25 per cent of the gross contribution of the member, and
also the maximum allocation reg 10(1) permits
to be made to a PMSA in
a financial year.
[26]
Section 35(9) says that this R25, once allocated, becomes a liability
of the scheme, and s 35(9)
(c)
specifically says this liability is reflected as a credit in the
member’s PMSA. The credit balance therefore represents a
current, not a contingent liability.
[27]
Now s 35(1) requires a medical scheme to have sufficient assets as
contemplated in s 35(3) so that it is in a position to meet
its
liabilities at all times. From ordinary accounting principles, the
R25 allocated to the PMSA, which is a liability in the books
of the
scheme, must therefore have a corresponding asset in its books.
Otherwise it will not have an asset to meet this liability.
The
credit entry in the member’s PMSA must therefore have a
corresponding debit entry in its books. If the asset were the
trust
property of the member and is not to be reflected in the scheme’s
balance sheet as an asset of the scheme, as the Registrar
contends,
the scheme would not be able to meet this liability for the simple
reason that it cannot use the assets of a third person
(the member)
to meet its own liabilities.
[28]
The Registrar’s contention has the absurd result that in order
to comply with s 35(1)
(b)
and
(c)
,
a medical scheme must hold assets equivalent to the total value of
the PMSA funds under its control, the PMSA funds themselves
not
constituting assets of the medical scheme for these purposes. Thus,
if the scheme has R20 million in PMSA funds under its control,
it
would have to show cash on hand in the same amount, but exclude the
PMSA funds, to satisfy this legislative requirement. For
every rand
of PMSA funds under its control, the medical scheme would have to
find, elsewhere, a rand to match it. That is unworkable
because
medical schemes do not have any source of revenue (save for
investment returns) other than contributions paid by their
members.
[29]
Moreover, the interpretation advanced on behalf of the appellants has
the result that the member from whose contribution R100
is allocated
to his or her PMSA now appears to have an asset worth R200: R100 in
the form of cash in the bank and a further R100
in the form of a
claim for payment against the scheme.
[30]
Furthermore, reg 29(2) requires that a medical scheme maintain
accumulated funds expressed as a percentage of gross annual
contributions for the relevant accounting period which may not be
less that 25 per cent. Gross annual contributions include amounts
allocated to members’ PMSAs. ‘Accumulated funds’ is
defined in reg 29(1) as meaning the net asset value of the
medical
scheme. It is incongruous that the regulations should determine the
accumulated funds to be maintained as a percentage
of contributions
if, according to the Registrar, a portion of those contributions do
not constitute an asset of the medical scheme.
[31]
For a medical scheme to maintain a solvency reserve that is equal to
at least 25 per cent of gross annual contributions, and
for purposes
of calculating the amount required to be kept in reserve, the medical
scheme must include the amounts that are later
allocated by it to its
members’ PMSAs.
[32]
It does not make commercial sense for the legislature to have
intended savings accounts to be held in trust, outside the reach
of
the medical scheme, and simultaneously to insist that the medical
scheme’s solvency reserve must be higher than would
otherwise
be necessary because savings allocations are included in the
calculation. If the intention was to exclude PMSAs from
the medical
scheme entirely, then PMSAs should form no part of any further
calculation regarding solvency.
[33]
The solvency reserve is designed for prudential reasons. If PMSAs are
held outside the scheme, as postulated by the Registrar,
then it
makes no sense that the scheme should hold a reserve that includes
PMSA funds. To put it differently, not all medical schemes
operate
PMSAs (because it is optional, in terms of s 30 of the MSA), and yet
the solvency reserve applies equally to all schemes.
If PMSAs are not
the asset or liability of the medical scheme, then there can be no
reason for the solvency reserve to apply to
them.
[34]
Section 35(7) also provides an important contextual indication that
PMSA funds are not the members’ trust property. It
allows a
medical scheme to invest ‘its funds’ in any manner
provided for by its rules. The section makes no distinction
between
PMSA funds and other funds, which one would have expected if the PMSA
funds were ring-fenced as trust property and thus
precluded from
being invested as the scheme’s funds.
[35]
In my view the plain meaning of the provisions relating to PMSAs in
the MSA permits no interpretation other than that the funds
allocated
to PMSAs are not the trust property of the members, but remain the
assets of the medical scheme. The scheme is entitled,
indeed obliged,
to treat these funds as its own assets and to reflect them accurately
as such in its AFSs.
[36]
The Registrar’s resort to the regulations to interpret the MSA
is not only impermissible as I have pointed out, but amounts
to
pulling himself up by his own bootstraps. Besides, the regulations do
not support his construction either. The reference in
s 10(3) and
rule 1.1 in Annex 11 to the funds in the PMSA being available for the
exclusive
benefit
of the member, requires no more than that the scheme maintains funds
equivalent to those of in PMSAs for the use of the members
concerned,
as distinct from the general pool of contributions used to pay for
members’ benefits generally. Similarly reg
10(4) entitles a
member to have amounts standing to the credit in the PMSA to be
transferred to another scheme or benefit option,
which is consistent
with it being for the member’s exclusive benefit. By contrast
the R75, used in our example earlier, is
not for the member’s
exclusive benefit, and is lost to the member if not used.
[37]
The reference in rule 14.5 to the funds in PMSAs remaining ‘the
property’ of the members comes closer to the idea
that these
funds may be considered trust property. But, as with the regulations
the rule also cannot be used to interpret the Act.
And in the context
of how the MSA and the regulations treat PMSAs, the word ‘property’
can only mean that these funds
must be used in the manner specified
in the regulations, ie, for the member’s exclusive benefit. It
cannot mean that the
member has ownership of the funds because as I
have explained earlier, ownership is lost when the money is deposited
into the medical
scheme’s bank account. Neither can it mean
that it is the member’s trust property for the reasons given
earlier.
[38]
This brings me to Mr Brett’s alternative contention: that the
funds in PMSAs are trust funds as envisaged in ss 4(4)
and 4(5) read
with the definition of trust property in s 1 of the FI Act. In
Omnihealth
the
court found that Omnihealth’s rules, which like the
respondent’s specify that PMSA’s remain the property and
are for the exclusive benefit of the member, and reg 10, bring it
within the ambit of definition of ‘trust property’
in the
FI Act.
[11]
[39]
However, I have already held that the question whether PMSA funds are
trust property must be determined within the four corners
of the MSA,
and not the rules and regulations. Similarly this question cannot be
determined by reference to the FI Act.
[40]
The purpose of the FI Act is inter alia to provide for the
investment, safe custody and administration of funds and trust
property by financial institutions, and to improve the enforcement
powers of curators (s 5) and of the registrars of financial
institutions (s 6) (defined to include the Registrar).
[41]
Section 1 of the FI Act defines trust property as ‘any
corporeal or incorporeal, movable or immovable asset invested,
held,
kept in safe custody, controlled, administered or alienated by any
person, partnership, company or trust for, or on behalf
of, another
person, partnership, company or trust . . . .’ And a ‘financial
institution’ includes a medical scheme
as contemplated in the
MSA, which means that the provisions of FI Act apply to the MSA.
[42]
It is apparent from ss 2 and 3 that the FI Act deals with both funds
and trust property held by financial institutions, and
ss 5 and 6
with the enforcement powers of curators and registrars. While the
enforcement provisions of the FI Act apply to medical
schemes, not
all funds held by medical schemes constitute trust property. Only if
the nature of the funds held by a medical scheme
makes it trust
property will s 4 of FI Act apply.
[12]
And as I have pointed out the nature of the funds held in PMSAs can
only be determined by reference to the MSA and not the FI Act.
[43]
It follows that
Omnihealth’s
determination
that PMSAs constituted trust property as contemplated in the FI Act,
was incorrect. Mr Brett’s alternative submission
must
accordingly also fail.
[44]
It is necessary to return to two aspects of
Omnihealth’s
reasoning to support its conclusion that a deposit into a trust
account is capable of being treated as a liability even though
there
is no corresponding asset, and that whatever accounting difficulties
there may be cannot alter the substantive law. It relied
on
Fuhri
v Geyser NO
[13]
as authority to underpin these findings, and its reasoning proceeded
as follows: When a trust creditor hands money to a trustee
the former
immediately becomes the creditor of the latter for the amount to be
held in trust. This is so, said the court, regardless
of whether the
trustee kept the trust money in a separate account or becomes the
owner of the money. The implication is that there
is, in the case of
a deposit into a trust account, a liability without a corresponding
asset.
[45]
It must, however, be pointed out that in
Fuhri
the
court was concerned with money held in trust by an attorney. Section
33(7) of the Attorneys, Notaries and Conveyancers Admission
Act 23 of
1934 then determined how such funds are to be dealt with. In the
present matter we are concerned with the prior question,
whether the
funds in the PMSAs are indeed trust funds. This question, as I have
said, is to be determined primarily with reference
to the relevant
provisions of the MSA. And only if this question is decided in the
affirmative would provisions of the FI Act pertaining
to trust
property apply.
[46]
In any event,
Fuhri
does
not support the proposition that trust property creates a liability
(in the sense of a debt) without a corresponding asset.
All that
Hefer J said was that when an attorney receives an amount of money
‘for the account of the client, a debt immediately
arises . . .
for the payment of the amount to the client’.
[14]
But this ‘debt’ is not a liability in the sense in which
the word is used in s 35(9) of the MSA. Rather, it is an obligation
to account for the money deposited. The ownership of money deposited
into an attorney’s trust vests in the bank.
[15]
The attorney is entitled to operate the account and make withdrawals
from it, and the client is entitled to claim from the attorney
the
amount due to him.
[16]
[47]
Secondly, the learned judge’s finding that the accounting
difficulties presented by s 35(9)
(c)
cannot have a bearing on the substantive law as to how these funds
are to be treated in the accounting records rests, with respect,
on
the incorrect assumption that the proper accounting treatment of
these funds is not a matter of substantive law. Section 37(4)
requires, as a matter of law, that AFSs be prepared in accordance
with general accounting principles. And a failure to do so permits
the registrar to reject the AFS for want of compliance with any
provision of the Act, including s 37. Section 35, which has been
the
focus of this appeal, deals with the financial arrangements including
the requirement that the business of the scheme is maintained
in a
manner that is financially sound. The obligation to comply with these
provisions, and to ensure that these arrangements are
fairly
reflected in the financial statements, is a substantive legal
requirement. The Registrar’s difficulty explaining,
in his
answering affidavit, where the corresponding asset of the liability
in s 35(9) comes from, and how it is to be represented
in the
accounting books, shows his failure to come to grips with this legal
requirement, and cannot be dismissed as a mere accounting
difficulty.
[48]
I therefore conclude that
Omnihealth
incorrectly
determined PMSA funds to be trust property, and the court below
correctly reviewed and set aside the Registrar’s
decision to
reject the respondent’s 2012 AFS.
[49]
For these reasons I would have dismissed the appeal with costs of two
counsel.
_______________
A
Cachalia
Judge
of Appeal
Willis
JA (Seriti JA and Tsoka AJA concurring)
[50]
I have had the privilege of reading the judgment prepared by my
brother Cachalia. I regret that I am unable to agree with him.
Our
differences on the issue are fundamental and irreconcilable. I do
accept, however, that this is a technically difficult case
because it
requires a harmony between the law and basic principles of
accounting. In broad terms, despite some points of difference,
I side
with the judgment of Du Plessis J in
Omnihealth
[17]
and disagree with the reasoning of Davis J in the court a quo.
[18]
[51]
It is clear to me, if one reads the Regulations as a whole, taken
together with the answering affidavit, the circulars issued
both by
and on behalf of the Registrar and the correspondence between the
parties, that the system of savings accounts with medical
schemes was
designed and regulated to assist those members of medical schemes who
are not fortunate enough to have full and comprehensive
medical
cover. The system of savings accounts enables members to put away
funds for medical treatment for which they are not covered
and also
to save funds for medical treatment in their old age – when, in
the ordinary experience of humankind, we all tend
to be beset by
ailments more than when we are young. Over time, the amount that a
member may build up in his or her savings account
may be
considerable. These funds may have taken many years to accumulate.
[52]
For reasons that will emerge more fully later, I emphasise that these
observations as to how and why the system of savings
accounts
operates are conclusions of fact and not of law. This system of
provision for future medical treatment by way of savings
is
recognised by s 35(9)
(c)
of the Medical Schemes Act 131 of 1998 (MSA), which, as I shall later
show, provides for specific accounting measures which cater
therefor.
My reasoning on this aspect is ‘top-down’ rather than
‘bottom-up’. In other words, although the
facts emerge
from the Regulations, the interpretation of those Regulations derives
from s 35(9)
(c)
of the MSA and not the other way round.
[53]
It bears repeating that Omnihealth was a medical scheme which had
gone insolvent. Critically relevant was whether the amount
standing
to the credit of members’ savings accounts fell to be available
for the general
concursus
creditorum
(the general body of creditors)
[19]
or whether it stood outside thereof. Du Plessis J, relying on the
definition of trust property in the Financial Institutions
(Protection
of Funds) Act 28 of 2001 (the FI Act), found that these
savings were trust property (and, therefore, necessarily stood
outside
of the
concursus
).
The issue is one of fundamental importance: are members’
savings accounts, which may have painstakingly been built up over
a
number of years, ‘ring-fenced’ against claims by the
general body of creditors or are they not?
[54]
It would offend against justice if funds of this nature were
available to the predations of the
concursus
creditorum
in the event of the insolvency of a medical scheme. Moreover, it
requires no financial genius to understand that medical schemes,
unless properly managed, can easily become insolvent. Regulation
designed to protect members of medical schemes is therefore hardly
surprising and, indeed, desirable. In finding that
Omnihealth
was wrongly decided, the effect of Cachalia JA’s judgment is
that members’ savings accounts are indeed available to
the
concursus
creditorum
in the event of the insolvency of a medical scheme. Of course, no
interpretation of law by the courts should be too strained, but
the
divination of justice is an important aid and is constitutionally
enjoined in terms of the 39(2) of the Constitution. Besides,
the
publica
utilitas
of law was recognized by Johannes Voet as being a vital consideration
when interpreting the law.
[20]
[55]
The FI Act is, as its long title makes clear, social legislation
designed to protect funds placed with financial institutions.
The
definitions section defines any medical scheme contemplated in the
MSA to be a financial institution. It defines ‘trust
property’
as:
‘
any
corporeal or incorporeal, movable or immovable asset invested, held,
kept in safe custody, controlled, administered or alienated
by any
person, partnership, company or trust for and on behalf of, another
person, partnership, company or trust, hereinafter referred
to as the
principal.’
In
my opinion, there can be no question that funds invested by members
of a medical scheme in their savings accounts with that scheme
constitute incorporeal assets invested, controlled and administered
by the scheme for and on behalf of its members. Therefore,
Du Plessis
J was correct in finding that these saving fund contributions
constituted trust property.
[56]
Section 4(4) of the FI Act provides as follows:
‘
A
financial institution must keep trust property
separate
from assets belonging to that institution and must,
in
its books of account
,
clearly indicate the trust property as being property belonging to a
specified principal.’ (My emphasis.)
Furthermore,
s 4(5) of the FI Act provides that:
‘
Despite
anything to the contrary in any law or the common law, trust property
invested, held, kept in safe custody, controlled or
administered by a
financial institution or a nominee company under no circumstances
forms part of the assets or funds of the financial
institution or
such nominee company.’
[57]
Thus, in unmistakable terms, this subsection ring-fences items such
as the savings accounts of members of a medical scheme
from any
concursus
creditorum
.
Not only does s 4(4) provide that these must be accounted for
separately but also provides the indicator as to how the books of
account are to show the amounts standing to the credit of a member’s
savings account as a liability of the scheme with there
being a
corresponding asset showing these assets as being separate from those
of the scheme.
[58]
The Registrar was, in my opinion, correct to attempt to apply an
interpretation of the applicable statutory framework that
was
consistent with
Omnihealth
.
I also agree with the Registrar that the accounts of the respondent
were misleading inasmuch as they did not reflect the special
status
of funds standing to the credit of the members’ savings
accounts. After all, one of the important functions
of audited
sets of accounts is that they inform all those who may be interested
in doing business with the person concerned, whether
that person is
likely to be able to meet his or her intended obligations.
[59]
Mr Burger, who appeared for the respondent, relied inter alia, on the
fact that when Mr Tegobo Maziya, the Head: Financial
Supervision
wrote on behalf of the Registrar in a circular to all medical schemes
that: ‘The savings account and the bank
balances representing
the savings balances will no longer be reflected in the Statement of
financial position (Balance sheet).’,
he was requiring that the
savings account balances of members be ‘off balance sheet’.
That is incorrect. Section 35(9)
(c)
of the MSA requires that:
‘
For
the purposes of this Act, the liabilities of a medical scheme shall
include –
.
. . (c)
the
amount standing to the credit of a member’s personal savings
account.’
[60]
Clearly, this requires that a medical scheme’s liability to its
members in respect of their savings account must be an
‘on
balance sheet’ item. In terms of the first principles of
double-entry bookkeeping, for every liability there is
a
corresponding asset. This is commonly known as a ‘contra’.
There must and will be a ‘contra’, appearing
in the
assets of a medical scheme, for its liability to its members in
respect of their savings account. I shall deal with this
aspect
later.
[61]
The Registrar was wrong to have required liabilities to be ‘off
balance sheet’ when a plain and sensible reading
of the MSA
required that they should be ‘on’. I am fortified in this
opinion by s 37(4)
(a)
of
the MSA that requires that the annual financial statements of a
medical scheme shall be prepared ‘in accordance with
general[ly]
accepted accounting practice’ and s 37(4)
(c)
,
which requires that these financial statements must ‘fairly
present the state of affairs’ of a medical scheme.
[62]
The respondent did not, however, make the requirement that
personal
medical savings accounts
(PMSA funds) should be ‘off balance sheet’ a basis for
the review. Indeed it could not do so. The basis upon which
the
respondent approached the court and short-circuited the exhaustion of
the Medical Council’s internal procedures was the
correctness
or otherwise of the decision (and therefore the order) in
Omnihealth
.
[63]
At this stage, we have no way of knowing whether, had the internal
procedures been followed, the issue of ‘on balance
sheet’
or ‘off’ would have been satisfactorily dealt with. The
only reason that the court a quo gave, when granting
leave to appeal
against its judgment to this court, was the existence of
Omnihealth
,
which it found to be wrong. The fact that the Registrar may have been
wrong in requiring members’ savings accounts to be
‘off
balance sheet’ was not a ground for the review and cannot be
considered at this stage.
[64]
Regulation 10(5) of the MSA
[21]
provides that when a membe
r
terminates
his
or her membership and thereby withdraws cash from his or her personal
medical savings account, without transferring the funds
to a savings
account at another medical scheme, he or she is liable to tax. It
would not only be absurd but also unjust if a members’
savings
account was available to the
concursus
creditorum
but also taxable at the same time.
[65]
In addition, in terms of regulation 10(3), if a member owes a debt to
a medical scheme at the termination of his membership
of the medical
scheme, that member may use PMSA funds standing to his credit to
offset such debt. If PMSA belongs to a medical
scheme, how can
set-off operate against the member’s own debt? It makes no
sense at all. The issue of set-off can only arise
if PMSAs are assets
of the members and not of the medical scheme.
[66]
I disagree with Cachalia JA insofar as his understanding of the
function of that the solvency reserve is concerned. The reserve
must
be held in proportion to gross
annual
contributions. (The emphasis is my own.) The solvency reserve cannot
protect funds saved by members over a number of years. The
solvency
reserve is designed to ensure that a scheme can meet its
current
and relatively short-term future
obligations for medical expenses in terms of its own rules. (Again,
the emphasis is mine.)
[67]
Both Cachalia JA and Davis J have found that the
Omnihealth
was wrong in holding that the funds in members’ saving accounts
was ‘trust property’ within the meaning thereof
as
defined in the FI Act. For reasons that have been given above, I
disagree with them. I also disagree with Davis J in his finding
that
this interpretation in
Omnihealth
would, if correct, require that for every rand of PMSA funds under
its control, a medical scheme would have to find an additional
rand
(over and above the corresponding contra) in order for its assets to
match its liabilities. This is, in my respectful opinion,
simply
cannot be supported: it does not make sense. Moreover, it contradicts
the professional and independent advice of the South
African
Institute of Chartered Accountants (SAICA). I shall deal with this
aspect more fully later. I have similar, but less vivid,
reservations
concerning Cachalia JA’s construction of the accounting
consequences that derive from holding that members’
savings
accounts constitute ‘trust property’ in terms of the
definition thereof in the FI Act.
[68]
I also disagree with Cachalia JA that the Registrar impermissibly
resorted to the regulations to interpret the MSA and amounts
to his
‘pulling himself up by his own bootstraps’. Ever since
the judgment of Lord De Villiers CJ in
Chotabhai
v Union Government (Minister of Justice) and Registrar of
Asiatics
,
[22]
it has been our law that, unless it would result in repugnancy or a
practical impossibility, it is reasonable to construe two or
more
different pieces of legislation as co-existing and to interpret them
in a manner that is mutually consistent.
[23]
I have no difficulty in reading the MSA, the FI Act and the
Regulations harmoniously and in conformity with the conclusion
reached
in
Omnihealth
.
I fully accept, however, in line with
Moodley
v Minister of Education & Culture, House of Delegates &
another
,
[24]
that it is not permissible to treat an Act of Parliament and the
regulations made thereunder as a single piece of legislation and
to
use the latter as an aid to the interpretation of the former.
[25]
Even without reference to the Regulations, the same conclusion that
Omnihealth
was correct can be reached. Indeed, Du Plessis J came to his
conclusion without any reference to the Regulations.
[69]
It hardly needs be stated that Du Plessis J did not have the benefit
of the recommendations of the SAICA, which were made in
response to
his judgment in
Omnihealth
. He also had the intellectual
humility to acknowledge that, in respect of the treatment of the
issue in the accounts, he would
need expert advice. In my respectful
opinion,
Omnihealth
did, however, show considerable confusion
about accounting methods and was incorrect in holding that: ‘In
our law it does
not follow, because the amount standing to the credit
of a member’s personal savings account is regarded as a
liability,
that the PMSA- funds must be an asset of the scheme’.
This criticism does not alter the fact that the order given was the
correct one.
[70]
A proper answer to the issue is, in my opinion, to be found in the
concept of
commixtio
in our law. The matter has been dealt with by this court in
Louw
NO & others v Coetzee & others.
[26]
The money contributed by members to their savings account with a
medical scheme inevitably becomes scrambled, jumbled up or mixed
up
with the other cash contributions which it receives. In
Louw
,
the court had to deal with a similar situation – funds
deposited with a bank, which it is trite become owned by the bank
once they have been deposited therewith.
[27]
Lewis AJA said:
‘
As
long as the records of the bank show that a particular amount is
designated as being due to a particular customer, there would
appear
to be no difficulty in finding that a bank holds
money
that is deposited or invested in trust for that customer.’
[28]
The
cash, of course, is and remains that of the bank. This is the
position despite the fact that the funds are held in trust for
a
customer.
[71]
Mutatis mutandis
, the following would appear to be the
position as to how a medical scheme would deal with its contra for
the liability in respect
of members’ savings accounts:
As
long as the balance sheet of the medical scheme shows that a
particular amount is designated as being due to members in respect
of
members’ savings accounts, there is no difficulty in finding
that the scheme holds cash that has been deposited or invested
in
trust for those members.
[72]
By reason of restrictions imposed by ss 4(4) and 4(5), together with
the application of the law of
commixtio
,
the contra for its liability to members in respect of their savings
accounts, to be reflected in the assets of the medical scheme,
would
be in the cash which it holds. The balance sheet would have to
designate, in a manner consistent with generally accepted
accounting
practice, the extent of which such cash holdings were held for and on
behalf of members in respect of their savings
account. The ledgers of
the scheme would have to keep account of the amount standing to the
credit of each individual member’s
savings account.
[73]
I am mindful of the fact that in
Louw
this court held that the bank continued to be free to deal with the
funds as it wishes,
[29]
whereas in the case of a medical scheme it is not. Of course this is
so. In
Louw
the court was dealing with the trust funds of attorney deposited with
a bank. Here we are dealing with how the medical scheme accounts
for
its very own trust funds which it holds, separately and on behalf of
others that have invested with itself. The legal consequences
of
these two separate issues may differ – and indeed do so. The
point is, however, that it is quite easily possible, both
legally and
in the practice of accounting, to hold an asset such as cash, on
behalf of another, and to make this fact clear to
the world.
[74]
It is for this reason that I agree with the submission of the
Registrar that
Fuhri
v Geyser NO & another
[30]
is irrelevant to and finds no application in the present case.
Fuhri
dealt
with an attorney’s trust account and not ‘trust property’
as defined in the definitions section and ss 4(4)
and 4(5) of the FI
Act. The two are not coextensive.
[75]
Moreover, in the Registrar’s circular letter of 16 February
2001, referring to the audit and accounting guide approved
by the
SAICA, it is indicated in para 3.2 that funds of the kind in question
should be classified as ‘reserves’, the
precise
description of which is left to the medical scheme concerned.
[76]
In this way, not only can a medical scheme properly account to all
who may have an interest in its affairs for how it holds
the savings
contributions of its members but also justify and ensure the
separation of these funds from any claims by a
concursus
creditorum
in future.
[77]
Just as one can distinguish, in a balance sheet, between assets that
are held as 'Land and Buildings' and 'Debtors', for example,
so one
can distinguish between asset funds that are held as 'Trust Property'
(as defined in the FI Act) and other funds. It is
as simple as that.
In other words, the medical scheme tells the world that it holds the
'trust property' as funds but for restricted
purposes. It tells the
world that these funds, held as ‘trust property’, are
ring-fenced, as a matter of law. In other
words, the funds are highly
liquid for certain specified purposes (claims in respect of members’
savings accounts) but are
otherwise illiquid. Potential creditors,
interested in doing serious business with any person can call for
that person’s
audited balance sheet. Creditors of medical
schemes cannot then legitimately complain later that these funds are
not available
to the
concursus
.
They were, in effect, alerted well in advance. Fundamental to the
principle of protecting certain assets of a debtor from claims
by the
concursus
creditorum
(for
example, creditors secured by a first mortgage bond registered over
immovable property) is the publicity, given well in advance
to the
world, that these assets may be beyond the reach of the
concursus
.
[78]
Accordingly, the following order is made:
1
The
appeal is upheld with costs.
2
The
order of the court a quo is set aside and replaced with the
following:
‘
The
application is dismissed with costs.’
_______________
N
P Willis
Judge
of Appeal
APPEARANCES
For
Appellant:
J J Brett SC
Instructed
by:
Savage
Jooste & Adams c/o Bisset Boehmke McBlain,
Cape
Town
Symington
& De Kok, Bloemfontein
For
Respondent:
S F Burger SC (with
him G Cooper) (Heads of argument prepared by E
Fagan SC and E van Huyssteen)
Instructed
by:
Clyde
& Co, Cape Town
Lovius
Block, Bloemfontein
[1]
Genesis Medical
Scheme v Registrar of Medical Schemes & another
2015
(4) SA 91 (WCC).
[2]
Section 7
(b)
of the
Medical Schemes Act 131 of 1998
.
[3]
Registrar of
Medical Schemes v Ledwaba NO & others
[2007]
JOL 19202
(T).
[4]
Natal Joint
Municipal Pension Fund v Endumeni Municipality
[2012]
ZASCA 13
;
2012 (4) SA 598
(SCA) para 18.
[5]
General
Regulations, GN R1262,
GG
20556, 20 October 1999.
[6]
Novick &
another v Comair Holdings Ltd & others
1979
(2) SA 116
(W) at 140G-141A.
[7]
The relevant
portion of s 1 of the FI Act is set out at para 41 below.
[8]
Omnihealth
at 7.
[9]
EA Kellaway
Principles
of Legal Interpretation of Statutes, Contracts and Wills
(1995)
at 208-209;
Moodley
v Minister of Education & Culture, House of Delegates &
another
1989 (3) SA 221
(A) at 233E-F.
[10]
See
eg s 79 of the Attorneys Act 53 of 1979. It reads:
‘
Trust
property not to form part of assets of practitioner.
—
Notwithstanding
anything to the contrary in any law or the common law contained,
trust property which is expressly registered
in the name of a
practitioner, or jointly in the name of a practitioner and any other
person in his or her or their capacity
as administrator, trustee,
curator, or agent, as the case may be, shall not form part of the
assets of that practitioner or other
person.’
[11]
Registrar of
Medical Schemes v Ledwaba NO & others
[2007]
JOL 19202
(T) at 3-5.
[12]
Section 4(1)
provides that a financial institution that ‘administers trust
property under any instrument or agreement may
not cause such trust
property to be invested other than in a manner directed in, or
required by, such instrument or agreement’,
and s 4(2)
provides for investment in the absence of such direction or
requirement. Section 4(4) provides that trust property
must be kept
separate from assets belonging to the financial institution
concerned, and s 4(5) says that such trust property
‘under no
circumstances forms part of the assets or funds of the financial
institution’ concerned, despite ‘anything
to the
contrary in any law or the common law’.
[13]
Fuhri
v Geyser NO & another
1979
(1) SA 747
(N) at 749A-750A.
[14]
Ibid at p 749F.
[15]
Ibid at p 749C-D.
[16]
Ibid at p 749D-E.
[17]
Registrar of
Medical Schemes v Ledwaba NO & others
in
the Transvaal Provincial Division (unreported case number 18545/06,
delivered on 30 January 2007) (
Omnihealth
).
[18]
Reported
sub
nom Genesis Medical Scheme v Registrar of Medical Schemes &
another
2015 (4) SA 91 (WCC).
[19]
The Latin term
concursus
creditorum
means more than ‘the general body of creditors’. It
means something like this: ‘the creditors, coming together
and
waiting, expectantly, for at least some of their money back’.
The density of the Latin term probably explains its retention
among
lawyers.
[20]
J Voet
Commentarius
Ad Pandectas
(1723) 1.3.17. (translated by Sir Percival Gane in
The
Selective Voet being the Commentary on the Pandects
(1955)). See also L C Steyn
Uitleg
van Wette
5 uitg (1981) p 124.
[21]
Medical Schemes
Act 131 of 1998
Regulations, GN R1262,
GG
20556,
20 October 1999 (as amended).
[22]
Chotabhai v
Union Government (Minister of Justice) and Registrar of Asiatics
911 AD 13.
[23]
At 23.
[24]
Moodley v
Minister of Education & Culture, House of Delegates &
another
1989 (3) SA 221 (A).
[25]
At 223E-F. See
also
Rossouw
& another v Firstrand Bank Ltd
[2010] ZASCA 130
;
2010 (6) SA 439
(SCA) para 24 and
Trustco
Group International (Pty) Ltd v Vodacom (Pty) Ltd
[2016] ZASCA 56
(1 April 2016) para 14.
[26]
Louw NO &
others v Coetzee & others
[2002]
ZASCA 156; 2003 (3) SA 329 (SCA).
[27]
See
Louw
(above)
para 12 and the authorities therein cited.
[28]
Ibid.
[29]
Paragraph 13.
[30]
Fuhri v Geyser
NO & anothe
r
1979 (1) SA 747
(N).