Brief Summary

Medical Schemes — Curatorship — Appointment of curator to Health Squared Medical Scheme — Registrar of Medical Schemes applying for curatorship due to Scheme's unsound financial condition and impending winding-up — Scheme's announcement of termination of benefits with insufficient notice to members — Urgency of protecting members' interests necessitating interim order for curatorship — Court satisfied that appointment of curator was desirable and in beneficiaries' interests, given the Scheme's failure to comply with solvency requirements and timely communication of financial status.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings concerned an urgent curatorship application brought on an ex parte basis for the appointment of a curator to a medical scheme under section 56 of the Medical Schemes Act 131 of 1998 and section 5 of the Financial Institutions (Protection of Funds) Act 28 of 2001. The applicant was the Registrar of Medical Schemes (with the judgment at times referring collectively to the Registrar and the Council for Medical Schemes as “the Registrar”), and the respondent was Health Squared Medical Scheme (“the Scheme”).

The curatorship application was pursued against the immediate background of a separate urgent application launched by the Scheme for leave to apply for its voluntary winding-up under section 51(2) of the Medical Schemes Act 131 of 1998, together with ancillary relief (“the leave application”). At the hearing of the leave application, the Registrar and the Council did not oppose the relief sought. On 30 August 2022, the South African Nephrology Society and two individuals were granted leave to intervene in that leave application as further respondents. On 2 September 2022, the court granted an order (agreed between the Scheme and the intervening parties, and not opposed by the Registrar) regulating the winding-up process and, importantly, addressing protections for a class of members facing “grave life-threatening risks” (“the leave order”).

The general subject-matter of the dispute was the appropriate regulatory and judicial response to a medical scheme in a rapidly deteriorating financial condition, which had announced an imminent termination of members’ benefits and an intention to wind up, and the consequent need to protect beneficiaries, including by facilitating migration to alternative schemes and ensuring governance and investigation pending winding-up.

2. Material Facts

It was common cause that the Scheme was not in a sound financial condition, that its position was fast deteriorating, and that its business was not able to be saved. It was further common cause that the Scheme was unable to comply with the statutory minimum solvency ratio requirements in section 35(1) of the Medical Schemes Act 131 of 1998 read with regulation 29 of the General Regulations under that Act.

Chronologically, the key factual development was the Scheme’s announcement on 18 August 2022 that it intended applying for voluntary winding-up on 1 September 2022, and that claims submitted after 31 August 2022 would not be honoured. The court treated this announcement, and in particular its timing, as materially prejudicial to members because it afforded less than two weeks’ notice of the impending termination of benefits, which was insufficient time to secure replacement cover and exposed members to delays and waiting periods if alternative cover could be obtained.

The leave application was launched on 18 August 2022 and set down for hearing on 30 August 2022. After intervening parties were joined, the court granted the leave order on 2 September 2022. The leave order permitted the Scheme to apply for winding-up under sections 51(5)(e) and 53 of the Medical Schemes Act 131 of 1998, with notice to parties required under the Companies Act 61 of 1973 and to the Registrar, and provided that the winding-up application would not be enrolled before 27 September 2022, with at least 15 days’ notice to the Registrar.

The curatorship application itself was delivered on 1 September 2022. When the parties appeared on 2 September 2022, the Scheme sought an additional period (about three days) to file an answering affidavit. The Registrar opposed a postponement. The court considered that postponement would likely delay determination until the week of 20 September 2022, which would not sufficiently protect beneficiaries in the interim.

On the issue of governance and disclosure, the court attached significance to the Scheme’s failure to take steps to rectify solvency levels and to inform its members and the regulator timeously of the precarious position and impending winding-up. The court also noted, as context for urgency and beneficiary vulnerability, that the trustees must have known from January 2022 (if not earlier) that the Scheme’s financial position was precarious, yet the notice to beneficiaries was “draconian” in timing and consequences.

Certain allegations about lack of corporate governance were expressly noted as being denied by the Scheme, with the court treating the appointment of an interim curator as a mechanism to investigate and clarify those allegations.

3. Legal Issues

The central legal questions were whether, on the evidence placed before it, the court should grant interim curatorship relief under section 56(1) of the Medical Schemes Act 131 of 1998 and section 5 of the Financial Institutions (Protection of Funds) Act 28 of 2001, including whether the statutory requirements of desirability, good cause, and the interests of beneficiaries were met in the circumstances.

Closely connected to that central issue were procedural and fairness questions. The Scheme contended that the urgency and the lateness of the Registrar’s approach prejudiced its right to audi alteram partem, and it sought additional time to file answering papers. The court was therefore required to determine whether a postponement should be granted or whether immediate interim relief was justified despite the constrained timetable.

The dispute required the court primarily to apply legal standards to largely common-cause facts regarding insolvency and operational instability, while also making evaluative judgments about beneficiary vulnerability, the adequacy of alternative statutory mechanisms, and the extent to which interim curatorship could address identified problems pending winding-up.

4. Court’s Reasoning

The court approached the matter through the combined statutory framework of section 56 of the Medical Schemes Act 131 of 1998 and section 5 of the Financial Institutions (Protection of Funds) Act 28 of 2001. Under section 56, the Registrar may apply for the appointment of a curator if the Registrar is of the opinion that it is in the interests of beneficiaries to do so where a scheme is not financially sound. The court emphasised that although the test refers to the Registrar’s subjective opinion, that opinion must rest on grounds capable of objective scrutiny.

In applying section 5 of the Financial Institutions (Protection of Funds) Act 28 of 2001, the court framed the inquiry as whether appointing a curator would be desirable and in the interests of beneficiaries on good cause shown. The court described desirability as requiring an assessment of whether curatorship is needed to address identified problems in the institution’s business, whether it will have beneficial consequences for beneficiaries, and whether preferable alternatives exist in the circumstances. The court indicated that, where the Registrar’s concerns are legitimate and curatorship will assist in resolving those concerns, it will ordinarily be appropriate to grant the appointment.

A core evaluative premise in the court’s reasoning was that the interests of beneficiaries are paramount. The court considered beneficiaries to have been placed in a particularly vulnerable position by the Scheme’s sudden announcement and termination stance regarding claims after 31 August 2022, combined with an absence of sufficiently early disclosure of the Scheme’s perilous financial position. The court accepted that this materially impeded members’ ability to obtain replacement cover and also constrained the Registrar’s ability to assist in arranging migration to alternative schemes.

The court treated the interim period between the leave order and the earliest likely winding-up hearing date as a significant governance and protection gap. It reasoned that, although curatorship would not restore the Scheme’s financial health, a curator could still play an important role by ensuring interim governance, facilitating and negotiating member migration on favourable terms, protecting the processing of claims (including claims received before a specified date), investigating the Scheme’s affairs leading to its demise, and reporting to the Registrar. The court also considered that beneficiaries and service providers had a right to receive information explaining the Scheme’s failure and sudden termination conduct, and that such information should come from a neutral source rather than solely from the Scheme and its trustees.

In addressing the Scheme’s procedural objection based on audi alteram partem, the court noted that the legislation permits an ex parte approach. It also found, on the history between the leave application and curatorship application, that substantial parts of the Registrar’s case repeated allegations previously ventilated in the leave application to which the Scheme had replied, and that the Scheme had filed heads of argument in the curatorship application. The court further recorded that incorrect statements were made from the Bar by the Registrar’s counsel, that this was acknowledged, that the Scheme’s counsel was able to deal with them, and that the court did not rely on the discredited statements.

On the request for postponement to permit further answering papers, the court assessed the likely consequence of postponement as delaying relief until the week of 20 September 2022. It concluded that beneficiaries’ protections could not withstand such a delay given the sudden termination of medical benefits and the immediate risks flowing from the short notice period. This evaluation underpinned the refusal to postpone and the granting of interim relief.

The court also considered and rejected the Scheme’s reliance on alternative regulatory powers (referred to as those in sections 42 to 45 of the Medical Schemes Act 131 of 1998) as adequate substitutes. In the court’s view, those powers did not address the specific scenario of a scheme that had already applied for leave to wind itself up voluntarily, where beneficiary interests were both vulnerable and paramount and the scheme’s precarious financial position was not capable of being saved.

Finally, the court reasoned that interim curatorship would not necessarily have final effect because the matter was structured as a rule nisi with a return day, meaning that the interim relief could be discharged on the return date. The court also addressed coexistence, noting that section 56 contemplates the possibility that a curator may coexist with a liquidator, and the leave order similarly contemplated coexistence alongside any liquidator appointed by the court.

5. Outcome and Relief

The court granted an interim order issuing a rule nisi calling upon the Scheme and interested persons to show cause on 20 September 2022 why a final curatorship order should not be made. Pending the return date, the order operated as interim relief with immediate effect.

The order placed the Scheme under curatorship in terms of section 56(1) of the Medical Schemes Act 131 of 1998 and sections 5(1) and 5(2) of the Financial Institutions (Protection of Funds) Act 28 of 2001, appointed Mr Joe Seoloane as curator, and vested the curator with wide management and control powers ordinarily exercised by the trustees and principal officer. The curator was specifically directed to prioritise beneficiaries’ interests, to facilitate and negotiate transfer of members to other schemes, and to report to the Registrar on a weekly basis regarding migration efforts, with monthly reporting obligations including findings and recommendations concerning the Scheme’s affairs.

The court also ordered that the curator’s powers, whether provisional or final, would not extend to overruling, curtailing, or diminishing the rights of the class of patients referred to in the Scheme’s board resolution dated 31 August 2022, as incorporated into the leave order, for the relevant period identified in the order.

Service of the application and the interim order was directed on the Scheme and other interested parties. The costs of the application were reserved for determination by the court hearing Part B of the application.

Cases Cited

Executive Officer FSP v Dynamic Wealth Limited and Others 2012 (1) SA 453 (SCA). Barnard and Others v Registrar of Medical Schemes 2015 (3) SA 204 (SCA). Registrar of Medical Schemes v Sizwe Medical Fund Case no 28986/20, North Gauteng Division, 23 November 2020.

Legislation Cited

Medical Schemes Act 131 of 1998. Financial Institutions (Protection of Funds) Act 28 of 2001. Companies Act 61 of 1973. General Regulations made under the Medical Schemes Act 131 of 1998 (including regulation 29).

Rules of Court Cited

No specific rules of court were expressly cited in the judgment.

Held

The court held that the statutory requirements for interim curatorship relief were met on the evidence presented. It accepted that the Scheme was in an unsound and rapidly deteriorating financial condition, that beneficiary interests were paramount, and that the abrupt announcement and termination stance created acute vulnerability for members. It further held that appointing a curator was desirable and supported by good cause because curatorship could address interim governance, facilitate migration to alternative schemes, ensure appropriate handling of claims in the interim, and enable investigation and reporting to the regulator pending winding-up proceedings.

The court also held that a postponement to allow further answering papers would unduly delay protections required by beneficiaries, and that the audi alteram partem complaint did not warrant refusal of interim relief in the circumstances, particularly given the prior ventilation of issues in the leave application and the court’s approach to disputed submissions made from the Bar.

LEGAL PRINCIPLES

Section 56(1) of the Medical Schemes Act 131 of 1998 permits the Registrar to seek curatorship where a scheme is not in a sound financial condition and where, in the Registrar’s opinion, curatorship is in the interests of beneficiaries; however, the Registrar’s subjective opinion must be grounded on reasons capable of objective scrutiny.

Section 5 of the Financial Institutions (Protection of Funds) Act 28 of 2001 requires a court to be satisfied, on the evidence, that curatorship is desirable, in the interests of beneficiaries, and supported by good cause. The desirability inquiry includes whether curatorship will address identified problems, whether it will have beneficial consequences for beneficiaries, and whether preferable alternatives exist on the facts.

In curatorship matters involving medical schemes, the interests of beneficiaries are treated as of paramount importance, and interim curatorship may be justified even where the institution cannot be saved financially, if curatorship can protect beneficiaries, facilitate orderly migration, ensure interim governance, and secure investigation and reporting during the period preceding winding-up and liquidation processes.

The Registrar of Medical Schemes v Health Squared Medical Scheme: In re: Health Squared Medical Scheme v The Registrar of Medical Schemes and Others (2022/015979) [2022] ZAGPJHC 711 (20 September 2022)