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[2011] ZASCA 193
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Executive Officer: Financial Services Board v Dynamic Wealth Ltd and Others (888/10) [2011] ZASCA 193; 2012 (1) SA 453 (SCA); [2012] 1 All SA 135 (SCA) (15 November 2011)
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THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no: 888/10
In the matter between:
EXECUTIVE OFFICER OF THE
FINANCIAL SERVICES BOARD
…................................................
Appellant
In re
the collective investment scheme, financial services and securities
services business (excluding the collective investment
scheme
business conducted by virtue of a white label agreement) of
DYNAMIC WEALTH LTD
…...............................................
First
Respondent
DYNAMIC WEALTH MANAGEMENT
(PTY) LTD
….......................................................................
Second
Respondent
DYNAMIC WEALTH STOCKBROKERS
(PTY) LTD
…..........................................................................
Third
Respondent
THE BRIDGING FACTORY (PTY) LTD
…....................
Fourth
Respondent
SPECIALIST INCOME LIMITED
…...................................
Fifth
Respondent
and
ASSOCIATIONS
known as
DYNAMIC WEALTH
INVESTMENT ASSOCIATION, RETIREMENT FUND ASSOCIATION, MULTI MANAGER
ASSOCIATION, KWANDA ASSOCIATION, MFI ASSOCIATION
and
SASEP
ASSOCIATION
Neutral citation:
Executive Officer: Financial
Services Board v Dynamic Wealth Ltd & others
(888/10)
[2011]
ZASCA 193
(15 November 2011)
Coram:
HARMS AP, VAN HEERDEN, MALAN and WALLIS
JJA and PETSE AJA.
Heard
: 31 October 2011
Delivered
: 15 November 2011
Summary:
Appointment
of curators in terms of s 5(1) of
Financial
Institutions (Protection of Funds) Act 28 of 2001
– test for
grant of order – admissibility of inspectors’ report
prepared under
s 3
of the
Inspection of Financial Institutions Act 80 of 1998
– w
hether
application for curatorship should have been granted on the evidence
– change of circumstances since application commenced
–
further evidence on appeal – whether curatorship should be
ordered at time appeal heard – whether change in
circumstances
rendering the appeal moot.
ORDER
On appeal from:
North Gauteng High Court,
Pretoria (De Vos AJ sitting as court of first instance) the following
order is made;
The appeal is upheld with costs including the costs of
two counsel.
The order of the court below is set aside and replaced
by an order that the respondents pay the applicant’s costs,
including
the costs of two counsel.
Both costs orders are joint and several, the one paying
the others to be absolved.
JUDGMENT
WALLIS JA (HARMS AP, VAN HEERDEN and MALAN JJA and PETSE AJA
concurring)
[1] Ever since the
bursting of the South Sea Bubble in 1720 governments have recognised
the need, in the interests of the investing
public, for regulation of
the financial services industry. The present appellant, the executive
officer of the Financial Services
Board (the FSB), in his capacity as
registrar of various financial institutions (the Registrar),
1
is the principal regulator of the
financial industry in South Africa.
2
The various statutes regulating the
industry vest in the Registrar a range of powers of which two are
relevant for the purposes
of this appeal. They are the power to
instruct inspectors in terms of s 3 of the Inspection of
Financial Institutions Act
80 of 1998 (the Inspection Act) to inspect
the affairs of a financial institution or associated institution and
the power to apply
to the high court for the appointment of a curator
or curators to take control of and manage the whole or any part of
the business
of a financial institution in terms of s 5(1) of
the Financial Institutions (Protection of Funds) Act 28 of 2001 (‘the
FI Act’).
[2] On 9 April 2008
the Registrar appointed a team of inspectors under the leadership of
Mr Barend Bredenkamp to investigate
the affairs of the first
respondent, Dynamic Wealth Ltd (Dynamic Wealth) and its associated
companies including the second to fifth
respondents (the Dynamic
Wealth group). The scope of the inspection was expanded in July 2008
and the inspectors produced their
final report on 15 September
2009.
3
Thereafter, and on the basis of the
contents of the report, the Registrar applied to the North Gauteng
High Court, Pretoria for
the appointment of curators to the business
of the present respondents and certain entities referred to in the
report as associations.
The application came before De Vos AJ
who dismissed it on technical grounds relating to the admissibility
of the evidence
underlying the report, without considering the merits
of the Registrar’s concerns about the operations of the Dynamic
Wealth
group. This appeal comes to us with the leave of the court
below.
Curatorship under the FI Act
[3] The statutory provisions in terms of which the Registrar may
apply for the appointment of a curator to a business falling within
his regulatory jurisdiction are contained in s 5 of the FI Act
and read, in material part, as follows:
‘
(1) The registrar may, on good
cause shown, apply to a division of the High Court having
jurisdiction for the appointment of a curator
to take control of, and
to manage the whole or any part of, the business of an institution.
(2) Upon an application in terms of subsection (1) the
court may-
(a) provisionally appoint a curator to take control of,
and to manage the whole or any part of, the business of the
institution
on such conditions and for such a period as the court
deems fit; and
(b) simultaneously grant a rule
nisi
calling upon
the institution and other interested parties to show cause on a day
mentioned in the rule why the appointment of the
curator should not
be confirmed.
(3) On application by the institution the court may
anticipate the return day if not less than 48 hours’ notice of
such application
has been given to the registrar.
(4) If at the hearing pursuant to the rule
nisi
the court is satisfied that it is desirable to do so, it may confirm
the appointment of the curator.
[4] The Registrar must
therefore satisfy the court that there is good cause to appoint a
curator.
4
Reading sub-sec (1) together with
sub-sec (4) that means that the court must be satisfied on the basis
of the evidence placed before
it that it is desirable to appoint a
curator. Something is desirable if it is ‘worth having, or
wishing for’.
5
The court must assess whether
curatorship is required in order to address identified problems in
the business of the financial institution.
It assesses this in the
light of the interests of actual or potential investors in the
financial institution, or investors who
have entrusted or may entrust
the management of their investments to it. It must determine whether
appointing a curator will address
those problems and have beneficial
consequences for investors. It must also consider whether there are
preferable alternatives
to resolve the problems. Ultimately what will
constitute good cause in any particular case will depend upon the
facts of that case.
I take heed of what Innes CJ said,
6
in regard to any attempt to define
the content of the expression ‘good cause’, that:
‘
In the nature of things it is
hardly possible, and certainly undesirable, for the Court to attempt
to do so. No general rule which
the wit of man could devise would be
likely to cover all the varying circumstances which may arise in
applications of this nature.
We can only deal with each application
on its merits, and decide in each case whether good cause has been
shown.’
The potentially complex circumstances that may exist in
regard to the operations of a financial institution render it
undesirable
to try and define further what will constitute good cause
for the grant of such an order.
[5] In the court below
the respondents relied on the judgment in
Ex
parte Executive Officer of the Financial Services Board: In re Joint
Municipal Pension Fund
,
7
where it was held that s 5 ‘does
not suggest a test which is more lenient than that set by the common
law for the removal
of trustees’ and the court consequently
applied in relation to s 5(1) of the FI Act the approach to the
removal of trustees
laid down by this court in
Sackville
West v Nourse & another
.
8
That test is broadly whether the
trustees have endangered the trust property by their acts or
omissions or shown a want of honesty,
fidelity or capacity to perform
their duties. Lack of honesty or capacity on the part of the
financial institution and those responsible
for managing its affairs
will ordinarily justify the appointment of curators to manage its
business under s 5(1) of the FI
Act. To that extent it is
correct to say that circumstances warranting the removal of trustees
of a trust, whether testamentary
or
inter
vivos
,
9
would, if present in relation to a
financial institution, ordinarily justify the grant of an order for
the appointment of curators.
However, it by no means follows that the
power of a court to make such an order is limited to that class of
case and in my view
the analogy with the removal of trustees leads to
an approach to s 5(1) that is too restrictive.
[6] The appointment of
curators under s 5(1) may be appropriate even where the funds
under administration are not shown to
be at risk. Take an institution
that is unlicensed and not qualified to be licensed, because those
responsible for its management
are disqualified from obtaining a
licence. It can hardly matter that it demonstrates that the funds
invested with it are properly
segregated and identified,
10
invested in accordance with the
mandates given by investors and entirely safe. The inability or
unwillingness of the institution
to comply with regulatory
requirements applicable to protected funds itself provides a reason
for appointing a curator. Where there
is uncertainty whether the
funds of investors are at risk it may be desirable in order to
safeguard the interests of investors
to appoint a curator. In
argument the example was put of the Registrar being furnished with an
adverse report by inspectors where
management disputes the factual
contents and conclusions of that report. Both counsel accepted, and
rightly so in my view, that
it might be proper for a curator to be
appointed notwithstanding the dispute. The existence of an adverse
report by inspectors
after conducting an inspection under the
Inspection Act may of itself provide legitimate grounds for concern
and found an application
for an interim curatorship, even if its
conclusions are disputed. When dealing with the investment of the
funds of the public,
where considerable hardship will be suffered by
ordinary people if things go wrong, the Registrar cannot be expected
to resolve
factual disputes by litigation before obtaining an order
appointing a curator. Provided the court is satisfied that the
Registrar’s
concerns are legitimate and that the appointment of
a curator will assist in resolving those concerns it will ordinarily
be appropriate
to grant an order.
Admissibility of report and its annexures in evidence
[7] The Registrar sought the appointment of curators on
the basis of a detailed report concerning the activities of the
Dynamic
Wealth group furnished by the inspectors. That report ran to
421 paragraphs and 169 pages and had annexed to it some 2000 pages
of
documents contained in 110 annexures. It set out a number of facts,
based on those documents, in each instance identifying in
the
footnotes the source of those facts. It concluded that the Dynamic
Wealth group was in material breach of no less than five
regulatory
statutes; that in administering the investments entrusted to it there
was inadequate identification of the interests
of the investors in
those investments and no proper control by means of regular audits;
that it had restructured one portfolio
without consulting investors,
thereby altering the very basis of their investments; and that in
certain respects the funds were
at risk.
[8] After considering
the report the Registrar brought the present application in relation
to the business of the Dynamic Wealth
group and the associations,
whose funds it administered. The value of the investments involved in
this business was approximately
R1 billion. He excluded that
part of the business that consisted of unit trust schemes operated on
a white label basis
11
through another financial
institution, Metropolitan Life, where Standard Bank held the
investments as trustee. These amounted to
some R2 billion.
[9] Despite a claim to personal knowledge of matters
relating to the Dynamic Wealth group, in the founding affidavit
deposed to
by Mr Chanetsa, the Deputy Registrar, reliance was placed
exclusively on the inspection report. He annexed a copy of the report
together with ‘a verifying affidavit’ by Mr Bredenkamp.
He then said:
‘
10.2 For the sake of brevity,
and for no other reason, the attachments to the report have been
omitted from these papers. However,
they will be available in Court
in a separately paginated bundle when the matter is heard and must be
regarded as forming part
of the report as they in fact do. Reference
to the annexures is made by way of footnotes in the main report and
in addition they
have been indexed and described from p16 of the
report onwards.’
The bundle of annexures was served on Dynamic Wealth
together with the application papers and its deponent, Mr van Wyk,
made use
of some of its contents in seeking to rebut the Registrar’s
case. It was also made available to the judge.
[10] The Deputy Registrar then set out ‘to capture in this
affidavit the salient findings of the inspectors’ on the
basis
of the report. He did so in 42 subparagraphs containing a mixture of
facts and conclusions detailing the conduct on the part
of the
respondents that caused him to bring the application. Reliance was
placed on the findings and recommendations of the inspectors
by cross
referencing each factual statement and each conclusion relied on to
the relevant page and paragraph of the report. In
turn reference to
the identified passages enables the reader, by having regard to the
footnotes, to identify the particular documents
from which those
facts have been drawn. All this was prefaced by the following
statement:
‘
11.3 However, the whole report
must be deemed incorporated in this affidavit as the report in its
entirety is relevant to this application
despite the fact that an
aspect may not have been highlighted in this affidavit.’
[11] In the answering affidavit on behalf of the
respondents Mr van Wyk adopted an ambivalent approach to the report.
He said that
he had studied it closely and that in some respects it
contained incorrect information. He then complained that:
‘
It is obviously impossible for
DW to deal with these attachments and to speculate on which parts of
the attachments the Applicant
might rely and which not. Consequently
DW reserves the right to move, at the hearing of this application,
for an order to strike
out the attachments from the papers, inasmuch
as the Applicant may want to rely upon the attachments at the hearing
of this application.’
However in the later portions of the affidavit a vigorous assault was
launched on the inspectors and the report, which was said
to contain
‘sweeping and unfounded’ statements that were ‘grossly
inaccurate’. The judge was urged to study
the entire report and
the opposing affidavit and the deponent added ‘I trust then
that justice will be done.’ In other
words the respondents
sought a decision on the merits of the application.
[12] The challenge to the annexures to the report attracted the
following response from the Registrar:
‘
59.1 The reason why the
annexures to the inspection report were excluded from the papers and
compiled and paginated in a separate
bundle, is set out in full in
paragraph 10.2 of my founding affidavit.
59.2 The factual statements in the inspection report are
supported by the annexures, properly referenced by way of footnotes.
The
annexures provide proof of the factual statements in the report.
59.3 An application to strike out any of the annexures
can, with respect, not succeed unless the respondents have placed the
correctness
of the factual statements in the report in dispute with
specific reference to the particular statement and motivation why it
is
incorrect. Such an approach I have not been able to discern from
the respondents’ answering affidavit.’
[13] In the court below the respondents
built their arguments around the admissibility of the report and its
contents. They contended
that the annexures were not properly before
the court; that the passages in the report and its annexures relied
on by the Registrar
were not identified and that there was
accordingly no admissible direct evidence of the facts relied on by
the Registrar in bringing
the application. They argued that in
relying on the report the Registrar was seeking to substitute the
judgment of the inspectors
for that of the court and relied on
Society of Advocates of South Africa
(Witwatersrand Division) v Rottanburg
12
where Boshoff JP said:
‘
Despite the very responsible
and competent way in which complaints are investigated by the
committee of the Bar Council or the Bar
Council itself, these bodies
are not judicial bodies in the ordinary sense and their findings
cannot be equated with that of a
court of law. Furthermore, the
acceptance of evidence of their findings even as
prima
facie
evidence
of the facts upon which the complaints are based would be inimical to
the requirements of the system of justice of this
country; the Court
cannot allow the findings of the body, which investigates the
complaints and brings the facts upon which the
complaints are based
to the attention of the Court, to be presumptive evidence of such
facts.’
This was said to be a parallel situation where that approach applied.
[14] The judge accepted
these contentions. He said in regard to
Rottanburg
that the court
should not be the rubberstamp of the Registrar. He held that the
evidence embodied in the bundle of annexures to
the report had not
been properly placed before the court and that the contents of the
report itself constituted the opinion of
the inspectors and could not
be relied on in the absence of evidence
aliunde
of ‘the
primary facts on which they are based’. He said that the
failure to deal extensively and specifically with the
passages in the
annexures on which the findings and conclusions in the report were
based was fatal to the application. He relied
on passages in
Swissborough Diamond
Mines (Pty) Ltd & others v Government of the Republic of South
Africa & others
13
and
Minister
of Land Affairs and Agriculture & others v D & F Wevell Trust
& others
14
in support of that conclusion.
[15] In adopting this approach the judge erred. His
starting point that the annexures to the report were not evidence
before the
court was incorrect. Had they been attached to the
founding affidavit there could have been no doubt that they were
properly before
the court as evidence. Counsel for the respondents
conceded as much. The fact that they were not physically attached to
the founding
affidavit, cannot affect their status as evidence. That
is to place form over substance. Solely for reasons of convenience,
and
to avoid the papers being unduly and possibly unnecessarily
bulky, they were placed in an identified separate bundle that was
served
on the respondents and made available to the court. It was
expressly stated that they formed an integral part of the report that
was attached to the founding affidavit. They were properly placed in
evidence and should not have been excluded.
[16] The confusion arose because the Registrar sought in
his affidavit ‘to capture … the salient findings of the
inspectors’
and relied on a verifying affidavit by the leading
inspector that confirmed ‘the authenticity of the report’.
This
led the court below to think that the source of the evidence was
the Registrar as opposed to the report and its annexures. It would
have been far simpler had the report been attached to an affidavit by
the leading inspector in which he confirmed that insofar
as it
contained facts they were embodied in the annexures and that the
conclusions were drawn from those facts. The Registrar could
then
have confined his affidavit to saying why the matters disclosed in
the report concerned him and justified the appointment
of curators.
Be that as it may, properly understood the Registrar’s
affidavit incorporated and relied on the report and the
annexures.
The most relevant passages in the report were clearly identified by
page and paragraph references. Those in turn took
the reader to the
source of the facts. A commendable endeavour to limit costs and
simplify the judge’s task in reading the
papers in a busy
opposed motion court should not have led to the exclusion of the
evidence embodied in the documents in that bundle
and the failure to
consider the merits of the application.
[17] As the foundation for the judge’s conclusion
lay in his erroneous decision to exclude the annexures to the report
the
other points argued before him and upheld cease to be of
relevance. It is accordingly unnecessary to examine the authorities
on
which he placed reliance.
[18] There was no
dispute that if the annexures were properly before the court the
evidence embodied in them was admissible. This
was so in regard to
the bulk of them because their source was the respondents themselves.
Some were public documents and others
were properly admissible under
the exception to the hearsay rule contained in
s 3(1)(c)
of the
Law of Evidence Amendment Act 45 of 1988
. They must accordingly be
considered in assessing the merits of the Registrar’s
application. This distinguishes
Rottanburg
,
which in any event predates the mentioned Act. In this case the
Registrar did not base his case on the conclusions in the report
of
the inspectors but on the admissible facts on which they had based
their conclusions. The court could, accordingly, decide for
itself
whether those conclusions were justified.
[19] There is a further
point in relation to the evidence before the court. It was not
correct for the judge to say, as he did,
that the respondents
refrained from dealing with the allegations in the founding
affidavit. In a lengthy answering affidavit they
dealt with each
paragraph of the founding affidavit and in particular with each of
the 42 sub-paragraphs in which the Deputy Registrar
set out the
salient findings of the inspectors. Where the correctness of those
findings, or the facts on which they were based,
was challenged the
basis for such challenge was set out and support was sought from the
contents of 50 annexures, many of which
were also annexures to the
inspection report. It is true that the affidavit was frequently
superficial in its answers but the respondents
nonetheless addressed
the case on the merits. In so doing it became apparent that there was
no serious dispute of fact. The relevant
facts were essentially
common cause and derived from information and documents supplied by
the respondents. Counsel for the respondents
properly disavowed any
reliance on cases where argument is addressed to a court on the basis
that the founding affidavit does not
establish a case. In those
circumstances the case should have been and must be determined on the
evidence as a whole.
15
The merits
[20] At the outset of the appeal appellant’s
counsel said he had been advised by respondents’ counsel that
the respondents
accepted that, if the inspection report and annexures
were properly before the court, these disclosed good cause for the
grant
at the time of the hearing of an order for curatorship in terms
of s 5(1) of the FI Act. Respondents’ counsel confirmed
this, saying only that it would still have been open to them to argue
that the matters disclosed in the report were largely of
an
historical nature and that by the time the application was brought
matters had been put in train to remedy the problems identified
by
the inspectors, thereby rendering curatorship unnecessary. It is
unnecessary in those circumstances to go into the merits in
any great
detail. I will confine myself to the two major issues that aroused
the Registrar’s concern.
[21] The first issue concerned the status and
functioning of the associations that were cited as part of the
business the Registrar
sought to have placed under curatorship.
According to a sample constitution of one such association they were
established:
‘
To create pooled investment
structures for purposes of direct pooled investments by its members
in such investment structures, which
direct pooled investments will
be managed by the Asset Management Company appointed on behalf of its
members.’
Pooled
investments in which members of the public are invited to invest are
regulated in terms of the Collective Investment Schemes
Control Act
45 of 2002 (CISCA). That requires that persons carrying on the
business of a collective investment scheme be licensed.
Schemes must
have an approved manager and, depending on the nature of the scheme,
a trustee or custodian must hold the assets of
the scheme. An auditor
must be appointed and there must be both accounting records and
annual financial statements prepared in
accordance with generally
accepted accounting practice. These must be audited in accordance
with the requirements of CISCA. All
this is intended to safeguard the
investments of the investors. None of the companies in the Dynamic
Wealth group were licensed
to conduct collective investment schemes
under CISCA and none of the portfolios of investments held on behalf
of the associations
were administered in accordance with the
requirements of CISCA. Therefore if the associations were collective
investment schemes
it was unlawful for the Dynamic Wealth group to
operate them, as they had been doing since 2002, with a substantial
number of ‘portfolios’,
each of which was in essence a
separate scheme. Dynamic Wealth contended that the associations were
not subject to CISCA and that
it was unnecessary to observe the
controls laid down in CISCA or to have the accounts of the
associations audited.
[22] A collective investment scheme is defined in s 1
of CISCA as:
‘
[A] scheme, in whatever form,
including an open-ended investment company, in pursuance of which
members of the public are invited
or permitted to invest money or
other assets in a portfolio, and in terms of which –
(a) two or more investors contribute money or other
assets to and hold a participatory interest in a portfolio of the
scheme through
shares, units or any other form of participatory
interest; and
(b) the investors share the risk and the benefit of
investment in proportion to their participatory interest in a
portfolio of a
scheme or on any other basis determined in the deed
...’
In
setting up the associations Dynamic Wealth, under whose umbrella the
other companies in the group operated, sought to take advantage
of an
exception in the definition of ‘members of the public’ in
s 1 of CISCA designed to exclude from its operations
certain
limited types of collective investment schemes, such as stokvels or
investment clubs. The definition reads:
‘
Members of the public’
includes –
members of any section of the public, whether selected
as clients, members, shareholders, employees or ex-employees of the
person
issuing an invitation to acquire a participatory interest in
a portfolio; and
a financial institution regulated by any law,
but excludes persons confined to a restricted circle of
individuals with a common interest who receive the invitation in
circumstances
which can properly be regarded as a domestic or private
business venture between those persons and the person issuing the
invitation.’
[23] Dynamic Wealth said that the members of the
associations were a restricted circle of individuals engaged in a
domestic or private
business venture and therefore that the
associations were not collective investment schemes in terms of
CISCA. This claim was shown
to be false when lists of participants
were provided to the inspectors. By way of example, in one of the
portfolios the members
included a tennis association; a primary
school and a school for the blind; a church; an optometrist and other
businesses; several
trusts, both family and charitable; some deceased
estates and a number of individuals from various parts of the country
and having
little other than their investment in that portfolio in
common. The answering affidavit said that membership was restricted
to
persons invited to join through Dynamic Wealth’s network of
independent financial advisers. However this network was 470 strong
and it recruited literally thousands of investors who invested
hundreds of millions of Rand through these associations. There can
be
no doubt that investments were being solicited from members of the
public. By no stretch of the imagination did the associations
fall
within the ambit of the exemption. Their business operations were
being conducted unlawfully by unregistered persons, without
audits
and without complying with the requirements of CISCA designed to
safeguard investors’ funds in collective investment
schemes.
The proffered excuse that the FSB was aware of these activities and
did not stop them was based on documents that revealed
that the FSB
was told that these were investment clubs and that investments were
not being solicited from the general public. This
was false. The bulk
of the business in respect of which curatorship was sought was being
conducted unlawfully and without complying
with regulatory
safeguards.
[24] The second issue
concerns the circumstances in which the fifth respondent, Specialist
Income Ltd (SIL), came into being. One
of the portfolios offered to
investors in the associations was an investment in bridging finance
transactions. This attracted very
large sums of money the bulk of
which was placed in the Specialist Income Portfolio A and the
Specialist Income Portfolio B. The
attraction of these portfolios was
said to be that the investments were backed by bank and similar
guarantees, that they paid more
generous rates of return than could
be obtained elsewhere in the market and that they were relatively
liquid. This may have been
true for a while but by early in 2008
market conditions had changed, there was a view that bridging finance
transactions might
be affected by the
National Credit Act 34 of 2005
and the operations were no longer profitable. This was
recorded in the minutes of an investment committee
meeting of Dynamic Wealth held on 29 January 2008. At that meeting
the decision
was taken to close the fund and to seek an institutional
investor with which to place the money. The existing investors were
to
have their money returned to enable them to invest in other funds.
It was, however, agreed that this was to remain confidential
and not
be disclosed to the network of agents.
[25] At a later meeting on 25 February 2008 it was
agreed to close the fund in order to create a new portfolio for an
investor
known as Kwanda. The existing funds would only be closed
once Kwanda had deposited money in the group’s money market
fund
and until at least the end of March everything was still to be
kept confidential. The intention was said to be that the fund would
close at the end of April after which the money in the fund would be
transferred to the money market fund and agents would be given
the
opportunity to approach their clients and ascertain what they wanted
to do with their money.
[26] It is unclear whether the Specialist
Income Portfolios continued to accept further investments after the
decision to close
them. On 4 August 2008 investors were notified
that the portfolios would be closed. This was blamed on the impact of
the
National Credit Act and
high rates of interest rendering bridging
transactions uncompetitive. The letter advised investors to speak to
their brokers about
transferring their funds to other investments and
assured them that the funds would be transferred once the capital was
available.
16
Thereafter on 8 September 2008 Dynamic Wealth advised
the FSB as part of a package of proposals to regularise its
operations that
the Specialist Income Portfolios, with investments of
some R247 million, and three smaller but apparently similar
portfolios,
17
had been closed and the investments were being
liquidated. They said that the members would either have their money
returned to
them or it would be reinvested in one or other of the
white label funds. It said that all members and their advisers had
been informed
of this.
[27] The Registrar’s response to this package of
proposals on 11 September 2008 was to instruct Dynamic Wealth
not to
implement them. Thereafter on 16 September (and again on 25
September after receiving a letter of 17 September that did not deal
with this instruction) the FSB asked for confirmation that the
instruction had been followed. It sought the same assurance on
2 October threatening action if it did not receive a response.
That same day Dynamic Wealth wrote to the Registrar saying ‘Dynamic
Wealth has ceased implementation of the plan or solution’
described in its letter of 8 September. Insofar as the
Specialist
Income Portfolios and the three smaller portfolios were
concerned that was technically true, but only because Dynamic Wealth
had
done something entirely different with the assets of these
portfolios.
[28] On 1 October 2011, SIL, a company with an
issued share capital of 100 shares, all owned by the second
respondent, took
cession from the third respondent, as ‘asset
administrator’ of the Specialist Income, Secure Growth and
Kwanda Secure
Growth Portfolios, of all ‘right, title and
interest in and to the book debts, bank, stockbroker accounts’
of the Dynamic
Wealth Investment Association in return for the issue
to the investors in the affected portfolios of non-redeemable,
non-cumulative
preference shares in SIL. The second respondent
consented to this cession on behalf of the Dynamic Wealth Investment
Association
and presumably through that association on behalf of the
investors. It also entered into an agreement with SIL in terms of
which
it would manage the business of SIL in return for a fee. This
amounted in the period until 28 February 2009 to R1.7 million.
[29] By these means the assets of these funds were
transferred to SIL and the investors were made preference
shareholders in SIL
without their knowledge or consent. They were
told about it in a letter addressed to them on 2 November 2008.
In dealing with
these transactions the letter read as follows:
‘
Conversion of portfolio
The Portfolio Manager has also, after taking into
consideration all alternatives, made a decision to convert the
portfolio's assets
to a public company and to issue preferential
shares to all investors within the two funds listed above. The main
reason for the
decision is that property cannot be held by the
portfolio in its current structure as a legal entity.
The public company will become the beneficial owner of
all bank guarantees and properties and all investors will be issued
with
preferential shares on a pro-rata basis to the investors' share
in the portfolio. In essence, all assets and investor holdings will
be converted into a new legal structure and all investors will
receive the same value in shares as they currently hold within the
portfolio. All assets, whether bank guarantees or properties, will be
transferred to the new public company.
…
The preferential shares will be issued to investors in
the weeks to follow. The surplus within the company, if any, will
serve as
a buffer and will be accrued to the benefit of the investors
once the outstanding transactions have been collected.’
[30] In the result people who had invested on the basis that they
would receive reasonable rates of interest on liquid investments
became instead shareholders in a private company. That immediately
detrimentally affected the value of their investments. The shares
are
described as non-cumulative, which suggests that the articles
provided for an annual dividend at a fixed rate, but on the footing
that if the dividend was not paid in any year it would be lost. The
shares were non-redeemable so that investors were locked into
the
investment and could no longer demand the return of their capital.
Nothing emerges from the papers concerning voting rights
but it is
relatively unusual for preference shareholders to enjoy such rights,
which probably means that control over the company
lay entirely with
the second respondent. Even the tenuous rights the investors had
enjoyed to vote in relation to the affairs of
the Association were
therefore nullified.
[31] All of this was done without informing the
investors or affording them an opportunity to object and by
misrepresenting to them
what was happening with their investments.
They were told that the portfolios would be closed and their
investments repaid. Instead
they were presented with a
fait
accompli
in which they became, like it or not, preference
shareholders in SIL. Throughout the process the FSB had been misled
and its instructions
defied. Counsel for the respondents was
constrained to say that his clients should not have done this and
that it was ‘certainly
improper conduct’. I go further.
It was blatantly dishonest and of such a character that the Registrar
was compelled to act
to remove the persons responsible from their
management and control of the financial institutions concerned.
[32] For those reasons alone, leaving aside all the
other conduct identified by the inspectors, an interim curatorship
order should
have been granted by the court below. It was submitted
that such an order could not be granted in relation to the third
respondent
because the Registrar did not allege that there had been
prior consultation with the committee or executive committee of the
JSE
before bringing the application as required by s 8 of the FI
Act. There is no merit in this point. There had in any event been
communication between the inspectors and the senior manager:
surveillance of the JSE during the inspection process and an
affidavit
by her, detailing transgressions of the JSE’s rules,
was filed together with the replying affidavit. We do not know
whether
there was in fact ‘consultation’ as required by
the section. The point was not raised in the affidavits and the
Registrar
was therefore deprived of the opportunity, if there was
non-compliance, to remedy the position as he could have done. The
point
cannot be raised by way of argument.
Further evidence
[33] The application was
brought in October 2009 and an interim curatorship order should have
been made when it was argued in February
2010. The Registrar contends
that an interim curatorship order should be granted now in a form
slightly amended from that originally
sought. However the situation
has changed materially since then as emerged from three applications
to lead further evidence on
appeal lodged respectively by the
Registrar, the second and third respondents and the fifth respondent.
This evidence satisfies
the tests for the admission of further
evidence on appeal
18
and is admitted. It demonstrates that
the present situation with the Dynamic Wealth Group is very different
now from what it was
when the application was brought.
[34] The first and most important difference is that the
second and third respondents are no longer licensed financial
services
providers in terms of the
Financial Advisory and
Intermediary Services Act 37 of 2002
. That precludes them from
conducting the business of a financial institution. The registrar
withdrew their licences in terms of
s 9
of that Act and the
Appeal Board established under the Financial Services Board Act 97 of
1990 upheld that decision on 18 June
2011. The effect of the
withdrawal was that these two entities could no longer conduct
business in the financial services industry.
As they were always the
licensed vehicles through which the Dynamic Wealth group conducted
its business, this destroyed the foundations
of the group’s
business. All that remained for them to do under the terms of
withdrawal laid down by the Registrar was to
return uninvested funds
to clients without delay; account fully to the persons entitled
thereto for any scrip, participating interests,
investment vouchers
or other forms of proof of investment; and, after consulting clients
and product suppliers, to take reasonable
steps to ensure that any
outstanding business was transferred to another services provider in
the best interests of clients.
[35] The second and third respondents led evidence of
what they had done pursuant to these conditions of withdrawal.
Neither of
them is still conducting any business. Metropolitan Life
has cancelled the white label agreements so that the second
respondent
no longer manages these portfolios. The equity portfolios
managed under discretionary mandates have been transferred to another
licensed financial services provider. The international portfolios
are in the process of being transferred to the same provider.
Thebe
Securities, another financial services provider, has realized the
investment portfolios of the associations and all of the
funds, save
some R110 000 owed to 18 clients, have been distributed to
investors. In the case of these 18 clients there have
been problems
in communicating with them and payments could not be made because
their bank accounts had been closed. The JSE platform
clients are now
invested directly through Metropolitan. There is very little
business, if any, left in the second and third respondents.
[36] The first respondent’s only business was that
conducted through the second and third respondents. The fourth
respondent
closed for business on 31 July 2008 and retrenched its
staff and ceased all operations a year later before the application
was
launched. That left only SIL in the group and the evidence was
that the second respondent had disposed of its 100 shares in SIL
and
the two directors of SIL connected to Dynamic Wealth had resigned as
directors.
[37] SIL’s current
chief executive officer amplified this. He testified that a new and
independent board of directors has
been appointed with considerable
experience in the financial services industry. None of these
directors were involved in the conversion
of the portfolios into SIL.
An annual general meeting of shareholders was held on 28 July
2011 and debated the advantages
and disadvantages of curatorship. It
resolved by a substantial majority
19
that they did not support a
curatorship. According to the attendance register at least 40 to 50
percent of shareholders were present
at the meeting or represented by
proxies and possibly more. The FSB declined an invitation to attend
the meeting.
What relief should be granted?
[38] The Registrar persisted in seeking an order
appointing curators notwithstanding the change in circumstances
outlined above.
It is essential to bear in mind in dealing with this
that the appointment of curators would operate prospectively not
retrospectively.
The order is not backdated and cannot be used to
undo what has passed. The desirability of such an order must be
assessed today
in the light of the information we have about the
current situation with the respondents.
[39] In the course of his reply counsel accepted that he
could not ask for such an order in relation to the third and fourth
respondents.
As a matter of fact it is doubtful whether the first and
second respondents are still carrying on a business. In my view
before
an order appointing curators can be made it is necessary for
the Registrar to show that there is a business that can be subjected
to curatorship. Section 5(1) provides that the curator’s
function once appointed is to ‘take control of and manage’
the business subject to curatorship. It follows that if there is no
longer a business there is nothing of which they can take control
and
nothing to manage, and the appointment of a curator is impermissible.
That may be an insuperable bar to a curatorship order
in respect of
the first and second respondents.
[40] In the further evidence the Deputy Registrar said
that a curatorship order would not be academic because there was work
to
be done by the curators in investigating and reporting to the
Registrar ‘what exactly the business of the Dynamic Wealth
entities consisted of at 18 June 2011’; to investigate and
report on irregularities by Dynamic Wealth’s management and
to
ascertain the current status of Dynamic Wealth’s business. If
such investigations are necessary to identify the business,
that
illustrates how tenuous is the notion that there is still a business
within the Dynamic Wealth group that can be subjected
to curatorship.
Furthermore I doubt whether investigation can be the principal reason
for appointing curators. It may be something
that curators should
undertake, where appointed, but that is in the context of there still
being a business that is under their
control and being managed by
them.
[41] Even if one accepts that there is some residual
business located within the first and second respondents there is
insufficient
reason to justify making a curatorship order in respect
of that business at this stage. In effect the curators would set out
on
a treasure hunt looking for the business of which they were the
curators. That is not a desirable situation or one contemplated
in
s 5(1). In my view it has not been shown that the appointment of
curators at this stage of affairs holds out any sufficient
prospect
of benefit to investors to render it desirable in respect of the
first and second respondents.
[42] That leaves only SIL. I accept that, although it
appears to have severed ties with the Dynamic Wealth group, it
remains a financial
institution and potentially subject to a
curatorship order. However the fact that it is no longer under the
control of those responsible
for its travails is an important
consideration in deciding whether to place its business under
curatorship. A further important
consideration is the views of the
shareholders who are the investors whose investments were dealt with
in such a cavalier fashion
by the Dynamic Wealth group. They have
said clearly that they do not want a curatorship and have appointed
new directors to look
after their interests and see what part of
their investments can be salvaged. It was suggested that they might
have legal claims
against Dynamic Wealth and its executives or
management. However they are free to seek advice on that and to take
action if so
advised. The minutes of the annual general meeting
reveal that some are already investigating that option. They do not
need curators
for that purpose. We were also referred to the terms of
withdrawal that provide that the former investors in the portfolios
transferred
to SIL ‘are to be regarded as investors’ in
the second respondent. Whatever this means, and assuming it to be
valid,
it does not provide any reason for subjecting SIL to a
curatorship, which will on the unchallenged evidence be an extremely
expensive
undertaking at the cost of investors who have already
incurred substantial losses. The condition in question invites the
independent
directors of SIL to meet with the Registrar, presumably
to try and address any continuing problems. It provides no reason to
place
SIL under curatorship.
[43] For those reasons and in the light of present
circumstances, I do not think that a curatorship order is desirable
at the present
time in respect of any of the respondents. The
respondents sought to turn this to their advantage by contending that
the appeal
should therefore be dismissed as moot, relying on s 21A(1)
of the Supreme Court Act 59 of 1959 that empowers the court to
dismiss an appeal if it would not have a practical effect or result.
I do not agree that the appeal will have no practical effect
or
result. Its determination involves the proper construction of an
important provision in the regulatory armoury of the Registrar,
the
test to be applied in considering an application for curatorship
under s 5(1) of the FI Act and a consideration of the
evidential
status of an inspection report. These are all important issues that
will impact upon the future conduct of the Registrar.
[44] Lord Slynn of
Hadley said
in
R v
Secretary of State for the Home Department, Ex Part Salem
:
20
‘
The discretion to hear
disputes, even in the area of public law, must, however, be exercised
with caution and appeals which are
academic between the parties
should not be heard unless there is a good reason in the public
interest for doing so, as for example
(but only by way of example)
when a discrete point of statutory construction arises which does not
involve detailed consideration
of facts and where a large number of
similar cases exist or are anticipated so that the issue will most
likely need to be resolved
in the near future.’
21
The present seems to me
precisely the type of case where the court should hear and decide the
dispute because of its importance
in the field of financial
regulation, where it will have a practical effect.
22
[45] In the result the Registrar’s submission that
the court below erred in dismissing the application and refusing to
appoint
curators to the business of the Dynamic Wealth group must be
upheld. His submission that curators should be appointed now fails.
The appeal must therefore succeed and the order of the court below be
set aside, but it can only be replaced by an order directing
the
respondents to pay the Registrar’s costs of the application. He
sought an order that those costs be paid on the attorney
and client
scale on the basis that he was discharging a statutory duty and his
office should not be out of pocket for the costs
incurred in doing so
but that was not pressed in argument. The respondents made common
cause both in the court below and in this
court and are accordingly
jointly and severally responsible for the payment of the costs.
Order
[46] In the result the following order is made:
The appeal is upheld with costs including the costs of
two counsel.
The order of the court below is set aside and replaced
by an order that the respondents pay the applicant’s costs,
including
the costs of two counsel.
Both costs orders are joint and several, the one paying
the others to be absolved.
M
J D WALLIS
JUDGE OF APPEAL
Appearances
For appellant: W H Trengove SC (with him E C Labuschagne SC)
Instructed by:
Rooth & Wessels Attorneys, Pretoria
Naudes Inc, Bloemfontein
For respondent: N D G Maritz SC (with him A P G Els)
Instructed by:
Van der Merwe & Associates, Pretoria
Rossouw Attorneys, Bloemfontein.
1
He
or she is the registrar of pension funds, friendly societies,
collective investment schemes, long and short-term insurance,
financial services providers and securities services under the
statutes governing those institutions.
2
The
only major participants in the financial services industry that are
outside the Registrar’s regulatory grasp are banks,
which have
their own registrar designated in terms of s 4 of the Banks Act
94 of 1990.
3
A
draft report had been prepared and made available for comment to
Dynamic Wealth in July 2009. A lengthy comment was produced
on 17
August 2009 and the report was then finalised. Dynamic Wealth’s
response to the draft covering some 202 pages (inclusive
of 28
annexures) is the last annexure to the final report.
4
The
English text may suggest at first sight that it is the Registrar to
whom good cause must be shown but any lack of clarity
about this is
resolved by reference to the Afrikaans text which reads: ‘Die
registrateur kan, by bewys van goeie gronde
by ʼn afdeling van
die Hoë Hof wat oor regsbevoegheid beskik, aansoek doen om die
aanstelling van ʼn kurator om
beheer te neem oor die geheel of
enige gedeelte van die besigheid van ʼn instelling en dit te
bestuur.’
5
Shorter
Oxford English Dictionary
(6 ed, 2002, 2007 (electronic)) sv
‘desirable’.
6
Cohen
Brothers v Samuels
1906 TS 221
at 224. In
Cairns' Executors v Gaarn
1912
AD 181
at 186 (180 at 184 in the 1921 reprint) he said in relation
to the similar expression ‘sufficient cause’ that ‘It
would be quite impossible to frame an exhaustive definition of what
would constitute sufficient cause …’ It is apparent
that Mason J was incorrect in saying in
Mintz
v Bloemhof Village Council
1922 TPD 430
at
431 that Innes J drew a ‘sharp distinction’ between the
concepts of ‘good cause’ and ‘sufficient
cause’.
7
Ex
parte Executive Officer of the Financial Services Board: In re Joint
Municipal Pension Fund
[2003] 4 All SA 603
(T) para 40.
8
Sackville
West v Nourse & another
1925 AD 516
at 527.
9
The
description in the FI Act of the assets held by a financial
institution as ‘trust property’ flows from the special
definition of that expression in that Act and the duties imposed
upon various persons representing financial institutions by
ss 2 and
3 of the FI Act and not from the law relating to trusts.
10
See
by way of example
s 2(2)
of the
Collective Investment Schemes
Control Act 45 of 2002
.
11
A
white label product is a product provided by one financial
institution in terms of its licence and for which it is responsible,
but branded to appear as if it is the product of another financial
institution that may lack the requisite licence.
12
Society
of Advocates of South Africa (Witwatersrand Division) v Rottanburg
1984 (4) SA 35
(T) at 40C-D.
13
Swissborough
Diamond Mines (Pty) Ltd & others v Government of the Republic of
South Africa & others
1999 (2) SA
279
(T) at 324F-325C.
14
Minister
of Land Affairs and Agriculture & others v D & F Wevell
Trust & others
2008 (2) SA 184
(SCA) para 43.
15
Valentino
Globe BV v Phillips & another
[1998] ZASCA 43
;
1998 (3) SA 775
(SCA) at
779E-780C.
16
The
letter read: ‘Ons beveel aan dat u met u makelaar in
verbinding sal tree om die oorplasing na ons ander fondse te
bespreek. U kapitaal sal dan na hierdie fondse oorgeplaas word soos
die kapitaal vrygestel word. U en u makelaars is welkom om
ons te
kontak rakende advies oor die beskikbare portefeuljes.’
17
These
were called the Secure Growth A, Secure Growth Holdings and Kwanda
Secure Growth Holding Fund respectively, holding total
investments
of some R45.5 million.
18
De
Aguiar v Real People Housing (Pty) Ltd
2011 (1) SA 16
(SCA) para
12.
19
93,7%
to 4.8%.
20
R
v Secretary of State for the Home Department, Ex Parte Salem
[1999] 2 All ER 42
(HL) at 47d-f.
21
Cited
in
Port Elizabeth Municipality v Smit
2002 (4) SA 241
(SCA)
para 7 and
Rand Water Board v Rotek Industries (Pty) Limited
2003
(4) SA 58
(SCA) para 18.
22
See
also
Natal Rugby Union v Gould
[1998] ZASCA 62
;
1999 (1) SA 432
(SCA) at 444 I
- 445C.