Ovation Preservation Pension Fund and Others v Executive Officer Financial Services Board (519/2007) [2008] ZASCA 82; 2009 (1) SA 485 (SCA) (2 June 2008)

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[2008] ZASCA 82
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Ovation Preservation Pension Fund and Others v Executive Officer Financial Services Board (519/2007) [2008] ZASCA 82; 2009 (1) SA 485 (SCA) (2 June 2008)

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THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
Reportable
CASE
NO 519/2007
In
the matter between
OVATION PRESERVATION PENSION FUND
...
First
Appellant
OVATION PRESERVATON PROVIDENT FUND
...
Second
Appellant
OVATION PRESERVATION ANNUITY FUND
...
Third
Appellant
and
EXECUTIVE OFFICER OF THE FINANCIAL
SERVICES BOARD
...
Respondent
Coram: Scott, Mlambo JJA and Hurt,
Leach, Kgomo AJJA
Heard: 21 MAY 2008
Delivered: 02 JUNE 2008
Summary
:
Appointment
of a curator to take control and management of an institution under
s
5
of the
Financial Institutions (Protection of Funds) Act 28 of 2001
– court having a wide discretion and entitled to order that the
costs of curatorship be defrayed from the assets of investors held
by
the institution – court further entitled to restrict payments to
investment beneficiaries and disinvestment from the institution
under
curatorship.
Neutral
citation
:
Ovation v Executive Officer Financial Services Board (519/2007)
[2008] ZASCA 82
(02 JUNE 2008)
___________________________________________________________
JUDGMENT
__________________________________________________________
LEACH AJA
[1] On 2 March 2007 the Cape High
Court granted a provisional order in terms of s 5(2) of the Financial
Institutions (Protection of
Funds) Act 28 of 2001 (the “FI Act”)
placing the whole of the businesses of two companies known as Ovation
Global Investment
Services (Pty) Limited (“Ovation Services”) and
Ovation Global Investment Nominees (Pty) Limited (“Ovation
Nominees”) under
curatorship. Despite a number of intervening
parties, including the three appellants, having opposed certain
aspects of the relief
sought, the provisional order was confirmed on
14 June 2007, albeit with certain amendments suggested by counsel.
That judgment is
now reported as
Executive
Officer Financial Services Board v Ovation Global Investment Services
(Pty) Limited & Another (Ovation Preservation
Pension Fund and
Others Intervening)
2008
(3) SA 69
(C). The appeal is with the leave of the court
a
quo
.
[2] While not seeking to contest the
decision to issue an order of curatorship, the three appellants
contend that certain terms of
the order had been beyond the authority
of the court
a quo
and amount to a restriction on their
rights not authorised by the FI Act.
[3] Ovation Services is what is known
in the financial world as a “LISP”,
1
which conducts business by investing
moneys on behalf of its clients in various investment schemes and
financial products. To the
benefit of its clients, it “bulks” or
aggregates the funds invested with it when buying or selling
financial products. However,
the investment of each client is
administered separately with a detailed record of investments being
maintained and regular investment
statements being issued to the
client.
[4] Investments made by a LISP are
typically channeled through a nominee company. In the case of Ovation
Services, its nominee was
its fully owned subsidiary, Ovation
Nominees. Both Ovation companies were closely associated with two
asset management companies,
Common Cents Investment Portfolio
Strategists (Pty) Limited (“Common Cents”) and Fidentia Asset
Management (Pty) Limited (“Fidentia”).
In particular, substantial
cash investments made by clients of Ovation Services were placed
through Ovation Nominees in a cash portfolio
administered by Common
Cents.
[5] It is unnecessary for present
purposes to analyse precisely what went wrong. Suffice it to say the
businesses of Common Cents
and Fidentia were plagued by alleged
administrative chaos, misappropriations and other irregularities
which eventually led to them
both being placed under curatorship in
terms of section 5 of the FI Act. This had a negative effect on the
Ovation companies, whose
liquidity and accounting difficulties were
further exacerbated by the resignation of key directors and
personnel. This unhappy picture
caused retirement funds which had
invested in Ovation Services to threaten to place their business
elsewhere and the underwriters
of a post-retirement annuity product
marketed by Ovation Services to instruct that no new living annuity
business be concluded. This
precipitated a cash crisis and a major
shareholder in Ovation Services threatened to bring liquidation
proceedings. Fortunately,
a large insurance company was prepared to
consider extending financial assistance to the Ovation companies and
the respondent, the
executive officer of the Financial Services
Board, decided to apply for curators to be appointed to them under
section 5 of the FI
Act, which application was successful as already
detailed above.
[6] Each appellant is a registered
pension fund as defined in the
Pension Funds Act, 24 of 1956
. They
had each concluded an agreement with Ovation Services to administer
its business and had invested substantial funds with it.
Each had
also entered into an agreement with Ovation Nominees which had
undertaken to hold assets on its behalf. The appellants viewed
the
terms of the provisional order to be an unjustified interference with
their rights of ownership in their investments, and opposed
the
curators’ entitlement to restrict both their right to disinvest and
the payment of pension benefits to their members. They
also opposed
the curators’ authority to defray the costs of the curatorship from
their investments. Despite their opposition, the
order granted on 14
June 2007 provided as follows (I quote only those portions of the
order relevant to the present debate):
‘
4.2 Investments in or
administered by the business or companies shall not without the prior
approval of the Registrar be withdrawn,
transferred or otherwise
disinvested from the business or companies.
5. The curators are
hereby:
5.1 authorised to
maintain control of, and to manage and investigate the business and
operations of and concerning the companies,
together with all assets
and interests relating to such business, such authority to be
exercised subject to the control of the Registrar
in accordance with
the provisions of section 5(6) of the Act, and with all such rights
and obligations as may pertain thereto;
5.2 vested with all
executive powers which would ordinarily be vested in, and exercised
by, the board of directors or members of the
companies, whether by
law or in terms of their articles of association, and the present
directors, members or managers of the companies
continue to be
divested of all such powers in relation to the business;
5.3 …
5.4 …
5.5 authorised, in their
discretion and depending on available resources, to maintain payments
to annuitants, pensioners and other
beneficiaries who receive regular
payments;
5.6 directed to take
custody of the cash, cash investments, stocks, shares and other
securities held or administered by the companies,
and of other
property or effects belonging to or held by or on the instructions of
the companies or any entity directly or indirectly
controlled by,
affiliated to or associated with the companies;
5.7 …
5.8 subject to paragraph
7 below authorised to incur such reasonable expenses and costs as may
be necessary or expedient for the curatorship
and control of the
business and operations of the companies, and to pay same from the
assets held, administered or under the control
of the companies;
5.9 subject to paragraph
7 below permitted to engage such assistance of a legal, accounting,
administrative, or other professional
or technical nature, as they
may reasonably deem necessary for the performance of their duties in
terms of this order and to defray
reasonable charges and expenses
thus incurred from the assets held by or under control of the
companies;
…
6. … (T)he costs of
these proceedings, as between attorney and own client, and the costs
and remuneration of the curators shall
be payable by the companies,
jointly and severally, and to the extent that the assets of the
companies are insufficient for that
purpose, and only to the extent
of any such insufficiency, out of the assets or investments of
investors administered by or under
the control of the companies pro
rata the value of such assets or investments of each investor in
relation to the total value of
investors’ assets or investments
administered by or under the control of the companies on 2 March
2007; ...
7. In funding the
expenses and costs of curatorship referred to in paragraphs 5.8 and
5.9 above and the applicant’s costs of this
application … the
curators shall first utilise the resources of the companies, jointly
and severally, and only if those resources
are insufficient for that
purpose, and only to the extent of any such insufficiency, out of the
assets or investments of investors
administered by or under control
of the companies pro rata the value of such assets or investments of
each investor in relation to
the total value of investors’ assets
or investments administered by or under the control of the companies
on 2 March 2007...’.
[7] In this court, the appellants
essentially seek to impugn the competency of the court
a
quo
to grant the relief set
out in paragraphs 4.2, 5.5 and 5.6 of the order (and certain of the
ancillary terms related thereto) as well
as those provisions (eg in
paragraphs 5.8 ,6 and 7) entitling the curators to seek to recover
costs from the assets and investments
of investors. I interpose to
mention that it is common cause that the appellants’ investments in
the Ovation companies constituted
“trust property” as defined in
s 1 of the F1 Act, and were protected by s 4(5) which provides that
“trust property” as so
defined “invested, held, kept in safe
custody, controlled or administered by a financial institution or
nominee company under no
circumstances forms part of the assets or
funds of the financial institution or such nominee company”. It was
accepted by all parties
that the appellants’ investments therefore
remained their property and were not assets in the Ovation companies.
In the light of
this, the appellants’ first contention was that as
their investments were not assets of the Ovation companies, the
curators were
not entitled to recover any costs from them. Secondly,
the appellants argued that the curators’ function was no more than
to take
control of and to manage the business of the companies. They
therefore argued that the terms and conditions of the administration
and nominee agreements remained of full force and effect, and that
not only were the curators obliged to pay whatever benefits were
due
to them and their clients as and when they fell due under these
agreements, but that they could withdraw their investments if
they
were contractually entitled to do so and that the court
a
quo
had not been entitled
to restrict any such payment or withdrawals.
[8] The origin of the form of
curatorship arising in cases of this nature appears to have been s 6
of the Financial Institution (Investment
of Funds) Act 56 of 1964
which provided in certain circumstances for the appointment of a
curator, acting under the control of the
court, to take control of
and to manage the whole or part of the business of a financial
institution. That Act was replaced by the
Financial Institution
(Investment of Funds) Act 35 of 1984, s 6 of which was in similar
terms to s 6 of the 1964 Act. In turn, the
1984 Act was in due course
repealed and replaced by the current FI Act, s 5(5) of which reads as
follows:
‘
The
court may make an order with regard to –
(a)
the suspension of legal proceedings against the institution
for the duration of the
curatorship;
(b)
the powers and duties of the curator;
(c)
the remuneration of a curator appointed provisionally
under
subsection (2) (a) or finally under subsection (4);
(d)
the costs relating to any application made by the registrar
under
subsection (1);
(e)
the costs incurred by the registrar in respect of an
inspection
of the affairs of the institution concerned in
terms
of the
Inspection of Financial Institutions Act, 1998
(Act
80 of 1998); or
(f)
any other matter which the court deems necessary.’
[9] Sections (5)(b) and (f) are open
ended and extend a wide discretion to the court. The reason for this
is clear. A wide range of
persons fall within the definition of an
“institution” which may be placed under curatorship in terms of
s
5.
The definition in s 1 of the FI Act refers,
inter
alia
, to a “financial
institution” which is, in turn, defined as including not only a
medical scheme but also any other person or
institution referred to
in the definition of a “financial institution” in s 1 of the
Financial Services Board Act 97 of 1990.
The latter definition
includes pension funds, friendly societies, unit trust schemes,
participation bond schemes, stock exchanges,
registered insurers,
insurance brokers and mutual banks (this list is not exhaustive).
[10] In the light of the array of
“institutions” as defined which could be placed under
curatorship, even the wisdom of Solomon
would have been taxed in both
anticipating what would arise and need to be addressed in every case
and drafting an exhaustive list
of powers that curators would
require. In enacting s 5(5)(b) and (f) the legislature therefore
granted the court a wide discretion
to craft out an appropriate order
to meet the exigencies of each individual case.
[11] The essential feature of an order
in terms of s 5 is that it vests in the curator the management and
control of the business
of the institution. The order neither changes
the nature of the trust assets held by the institution nor
extinguishes the institution’s
contractual rights and obligations,
and certainly does not vest ownership of the trust assets in the
institution. But that does not
mean that the enjoyment of the full
rights of ownership in the trust assets will not be affected. By its
very nature, the order impacts
upon the institution and, for the
institution to be steered through a crisis, drastic steps might have
to be taken, even if they
impinge upon the rights of third parties.
Cf.
Conze v Masterbond
Participation Trust Managers (Pty) Ltd
1996
(3) SA 786
(C) at 798A-C.
[12] Bearing that in mind, I turn now
to consider the submission that the court was not authorised to order
that any portion of the
costs of the curatorship be defrayed from
trust assets, this being the aspect of the appeal which attracted the
most attention during
argument. As I have said, simply put, it is the
appellants’ argument that as the trust assets vest in them and not
in the Ovation
companies, the curators should not be entitled to look
to such assets for that purpose.
[13]
While
not necessarily axiomatic, it stands to reason that in many cases in
which an order of curatorship is required, the institution
concerned
will be in poor financial shape. This the legislature must have
appreciated, and it is significant that while s 6(8) of
both the 1964
and the 1984 FI Acts provided for the curator to be remunerated out
of the funds of the institution under curatorship,
this provision was
not carried over to the current FI Act and s 5(5) leaves it up to the
court to make an order with regard to the
curator’s remuneration.
As the funds of the institution under curatorship will often be
insufficient to defray the costs and expenditure
incurred in the
curatorship, including the curator’s renumeration, the question may
be asked from what source did the legislature
envisage the additional
funds would be forthcoming?
[14] In seeking to answer this
question, it was argued by the appellants that the respondent is to
be held responsible for whatever
expenditure the institution under
curatorship could not meet, particularly as the curator acts under
the control of the respondent
and may have to apply to him for
instructions in regard to any matter arising out of or in connection
with the control and management
of the institution’s business.
2
This argument was founded on s 3 of
the Financial Services Board Act 97 of 1990 (“the FSB Act”) which
provides that one of the
respondent’s functions is to supervise
compliance with laws regulating financial institutions and the
provision of financial services.
It was argued that the costs of the
curatorship were incidental to this function and that, as s 16(1)(b)
of the FSB Act entitles
the board to raise money,
inter
alia
, by way of levies
imposed on financial institutions, and as s 16(3) of the FSB Act
obliged the board to utilize its funds for the
“defrayal of
expenses incurred by the board in the performance of its functions”,
the respondent could use those funds to pay
the costs of curatorship.
[15] In my view, this argument cannot
be upheld. It is clear that the funds obtained by the Financial
Services Board by way of levies
are to be used by the board in the
performance of its functions, and while those functions involve the
supervision of compliance
with laws regulating financial institutions
and the provision of financial services, they do not include the
running of an institution
under curatorship. While the respondent, as
executive officer of the board, is entitled to apply for an order
appointing a curator,
the curator and not the respondent, thereafter
administers the institution. The costs and expenses incurred in
running an institution
under curatorship are a product of that
curatorship. They cannot be construed as being expenses incurred by
the board in the performance
of its functions, and a court cannot
order the board to bear them.
[16] The answer to the question who
should bear the costs of the curatorship should the institution’s
own funds be insufficient
for that purpose, is, I think, clear. The
curatorship is there to protect the assets of investors, and I can
see no reason why, when
necessary, those investors should not bear
any costs in respect of the curatorship intended to benefit them.
Indeed, I can see no
reason why any person other than the persons in
whose favour the curatorship was granted should bear any costs
related thereto in
the event of the institution’s funds being
insufficient. I therefore have no difficulty in concluding that the
court
a quo
was
entitled to grant the order it did in respect of the costs of the
curatorship.
[17] I turn to deal with paragraph 4.2
of the court’s order. As I have said, the court was endowed with a
wide discretion under
s 5(5)(f) to make an order regarding “any
other matter which (it) deems necessary”. Drastic times require
drastic measures, as
was recognized by the legislature in s 5(5)(a)
which specifically authorises the issue of an order suspending legal
proceedings against
an institution for the duration of its
curatorship, a moratorium which would render it impossible for a
third party to seek to enforce
a right to disinvest. I can therefore
see no reason why an order authorizing a restriction on disinvestment
could not have been countenanced.
[18] There are also sound policy
reasons justifying a restriction on disinvestment. Common experience
teaches us that even a vague
suggestion of financial instability on
the part of an institution will inevitably result in it being flooded
with investors seeking
to withdraw their investments, thereby
threatening its very existence. Of this the legislature must have
been aware, and must have
envisaged a court, granting an order
of curatorship, taking steps to guard against such an outcome.
Bearing that in mind, I have no
difficulty in concluding that the
court
a
quo
was entitled to impose
restrictions upon disinvestment during the period of curatorship.
[19] By a process of similar
reasoning, I conclude that s 5 also entitled the court
a
quo to place restrictions
upon the payment of pension benefits to members of the appellants’
pension funds. Even if the members
are paid less than what they are
entitled to receive, their contractual rights remain extant and are
not extinghuished by the order
of curatorship which will allow them
to claim any unpaid balance after it has been lifted. But in
preserving the trust assets of
an institution in financial distress,
it might at times be necessary to place restrictions on an outflow of
funds to avoid the institution’s
demise. This conclusion is
reinforced by the specifically authorised moratorium in respect of
legal proceedings. If the legislature
contemplated that a person
entitled to a benefit could not sue to recover benefits, it must also
have envisaged a court placing a
temporary restriction on payment of
those benefits.
[20] Accordingly, I am unpersuaded
that any of the provisions of the order of the court
a
quo
were either beyond the
court’s powers or inappropriate. The appeal must fail, with costs.
[21] I make the following order:
The appeal is dismissed with costs,
such costs to include the costs of two counsel.
____________________
L
E LEACH
ACTING
JUDGE OF APPEAL
CONCUR:
)
SCOTT JA
)
MLAMBO JA
)
HURT AJA
)
KGOMO AJA
1
An
acronym for ”Linked Investment Services Provider”.
2
S
5(6) of the FI Act.