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[2009] ZAGPPHC 102
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Executive Officer of the Financial Services Board v New Era Life Insurance Company Limited and Others (40043/2009) [2009] ZAGPPHC 102 (3 September 2009)
IN
THE HIGH COURT OF SOUTH AFRICA
(NORTH
GAUTENG HIGH COURT, PRETORIA)
CASE
NO: 40043/2009
DATE:
3 September 2009
In
the matter between:
EXECUTIVE
OFFICER OF THE FINANCIAL SERVICES
BOARD
Applicant
and
NEW
ERA LIFE INSURANCE COMPANY LIMITED
1
st
Respondent
SANDI
MAJALI
2
nd
Respondent
KRUMCHUND
HARIPARSHAD
3
rd
Respondent
NDABAZINHE
CECIL LLOYD MTSHALI
4
th
Respondent
PERMIT
GROUP 2 (PROPRIETARY) LIMITED
5
th
Respondent
With
HENDRIK
AUGUSTYN NO
Curator/Interested
Party
OCTAVIA
MATLOA NO
Curator/Interested
Party
JUDGMENT
HARTZENBERG
J
The
applicant, acting in terms of section 5(1) of the Financial
Institutions (Protection of Funds) Act, No. 28 of 2001 ("the
FI
Act") applied
ex
parte
for
the appointment of curators to take control of and to manage the
whole of the business of the first respondent ("New Era").
On 7 July 2009 an order for the provisional appointment of Mr. H
Augustyn and Ms. O Matloa, as curators and the removal of New
Era's
directors from authority was granted, with a return day. 1 September
2009. The provisional order, with interim effect, authorized
the
curators to take control of and manage the business of New Era and
set out their powers. The court granting the judgment
mero
motu
made
orders in terms of sections 416 and 417 of the Companies Act,
paragraphs 11 to 19 of the order. The applicants does not persist
with those orders and only proceed to have paragraphs 1 - 10 of the
order confirmed.
New
Era is a long-term insurer in terms of the Long Term Insurance Act
("the LTIA Act") Act No. 52 of 1998 and a financial
institution in terms of the Financial Boards Act, No. 97 of 1990, as
well as the FI Act. The main portion of its business consist
of
funeral policies. It has provided insurance products to members of
the lower income groups for approximately 30 years. 5% of
the shares
of New Era are owned by Limpopo Economic Development Enterprise
("Limdev"), which is owned by the Limpopo
government. The
other 95% of the shares are owned by Permit Group 2 (Pty.) Ltd
(Permit Group), a wholly owned subsidiary of Imvume
Resources (Pty.)
Ltd ("Imvume Resources"). The second respondent, Mr. Sandi
Majali, is the non executive chairman of
the board of directors of
New Era. The third respondent, Mr. Hariparshad, and the fourth
respondent, Mr. Mtshali, are both directors
of New Era.
The
applicant relied on an inspection report to persuade the court that
good cause existed to grant the
ex
parte
order.
The report is dated 29 June 2009. Preceding the report there was a
letter, dated 16 September 2008, written by the applicant
to New Era
and addressed to the second respondent in which certain concerns were
raised. It referred to an on-site visit to New
Era's offices, dated 9
April 2008. The applicant required a capital injection in New Era of
at least R15 million. There was a requirement
that a cession of an
African Life policy to Absa Bank in an amount of R15 million be
cancelled and that the cancellation be confirmed.
There was a request
for the financial statements of Invume Resources for the last three
years. There were a number of other requests.
There
was interaction between the applicant and the directors of New Era,
after the letter of 16 September 2008. and before the
application was
lodged. The directors had succeeded by April 2009 to have the cession
of the policy in the amount of R15 million
in favour of Absa Bank and
five subsequent cession of further amounts cancelled. The directors
tried to comply with the requirements
of the applicant.
When
the application was brought on 7 July 2009. on an urgent basis, the
main concerns raised by the applicant were: That the second
respondent effectively controls 95% of the shares in New Era, and
that that constitutes a contravention of section 26 of the LTI
Act.
(It provides that no one person will be entitled to acquire or hold
shares that will give it control over a long term insurer,
without
the approval of the applicant). That the second respondent ceded a
Liberty Life policy and a Sanlam policy, some of the
main assets of
New Era, to Absa as security for overdraft facilities of Invume
Resources and in the papers represented that he
was the sole owner of
95% of the shares in New era. That New Era declared dividends in
amounts of R33 million. R7 million during
the 2007 tax year, and a
third dividend of R7 million during the 2008 tax year and that the
amounts ended up in the pocket of Invume
and not of Permit Group and
Limdev. It was alleged that there were no meetings of directors
authorizing the payment of the dividends.
The
second to the fourth respondents became aware of the order of 7 July
2009 on 8 July 2009 when the curators turned up at New
Era
headquarters and took over the administration. The period between the
provisional order and the return day was approximately
8 weeks. On 14
August 2009 the respondents gave notice that they intended to
approach the court on 17 August to have the provisional
order
reconsidered in terms of Rule 6 (12). They filed bulky papers and
complained bitterly that the provisional order was obtained
without
notice to them and that the application was not urgent. The court
refused to entertain the application and postponed it
sine
die.
Thereafter
and on the same papers the respondents on 25 August 2009 attempted to
anticipate the return day. It was arranged with
the Deputy Judge
President that the matter would be heard by me on 1 and 2 September
2009.
The
curators have filed an interim and a further report in terms of the
provisional order. I shall deal with what is relevant therein
for the
purposes of this judgment, after I have outlined the respondents'
stance.
The
respondents have a number of arguments:
1.
They say that if the applicant had given notice to them of the
application on 7 July 2009, as he should have, they would have
opposed the application and the order would not have been granted.
2.
The say that the matter was not urgent and that the applicant was not
entitled to employ other periods of time as those prescribed
by the
Rules, and should have served in terms of the Rules.
3.
It is their contention that there was information available to
the applicant, which if disclosed to the court, would have
led to the
application being dismissed.
4.
There were other remedies available to the applicant such as to
direct New Era in terms of section 22 of the LTI Act to remove
the
second defendant from the board of directors.
5.
They deny that the corporate governance of New Era is not
conducted properly.
6.
They allege that they co-operated in every respect with the
applicant and that whatever requirements he imposed they complied
with.
7.
One
of their big concerns is that the curators cannot conduct the
business of New Era as well as they can, and that the goodwill
of the
company diminishes as a result of the order.
8.
The
costs of the curators are high, and an unnecessary burden on the
company.
9.
They
have produced evidence that if the curatorship is set aside New Era
will gain business from the SOUTH AFRICAN FUNERAL PRACTITIONER'S
ASSOCIATION ("SAFPA'*) of approximately R130 million per year.
In
my view it is important to look at the whole course of events that
led to the bringing of the urgent application. There is evidence
that
it was at all times a source of concern of the applicant exactly what
the shareholding of Permit Group 2 was. The applicant
by letter
during 2004 granted permission to Invume to obtain 33% of the shares
in Permit group. The acquisition of 66% of the shares
by Neotel. I
was contemplated. It is so that the respondents' attorney wrote to
the applicant, during 2007, that Invume held a
majority share of 57%
but there is no indication that that was ever approved and there is
certainly no shred of evidence of approval
by the applicant of the
acquisition of 100% of the shares.
It
was evident to the applicant that the second respondent had
encumbered the major asset of New Era by ceding it to Absa, holding
out that he is the sole share holder of New Era. The available
evidence indicated that there were very few directors' board meetings
and minutes thereof. The financial statements of New Era for 2008
were in draft form only. The auditors were not prepared to give
unqualified statements. It is so that there was a cancellation of the
cessions of the Liberty Life and Sanlam policies.
That
was the position when the applicant received the inspection report on
29 June 2009. The most disturbing information evidencing
itself was
that it is impossible to get reliable information about Invume. There
are until today not any audited financial statements.
The information
supplied the inspectors was that Invume is involved in a tax dispute
with the Receiver of Revenue and that it is
impossible for the
auditors to certify the financial statements. What is more disturbing
is that the dividends of R47 million ended
up in the pockets of
Invume. It was known that the second respondent, who seems to own
Invume, did not have any problem earlier
to indicate to Absa that he
was the sole shareholder of New Era. Even if he owns all the shares
in Permit Group 2 it was still
a misrepresentation as it is common
cause that Limdev at all relevant times owned 5% of the shares.
Although dividends of R47 million
were channelled to Imvume the 5%
shareholder was not paid its proportionate share of the dividends.
It
is clear from the relevant legislation that the applicant has an
important function to monitor the governance and assets of financial
institutions for the protection and benefit of investors and in this
case policy holders. In my view the applicant would have failed
in
his duty if he did not approach the court as early as possible after
29 June with an application like this one. It is clear
that section 5
of the FI Act contemplates an
ex
parte
application,
hence the provision for anticipation of the return day. At least the
applicant had reason to suspect the respondents
of strange if not
dishonest dealings. In the circumstances I reject the emotional
attack against the bringing of the application,
ex
parte
and
the argument that it was not urgent at the time. Until the applicant
had the inspection report it may have encountered opposition
on the
basis that the application is based on speculation.
It
is difficult to understand why the respondents waited for six week
before it attempted to have the order reconsidered or the
return day
anticipated. If they were prejudiced one would have expected an
approach to this court within a week or two after the
order was made.
The position is that the applicant was concerned about the position
of New Era but that it was doubtful if it could
persuade a court to
intervene. Moreover it afforded an opportunity to the respondents to
meet with his requirements. When the inspection
report became
available it had a duty to act. I cannot fault the conduct of the
applicant on that score.
In
this connection it is important to bear in mind that the respondent
accuse the applicant
of
mala fides
and
ask for punitive cost order against the applicant. I have invited Mr.
Nowitz to indicate to me the ulterior motive which caused
the
applicant to act
mala
fide.
None
was proffered. The applicant says that he brings this application to
safeguard the rights of policy holders. It is one of his
duties. I am
at a loss to perceive any
mala
fide
conduct
on the part of the applicant.
The
submission that the applicant should have resorted to less drastic
action is also without merit. The applicant afforded the
respondent
ample time to get their house in order. They failed to do so. When
the inspection report became available the applicant
was compelled to
act. The action that he took was specifically provided for in the FI
Act.
I
am satisfied that the books of New Era indicate that the management
did not apply proper corporate governance. To mention a few
aspects:
There were a mere six board meetings of the board of directors over a
period of more than three years There was never
an annual general
meeting. Dividends according to the articles of association have to
be approved on an annual general meeting.
The respondents*
explanation of directors' meetings on a round robin basis cannot
possibly rectify this serious defect in the governance
of New Era.
What is most disturbing in this connection is the payment of the
dividends. The respondent refers to New Era's statements
ending June
2007 and to an actuarial recommendation that a dividend of R44
million can be declared but that for sake of safety
it should be
restricted to R40 million. It indicates that the recommendation can
even be interpreted to justify a dividend of as
much as R48 million.
The argument is that the dividends of R33 million and R7 million paid
out during the 2007 tax year, as well
as the dividend of R7 million
paid out in the 2008 tax year fell within the recommendation.
There
are a number of Haws in the argument. It is a fact that dividends of
R 47 million were paid to 95% of the shareholders. 100%
of the
dividends would be an amount in excess of R49.35 million. That is
higher than even the respondents' fanciful interpretation
of the
actuarial recommendation. It cannot be argued that R7 million was
only paid out in the subsequent tax year because the uncertified
statements for that year indicate a nett loss of Rl 1,4 million which
eliminates a suggestion that the last R7 million was paid
out of
profits of the 2008 tax year. Moreover the payment of dividends was
never approved by an annual general meeting. As to the
last R7
million there is absolutely no evidence of any resolution sanctioning
the payment. More than R5 million of that R7 million
was paid to the
Receiver of Revenue on behalf of Imvune.
It
is possible that New Era will draw more business if it is not under
curatorship. Unfortunately it has only itself to blame if
that
business does not come its way. Bearing in mind that the 2008 tax
year indicates a loss of over Rll million one wonders what
the nett
result of the extra R130 million turnover will be. Will it be
administered on a profitable or a
loss
basis?
In
my view the applicant's reservations about the shareholding is well
founded. The respondents did not try to indicate who or what
Invume
is and what assets it has. It is clear that it regarded New Era as
its asset with which it could do as it pleased by encumbering
the
policies and by paying dividends to itself forgetting about Limdev.
It is clear that there must be a change in the shareholding
of Permit
Group 2 to the satisfaction of the applicant with the guidelines of
section 26 in mind. The applicant must be satisfied
that the
shareholding is such that there will not be a situation where one
shareholder can deal with the assets of the company
to the detriment
of other shareholders or without the approval of the other
shareholders to the detriment of the policy holders.
In my view the
request for an extension of the curatorship for six months is in
order, to enable the respondents to get their house
in order.
The
second, third and fourth respondent were not justified with their
scathing attack upon the
bona
fides
of
the applicant. He is after all a public officer with a public duty
which he has done to the best of his ability. The request
for costs
against him on the attorney and client scale was. to say the least,
outrageous. As a mark of my disapproval I shall order
them to pay the
applicant's cost on that scale. New Era is not to be mulcted with
those costs.
The
applicant complied with the directions of service of the order of 7
July 2009, as contained therein.
The
following order issues:
Paragraphs
1 - 10 of the order of 7 July 2009 are confirmed
Paragraphs
11 - 19 of the order of 7 July 2009 are set aside.
3. The
matter is postponed to 2 March 2010 so that the respondents can
comply with what has been suggested in this judgment.
4. The
curators are to file a report on or before 16 February 2010 reporting
to the court what the position in the company is and
what steps had
been taken to achieve an acceptable holding of shares in the company.
5. The
second, third and fourth respondents are ordered, jointly and
severally to pay all the applicant's costs of the application,
to
date, on the scale as between attorney and client.
W
J
HARTZENBERG
HEARD
ON
:
1
September 2009
ON
BEHALF OF THE APPLICANT
Counsel
: DAPREIS(SC) KKORF
Instructed
by : ROOTH WESSELS MOTLA CONRADIE INCORPORATED
ON
BEHALF OF THE RESPONDENTS
Counsel
: M NOWITZ
E
B CLAVIER
Instructed
by : BARRY AARON & ASSOCIATES