Brief Summary

Medical Schemes — Winding-up — Application for winding-up of medical scheme by Registrar — Compliance with section 53(2) of the Medical Schemes Act 131 of 1998 — Registrar not required to seek prior approval of High Court before application — Medical scheme failing to meet minimum membership requirements and solvency levels — Application granted. The Registrar of Medical Schemes sought a winding-up order for Solvita Medical Scheme, which had not achieved the required minimum membership of 6,000 within three months of registration and failed to meet prescribed solvency levels. The respondent raised points in limine regarding the necessity of prior court approval and the urgency of the application, which were dismissed by the court. The legal issue was whether the Registrar was required to obtain prior approval from the High Court before filing the winding-up application and whether the application was urgent. The court held that the Registrar was not compelled to seek prior approval before launching the application and granted the winding-up order due to the Scheme's non-compliance with the Act's requirements.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings were an urgent application brought in the High Court (Witwatersrand Local Division) by the Registrar of Medical Schemes seeking, among other relief, the court’s approval to bring the application in terms of section 53(2) of the Medical Schemes Act 131 of 1998 and an order placing Solvita Medical Scheme under winding-up in terms of section 53 of the Act read with Chapter XIV of the Companies Act 61 of 1973.

The applicant was the statutory regulator (the Registrar), acting with the concurrence of the Council for Medical Schemes, and the respondent was a registered medical scheme. The dispute concerned whether the Scheme should be wound up on the basis that it was financially unsound and operating in contravention of the Act and Regulations, and whether the matter justified urgent intervention.

The matter first served in the urgent court. After hearing full argument, the court granted an order on 16 January 2009 in favour of the applicant in terms of prayers 1, 2 and 4 of the notice of motion, with reasons to follow. The present judgment provides those reasons (furnished on 24 April 2009). At the outset, the respondent raised points in limine, including objections based on the alleged absence of prior court approval under section 53(2), alleged lateness of the replying affidavit, lack of urgency, and alleged failure to notify interested parties.

The general subject-matter was the regulatory winding-up of a medical scheme under the Medical Schemes Act, considered through the winding-up framework imported from the Companies Act, with emphasis on solvency requirements, statutory compliance, and the interests of beneficiaries.

Material Facts

The respondent Scheme was registered and commenced business in January 2008 as a restricted membership scheme (as contemplated in section 1 of the Medical Schemes Act), with membership restricted to members of the Solidarity Trade Union. It enrolled its first members in January 2008 and, as at the end of October 2008, had 722 principal members and 1 866 beneficiaries, increasing to 771 principal members by December 2008.

It was common cause that the Scheme was in contravention of Regulation 2(3), which required a minimum of 6 000 members to be admitted within three months of registration for schemes established after the regulations came into operation. The Scheme did not achieve this membership threshold.

The statutory financial compliance requirements were central. Under section 35(1) of the Act, the Scheme was required at all times to maintain its business in a financially sound condition by having sufficient assets (as contemplated in section 35(3)), providing for liabilities, and conducting business so as to meet liabilities at all times. Under Regulation 29, it had to maintain accumulated funds at not less than 25% of gross annual contributions, and under Regulation 29(3A) it had to meet phased-in solvency levels, including 10% during the first year of registration. It was common cause that the Scheme did not reach the 10% solvency level in its first year and that its solvency levels were below prescribed levels.

The Scheme’s financial position, as reflected in management accounts to October 2008, included that its current liabilities it was unable to pay amounted to approximately R4,3 million, that its liabilities exceeded its assets by approximately R2,9 million, and that its solvency level was approximately -35,8%. The court accepted that projected income for late 2008 would remain below projected claims and other expenditure.

A guarantee of R4 million existed as security for the payment of the Scheme’s liabilities. That guarantee was due to lapse on 17 January 2009. A replacement guarantee should have been issued by 31 December 2008, but the Scheme failed to furnish it despite an undertaking to do so.

The Scheme had two benefit options, Kosmos and Protea, and the membership was split between them. The court accepted that, given the low membership base and the division between benefit options, the options were not self-supporting in terms of membership and financial performance and were not financially sound as contemplated in section 33(2), and were therefore liable to withdrawal under section 33(4).

A meeting took place on 23 July 2008 between representatives of the applicant and the Scheme’s representatives, at which it was common cause that the Scheme’s representatives indicated the Scheme was unable to comply with section 35(1) and that it had negative reserves. The Scheme later submitted a business plan (delivered in October 2008) explaining its failure and setting out a restructuring plan premised on significant membership growth and a cash injection.

The court treated as material that members continued to consult medical service providers on the assumption that the Scheme would pay for covered services, and providers continued to render services on the assumption of payment. The court accepted, based on the financial position and projections, that there was no hope the Scheme would be able to pay claims submitted to it.

In the interlocutory history relevant to urgency, the matter came before the urgent court on 15 December 2008 and was postponed by agreement to January 2009 on terms that included a cash injection from Solidarity, an undertaking to cover liabilities beyond the guarantee, and replacement of the guarantee by 31 December 2008. It was common cause that none of those undertakings were complied with.

In the respondent’s answering affidavit, the Scheme conceded that it was trading while liabilities exceeded assets and that this had been the position from inception, supported only by the R4 million guarantee.

Legal Issues

The court was required to determine several interrelated questions concerning procedure, statutory interpretation, and the application of statutory requirements to largely common-cause financial facts.

A central procedural and interpretive issue was whether section 53(2) of the Medical Schemes Act 131 of 1998 required the Registrar to obtain the “approval of the High Court” before issuing and serving a winding-up application, such that the absence of prior approval would render the application defective. This aspect concerned primarily a question of law (interpretation of section 53(2)).

Further procedural questions were whether the applicant’s replying affidavit had been delivered timeously (a matter of procedural compliance and case management) and whether the application was properly brought as urgent (a mixed question involving both factual assessment of risk and discretionary/value judgment about urgency).

On the merits, the principal substantive issue was whether the Scheme’s admitted and demonstrated financial condition amounted to an inability to pay debts, construed under section 53(3) as an inability to comply with section 35(1), thereby justifying winding-up under the Companies Act winding-up provisions as adapted by the Medical Schemes Act. This required the court to apply law to largely undisputed facts and to evaluate the significance of ongoing trading in circumstances of insolvency.

In addition, because section 53(3) requires consideration of the interests of beneficiaries in addition to whether it is just and equitable to wind up, the court had to make an evaluative assessment of whether winding-up would serve those interests, particularly given the effect on members’ cover and the impending lapse of the guarantee.

Court’s Reasoning

On the first point in limine concerning section 53(2), the court interpreted the provision as permitting the Registrar, with the concurrence of the Council and with the approval of the High Court, to make an application for winding-up if satisfied that it is in the interests of beneficiaries. The court rejected the respondent’s contention that this wording created a requirement of prior approval before launching the application. The court held that section 53(2), on its plain reading, did not compel the Registrar to first seek approval as a separate preliminary step before approaching the court on notice of motion.

The court also rejected reliance on sections 51(2) and 51(5)(e) of the Act. It reasoned that section 51(2) dealt with a different situation, namely where a medical scheme itself seeks leave to apply for an order including winding-up, and that the proviso requiring leave of the High Court applied in that context, not to an application brought by the Registrar under section 53. The court considered the authority relied upon by the respondent, Jacobs en Andere v Polmed Medical Fund en Andere 2001 (2) SA 502 (TPA), and distinguished it as dealing with section 51 rather than section 53, with the result that it did not govern the present procedural objection.

On the alleged late delivery of the replying affidavit, the court considered the timeline and the fact that the matter had initially been enrolled for mid-December 2008, that the applicant was ready to proceed then, and that the postponement was agreed on undertakings that were not met. In that context, the court regarded the filing of a replying affidavit in January 2009 as not unreasonably delayed and dismissed the point.

Turning to the merits and the regulatory framework, the court applied section 53(1) of the Act, which imports Chapter XIV of the Companies Act 61 of 1973, and noted that the Registrar is deemed to be a person authorised under section 346 of the Companies Act to bring a winding-up application. The court accepted as common cause that the deponent to the founding affidavit was authorised and that concurrence of the Council had been obtained, establishing procedural competence to bring the application.

The court then evaluated the Scheme’s financial condition against the statutory requirements. It accepted as common cause that the Scheme failed to meet the minimum membership threshold under Regulation 2(3) and failed to achieve the phased-in solvency level under Regulation 29(3A). It accepted that the Scheme’s liabilities exceeded its assets by a substantial margin and that its solvency was significantly negative. The court treated as significant that the Scheme continued trading while insolvent, thereby exposing members to the risk of unpaid claims and exposure to claims by providers, and exposing providers to financial risk by rendering services without realistic prospect of payment.

The court also took into account the guarantee securing liabilities and the imminence of its expiry on 17 January 2009, coupled with the Scheme’s failure to replace it despite undertakings. The court considered this factor central to both urgency and the practical protection available to meet claims. It reasoned that if liquidation were not granted before expiry, there would be no security for payment of claims.

In addressing whether the Scheme’s business plan and revised business plan justified allowing it to continue, the court assessed the projected membership growth assumptions as unsupported by evidence, particularly given the Scheme’s repeated downward revisions of prior projections and the then-current membership figures. The court found the projections speculative and noted that even if increased membership were achieved, it did not necessarily follow that the Scheme would reach statutory solvency requirements or escape its current insolvency. The court also regarded aspects of the revised plan—such as moving towards self-administration without provision for re-insurance—as reinforcing concerns about non-healthcare costs and risk exposure in a small risk pool.

A key legal conclusion on the merits was that, for purposes of the relief sought, the relevant question was not whether the Scheme might later become compliant, but whether, as at the date of hearing, it was in contravention of section 35. The court held that contravention had been established, and that there was accordingly no reason not to grant a winding-up order.

On urgency, the court considered the history of the December postponement and the failure to comply with agreed undertakings, particularly the replacement of the guarantee. The court found it difficult to accept the Scheme’s argument that the matter lacked urgency in light of the agreed mechanism permitting re-enrolment if the guarantee was not replaced. The court also rejected an argument that the applicant delayed unreasonably after the Council’s approval, noting that the resolution attached to the founding papers showed approval had been passed on 9 December 2008, and that the application was brought timeously thereafter.

On the objection that members, beneficiaries, and Solidarity had not been given notice, the court held that Solidarity had participated in negotiations, including undertakings to inject funds and to address guarantee-related issues, and further held that there was no legal requirement that the application be served on members and/or beneficiaries.

Finally, applying section 53(3), the court construed “inability to pay debts” as inability to comply with section 35(1) and considered the interests of beneficiaries. While recognising that liquidation would leave members without cover under the Scheme, the court reasoned that members could join other schemes or be transferred with any medical savings account balance, and that claims would be settled by the existing guarantee due to lapse. On the facts as accepted, the court concluded that winding-up and the appointment of a liquidator on an urgent basis would protect beneficiaries and was in their interests.

Outcome and Relief

The court granted judgment in favour of the applicant in accordance with prayers 1, 2 and 4 of the notice of motion, which included the court’s approval contemplated in section 53(2) and an order placing the respondent medical scheme under winding-up in terms of section 53 of the Medical Schemes Act 131 of 1998, read with Chapter XIV of the Companies Act 61 of 1973.

The court further ordered that the respondent pay costs, including the costs occasioned by the postponement of 15 December 2008 and the costs of employing two counsel.

Cases Cited

Jacobs en Andere v Polmed Medical Fund en Andere 2001 (2) SA 502 (TPA)

Legislation Cited

Medical Schemes Act 131 of 1998 (sections 1, 33(2), 33(4), 35(1), 35(3), 35(9), 51(2), 51(5)(e), 53(1), 53(2), 53(3))

Companies Act 61 of 1973 (Chapter XIV; section 346)

Rules of Court Cited

Rules of the High Court (referred to in section 51(2) regarding security for costs, without identification of a specific rule number)

Held

The court held that section 53(2) of the Medical Schemes Act did not require the Registrar to obtain the High Court’s approval as a separate prior step before issuing and serving a winding-up application, and that the respondent’s reliance on section 51 and authority addressing section 51 was misplaced. The court held further that the replying affidavit was not filed with an unreasonable delay in the circumstances, that the matter was properly urgent, and that there was no legal requirement to serve the application on members and beneficiaries.

On the merits, the court held that the Scheme was hopelessly insolvent and unable to comply with section 35(1), that it continued trading while liabilities exceeded assets, and that its projections of recovery were speculative and unsupported. Applying section 53(3), the court concluded that winding-up was warranted and that it was in the interests of beneficiaries for a liquidator to be appointed urgently, particularly given the impending lapse of the guarantee that provided security for liabilities.

LEGAL PRINCIPLES

The judgment applied the principle that the winding-up of a medical scheme under section 53 of the Medical Schemes Act proceeds through the incorporation of Companies Act winding-up provisions, and that the Registrar is empowered to bring such proceedings as a person deemed authorised under section 346 of the Companies Act 61 of 1973, provided the Registrar acts with the concurrence of the Council and obtains the court’s approval in the course of the application.

In applying section 53(3), the judgment reinforced that, in the medical-scheme context, the concept of “inability to pay debts” is statutorily adapted and must be construed as an inability to comply with section 35(1) of the Medical Schemes Act. The inquiry therefore focuses on whether the scheme is maintaining its business in a financially sound condition and able to meet liabilities as required by section 35, rather than on an orthodox commercial insolvency test in isolation.

The judgment further applied the principle that, once contravention of section 35 is established on the facts at the time of hearing for purposes of the relief sought, the court’s task is not to conduct an extended speculative inquiry into whether future improvements might occur, particularly where ongoing trading exposes beneficiaries and third-party providers to material risk. In addition, the judgment applied section 53(3)’s requirement that the court consider the interests of beneficiaries alongside any “just and equitable” considerations, and treated the protection of members and the containment of further prejudice as central to that evaluation.

Registrar of Medical Schemes v Solvita Medical Scheme (2008/02548) [2009] ZAGPJHC 43 (24 April 2009)