The fall-out from the Fidentia disaster has had the unexpected effect of spelling out the extraordinary powers of curators. This is what came out of two court decisions, the first from the Cape High Court and the second from the Supreme Court of Appeal.
The cases were Executive Officer Financial Services Board v Ovation Global Investment Services (Pry) Ltd (Ovation Services) and Another (Ovation Preservation Pension Fund and Others Intervening) 2008 (3) SA 69 (C)) in the Cape High Court and Ovation v Executive Officer Financial Services Board (519/2007 [2008) ZAXCA 82 (2 June 2008)) in the Appeal Court. The appeal was brought by Ovation Preservation Pension Fund (first Appellant), Ovation Preservation Provident Fund (second Appellant) and Ovation Preservation Annuity Fund (third Appellant). All the Appellants are registered pension funds and each of them concluded an agreement with Ovation Services in terms of which Ovation would administer their business.
Substantial funds were invested with Ovation Services by the Appellants.
Ovation Services is a Linked Investment Services Provider (LISP). As such, its business is essentially to invest monies on behalf of its clients in various financial schemes and products. Two asset management companies with which Ovation Services was closely associated were Common Cents Investment Portfolio Strategists (Pty) Ltd (Common Cents) and Fidentia Asset Management (Pty) Ltd (Fidentia). When they ran into financial difficulties due to “administrative chaos, misappropriations and other irregularities” (para 5), this had a knock-on effect on Ovation Services – key directors and personnel resigned and the company’s liquidity was affected.
Ovation Services became plagued by financial difficulties which led to a cash crisis and a major shareholder in Ovation Services went so far as to threaten liquidation proceedings. A large insurance company stepped in and extended financial assistance. The Executive Officer of the Financial Services Board brought a curatorship application in terms of s5(1) of the Financial Institutions (Protection of Funds) Act (28 of 2001) (the FI Act).
On March 5 2007 this was granted and the Cape High Court placed the entire business of Ovation Services under curatorship. This Provisional Order was made final on June 14 2007.
On appeal, the Appellants did not seek to contest the actual decision to issue an Order of Curatorship. Rather its scope was contested. In particular, the Appellants raised three issues.
First, they contended that as their investments in the Ovation Companies constituted “trust property” they remained their property and were not the assets of Ovation Services. Following from this, it was submitted that the costs of curatorship could not be recovered from the Investors’ trust assets, as was permitted in terms of Clauses 5.8, 6 and 7 of the Order granted by the Court a quo.
Second, it was submitted by the Appellants that since the curator’s function is simply to manage the business of the company, the terms and conditions of the administration and nominee agreements remained in full force and effect. It followed that the curators were under an obligation to pay the investors whatever benefits fell due to them.
Third, and following from the second issue raised, was a separate but related issue: this was that the Appellant investors should be entitled to withdraw their investments in terms of the agreements, should as much be required and/or demanded by them. The Appellants submitted that the court a quo erred in disallowing this.
In response, Leach AJA for the Appeal Court examined the empowering legislation and noted that s 5(5)(b) and (f) of the FI Act indicate that the legislature intended to confer wide discretionary powers on courts in exercising their function to grant Curatorship Orders. The judge noted that, in light of the wide variety of institutions falling within the purview of the definition of “financial institution,” a court could not be expected to anticipate what would arise in each case and could not lay down a numerous clauses of powers and functions of curators.
Further, he held that, as the essential feature of a s5 Curatorship Order is that it vests the curator with the management and control of the business of the institution in question, such an Order will naturally impact 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.” (para 11).
On this note, Leach AJA adopted a ruthless approach in responding to the three issues.
With regard to the first, he noted that, because the FI Act leaves it up to the court to make an order regarding the currator’s remuneration and, further, that in most cases in which an Order of Curatorship is required, the institution concerned will be in poor financial shape. He pointed out that it may well be necessary to order that the costs of curatorship be paid out of the investor’s funds and that the court is indeed empowered to make such an Order. 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 … 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” (para 16).
With regard to the second and third issues raised, Leach AJA noted that, given the wide discretion bestowed on a court in terms of s5(5) of the FI Act to make an order regarding “any other matter which it deems necessary,” the legislature must have foreseen that drastic times ought to permit a court to implement drastic measures. (para 17). He could find no fault in a Curatorship Order disallowing disinvestment of investors’ funds.
Further, the restrictions placed upon the payment of pension benefits to members of the Appellant pension funds was not problematic insofar as the preservation of the trust assets during times of financial difficulty may be necessary to prevent the institution’s complete demise.
Leach AJA concluded:
“[a]ccordingly, 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” (at para 20).
The appeal was dismissed with costs.
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