Bophelo Life Insurance Company Limited (Bophelo) and Nzalo Insurance Services Limited (Nzalo) (collectively, the Insurers) were insurance companies wholly owned by Bophelo Insurance Group (BIG). BIG’s majority shareholder (70%) was Vele Financial Group (Pty) Ltd (Vele), who was also a shareholder in VBS Mutual Bank Limited (VBS). Bophelo deposited about 68% of its total assets with VBS, and VBS being placed in final liquidation, resulted in Bophelo’s funds being “effectively lost”. At that stage the Prudential Authority (a juristic person that operates within the administration of the South African Reserve Bank) became concerned about Bophelo’s financial health. Naturally, the Prudential Authority also became concerned about BIG’s ability to continue funding Nzalo because of its majority shareholder effectively losing its stake in VBS and its wholly owned subsidiary losing 68% of its assets.
Section 36(1) of the Insurance Act No.18 of 2017 (Insurance Act) provides that “An insurer must at all times maintain its business in a financially sound condition, by holding eligible own funds that are at least equal to the minimum capital requirement or solvency capital requirement, as prescribed, whichever is the greater.’ In light of this section and concerns around BIG’s ability to fund the Insurers, the Prudential Authority informed BIG and the Insurers that it required them to show proof that an amount of at least R100 million was immediately available to meet the Insurers’ capital requirements. Lebashe Financial Services (Pty) Ltd (Lebashe), an investment holding company, was approached to recapitalize BIG. Lebashe acquired Vele’s 70% shareholding in BIG and entered into a loan agreement in terms of which Lebashe lent and advanced the capital sum of R100 million to BIG. Ultimately, the funding of R100 million was provided in the form of shareholder loans between BIG and the Insurers.
In October 2018, the Prudential Authority was informed that Lebashe had withdrawn its capital contribution because of various issues identified during a due diligence exercise. Consequently, the Prudential Authority approached the High Court on an urgent basis for orders placing the Insurers under provisional curatorship in terms of section 54(1)(a) of the Insurance Act. The High Court granted the orders sought.
Paragraph 5 of the order in the Bophelo application stated that (the Nzalo order contained an identical provision):
“Pending the return day of this order, all actions, proceedings, the execution of all writs, summonses and other processes against Bophelo, including any proceedings before the Commission of Conciliation, Mediation and Arbitration, are hereby stayed and are not to be instituted or proceeded with, without the leave of this Court.”
A report compiled by the curator, indicated that the Insurers were facing major financial difficulties and had bleak future prospects. It was on that basis that the Prudential Authority applied for the provisional liquidation of the Insurers. Lebashe applied for leave to intervene in the liquidation applications, which leave was granted by agreement between the parties.
Lebashe did not dispute that the Insurers were insolvent, instead it contended that section 54(5) of the Insurance Act precluded provisional liquidation orders to be granted against companies under curatorship. Lebashe also argued that paragraph 5 of the provisional curatorship orders also precluded applications for winding up.
Section 54(5) of the Insurance Act states that an insurer or controlling company may not “begin or enter business rescue or be wound-up while under curatorship…unless the curator applies for the business rescue or winding-up”.
The High Court rejected Lebashe’s contention that section 54(5) of the Insurance Act rendered provisional liquidation orders incompetent and proceeded to confirm the orders.
Lebashe was granted leave to appeal to the Supreme Court of Appeal (SCA) by the High Court.
Lebashe’s locus standi
The first issue that the SCA considered was Lebashe’s locus standi. Lebashe was a creditor and majority shareholder of BIG, the holding company of the Insurers, there was no legal relationship between Lebashe and the Insurers. The SCA held that Lebashe’s commercial/financial interest was too indirect to give it the requisite locus standi in the appeal. The SCA held that the leave to intervene in the liquidation application and leave to appeal the High Court judgment should have never been granted.
Despite the adverse finding in respect of locus standi, the SCA was of the view that it was in the interests of justice to determine the remaining issues.
Was final liquidation precluded by the curatorship?
The SCA rejected the assertion of the court a quo that section 54(5) did not refer to the commencement of winding-up but rather to the process of winding-up. It would not make sense to only allow the commencement of winding up process but prohibit the actual process of winding up.
Additionally, the SCA held that if a company is placed under curatorship in terms of section 54(5) of the Insurance Act, only the curator may apply for a winding-up order, which meant the Prudential Authority did not have locus standi to apply for the Insurers’ winding up.
The SCA also noted that the powers and duties of curators and liquidators cannot co-exist as there would be uncertainty as to who has the duty to take control of the assets of the company if the company is simultaneously under curatorship and liquidation. It follows that by the curator applying for liquidation of the company, the curator also voluntarily relinquishes their powers, which would not be the case if a third party applied for the liquidation of the company under curatorship.
Notwithstanding the above, the SCA still had to deal with the conflict between section 54(5) and 57(1) of the Insurance Act. Section 57(1) of the Insurance Act provides, inter alia, that the Prudential Authority is deemed to be a person authorised under the Companies Act to make an application to court for the winding-up of an insurer or a controlling company. The SCA held that in this instance the special provision will limit the general provision. Therefore, although the Prudential Authority is empowered to apply for the liquidation of an insurer in terms of the Companies Act, in instances where the insurer is under curatorship only the curator is permitted to apply to court for a liquidation order.
The SCA therefore held that in terms of section 54(5) and paragraph 5 of the provisional curatorship orders, the provisional liquidation orders should not have been granted. However, the SCA also found that paragraph 5 of the provisional curatorship orders and section 54(5) of the Insurance Act did not prohibit the institution of liquidation proceedings but rather the commencement of business rescue or winding-up by resolution or a court order. As a result, the application for liquidation was not null and void, rather the proceedings were stayed by operation of law while the curatorship orders were in place.
Duty on the curator to effect recapitalisation
The SCA held that the curatorship orders did not place any obligation on the curator to obtain capital injections or long-term financing for the Insurers. Their obligation was merely to take control of the Insurers, investigate the business and report to the High Court on various issues. The curator therefore had no duty to affect any recapitalisation of the Insurers.
Finally, the SCA held that curatorship was only a means to an end and should not be viewed as a tool to rescue the businesses of the Insurers.
The SCA therefore dismissed the appeal with costs.
In summary, it appears that while an insurer is under curatorship, liquidation proceedings may be instituted, however, the proceedings will automatically be stayed by operation of law until such time as the curatorship is discharged.