Executive Officer, Financial Services Board v Dynamic Wealth Ltd and Others

• Jurisdiction: South Africa
• Judge: Harms AP, Van Heerden JA, Malan JA, Wallis JA and Petse AJA
• Judgment Date: 15 November 2011
• Citation: 2012 (1) SA 453 (SCA)
• Docket Number: 888/10 [2011] ZASCA 193
• Hearing Date: 31 October 2011
• Counsel: WH Trengove SC (with EC Labuschagne SC) for the appellant. NGD Maritz SC (with APJ Els) for the respondents.
• Court: Supreme Court of Appeal

Wallis JA (Harms AP, Van Heerden JA, Malan JA and Petse AJA concurring): A

[1] Ever since the bursting of the South Sea Bubble in 1720 governments have recognised the need, in the interests of the investing public, B for regulation of the financial-services industry. The present appellant, the executive officer of the Financial Services Board (the FSB), in his capacity as registrar of various financial institutions (the registrar), [1] is the principal regulator of the financial industry in South Africa. [2] The various statutes regulating the industry vest in the registrar a range of powers of which two are relevant for the purposes of this appeal. They are the C power to instruct inspectors in terms of s 3 of the Inspection of Financial Institutions Act 80 of 1998 (the Inspection Act) to inspect the affairs of a financial institution or associated institution and the power to apply to the High Court for the appointment of a curator or curators to take control of and manage the whole or any part of the business of a financial institution in terms of s 5(1) of the Financial Institutions (Protection of D Funds) Act 28 of 2001 (the FI Act).

[2] On 9 April 2008 the registrar appointed a team of inspectors under the leadership of Mr Barend Bredenkamp to investigate the affairs of the first respondent, Dynamic Wealth Ltd (Dynamic Wealth) and its E associated companies, including the second to fifth respondents (the Dynamic Wealth group). The scope of the inspection was expanded in July 2008 and the inspectors produced their final report on 15 September 2009. [3] Thereafter, and on the basis of the contents of the report, the registrar applied to the North Gauteng High Court, Pretoria, for the F appointment of curators to the business of the present respondents and certain entities referred to in the report as associations. The application came before De Vos AJ who dismissed it on technical grounds relating to the admissibility of the evidence underlying the report, without considering the merits of the registrar's concerns about the operations of the Dynamic Wealth group. This appeal comes to us with the leave of the G court below.

Curatorship under the FI Act

[3] The statutory provisions in terms of which the registrar may apply for H the appointment of a curator to a business falling within his regulatory

Wallis JA (Harms AP, van Heerden JA, Malan JA and Petse AJA concurring)

jurisdiction are contained in s 5 of the FI Act and read, in material part, A as follows:

'(1) The registrar may, on good cause shown, apply to a division of the High Court having jurisdiction for the appointment of a curator to take control of, and to manage the whole or any part of, the business of an institution. B

(2) Upon an application in terms of subsection (1) the court may —

(a)

provisionally appoint a curator to take control of, and to manage the whole or any part of, the business of the institution on such conditions and for such a period as the court deems fit; and

(b)

simultaneously grant a rule nisi calling upon the institution and C other interested parties to show cause on a day mentioned in the rule why the appointment of the curator should not be confirmed.

(3) On application by the institution the court may anticipate the return day if not less than 48 hours' notice of such application has been given to the registrar.

(4) If at the hearing pursuant to the rule nisi the court is satisfied that D it is desirable to do so, it may confirm the appointment of the curator.'

[4] The registrar must therefore satisfy the court that there is good cause to appoint a curator. [4] Reading ss (1) together with ss (4), that means that the court must be satisfied on the basis of the evidence placed before it that it is desirable to appoint a curator. Something is desirable if it is E 'worth having, or wishing for'. [5] The court must assess whether curatorship is required in order to address identified problems in the business of the financial institution. It assesses this in the light of the interests of actual or potential investors in the financial institution, or investors who have entrusted or may entrust the management of their investments to it. It must determine whether appointing a curator will address those F problems and have beneficial consequences for investors. It must also consider whether there are preferable alternatives to resolve the problems. Ultimately what will constitute good cause in any particular case will depend upon the facts of that case. I take heed of what Innes CJ said, [6] in regard to any attempt to define the content of the expression 'good cause', that: G

Wallis JA (Harms AP, van Heerden JA, Malan JA and Petse AJA concurring)

A 'In the nature of things it is hardly possible, and certainly undesirable, for the court to attempt to do so. No general rule which the wit of man could devise would be likely to cover all the varying circumstances which may arise in applications of this nature. We can only deal with each application on its merits, and decide in each case whether good cause has been shown.'

B The potentially complex circumstances that may exist in regard to the operations of a financial institution render it undesirable to try and define further what will constitute good cause for the grant of such an order.

C [5] In the court below the respondents relied on the judgment in Ex parte Executive Officer of the Financial Services Board: In re Joint Municipal Pension Fund, [7] where it was held that s 5 'does not suggest a test which is more lenient than that set by the common-law for the removal of trustees' and the court consequently applied in relation to s 5(1) of the FI Act the approach to the removal of trustees laid down by this court in D Sackville West v Nourse and Another. [8] That test is broadly whether the trustees have endangered the trust property by their acts or omissions or shown a want of honesty, fidelity or capacity to perform their duties. Lack of honesty or capacity on the part of the financial institution and those responsible for managing its affairs will ordinarily justify the E appointment of curators to manage its business under s 5(1) of the FI Act. To that extent it is correct to say that circumstances warranting the removal of trustees of a trust, whether testamentary or inter vivos, [9] would, if present in relation to a financial institution, ordinarily justify the grant of an order for the appointment of curators. However, it by no means follows that the power of a court to make such an order is limited F to that class of case and in my view the analogy with the removal of trustees leads to an approach to s 5(1) that is too restrictive.

[6] The appointment of curators under s 5(1) may be appropriate even where the funds under administration are not shown to be at risk. Take an institution that is unlicensed and not qualified to be licensed, because G those responsible for its management are disqualified from obtaining a licence. It can hardly matter that it demonstrates that the funds invested with it are properly segregated and identified, [10] invested in accordance with the mandates given by investors and entirely safe. The inability or unwillingness of the institution to comply with regulatory requirements applicable to protected funds itself provides a reason for appointing a H curator. Where there is uncertainty whether the funds of investors are at

Wallis JA (Harms AP, van Heerden JA, Malan JA and Petse AJA concurring)

risk it may be desirable in order to safeguard the interests of investors to A appoint a curator. In argument the example was put of the registrar being furnished with an adverse report by inspectors where management disputes the factual contents and conclusions of that report. Both counsel accepted, and rightly so in my view, that it might be proper for a curator to be appointed notwithstanding the dispute. The existence of B an adverse report by inspectors after conducting an inspection under the Inspection Act may of itself provide legitimate grounds for concern and found an application for an interim curatorship, even if its conclusions are disputed. When dealing with the investment of the funds of the public, where considerable hardship will be suffered by ordinary people C if things go wrong, the registrar cannot be expected to resolve factual disputes by litigation before obtaining an order appointing a curator. Provided the court is satisfied that the registrar's concerns are legitimate and that the appointment of a curator will assist in resolving those concerns it will ordinarily be appropriate to grant an order. D

Admissibility of report and its annexures in evidence

[7] The registrar sought the appointment of curators on the basis of a detailed report concerning the activities of the Dynamic Wealth group furnished by the inspectors. That report ran to 421 paragraphs and 169 pages and had annexed to it some 2000 pages of documents E contained in 110 annexures. It set out a number of facts, based on those documents, in each instance identifying in the footnotes the source of those facts. It concluded that the Dynamic Wealth group was in material breach of no less than five regulatory statutes; that in administering the investments entrusted to it there was inadequate identification of the interests of the investors in those investments and no proper control by F means of regular audits; that it had restructured one portfolio without consulting investors, thereby altering the very basis of their investments; and that in certain respects the funds were at risk.

[8] After considering the report the registrar brought the present application in relation to the business of the Dynamic Wealth group and the G associations, whose funds it administered. The value of the investments involved in...