The Supreme Court of Appeal (SCA) has dismissed an appeal by Lebashe Financial Services (Pty) Ltd to overturn the liquidation of Bophelo Life Insurance Company Limited and Nzalo Insurance Services Limited and to reinstate the curatorships.
In November 2018, the Prudential Authority (PA) obtained High Court orders placing Bophelo Life and Nzalo under provisional curatorship.
According to a report by the curator, Bophelo Life’s liabilities exceeded its assets by R58 million at the end of November 2018, and Nzalo’s liabilities were R30m in excess of its assets.
While the provisional curatorship orders were in force, the PA, in February 2019, obtained orders for the provisional liquidation of both insurers. Eventually, final liquidation orders were granted in respect of Bophelo Life and Nzalo.
Lebashe’s recapitalisation of BIG
Some background information is required to explain Lebashe’s interest in the fate of the two insurers.
Bophelo Life and Nzalo are wholly owned by Bophelo Insurance Group Limited (BIG).
Bophelo Life had deposited about 68% (R114 million) of its total assets with VBS Mutual Bank Limited. These assets were effectively lost when VBS was placed under curatorship in March 2015 and subsequently liquidated.
As a result, the PA became concerned about the financial soundness of Bophelo Life. It also had concerns about the ability of BIG to continue to fund Nzalo. In April 2018, the PA prohibited both insurers from writing new business.
Lebashe was approached to recapitalise BIG. In June 2018, it lent BIG R100m, in exchange for subscriptions by BIG for additional shares in each of the insurers.
According to Lebashe, it obtained Vele Financial Group’s 70% shareholding in BIG around this time. (The Public Investment Corporation held the remaining 30%.)
In October 2018, Lebashe recalled its loan, at which stage the capital and interest were about R106m. BIG paid R87m to Lebashe, leaving an outstanding balance of R19m.
Lebashe’s withdrawal of its capital injection resulted in the PA’s ex parte application to place Bophelo Life and Nzalo under provisional curatorship.
According to the SCA, the issues to be decided on appeal were:
- Whether Lebashe had standing to bring the appeal;
- Whether section 54(5) of the Insurance Act and the provisional curatorship orders precluded the final liquidation orders; and
- Whether the curator was required to seek or effect the recapitalisation of the insurers.
Did Lebashe have sufficient standing?
Lebashe failed to satisfy the court that it had sufficient interest in the matter “to clothe it with the required locus standi in the appeal”, as Judge Christiaan van der Merwe put it in the judgment handed down on 24 October.
The SCA accepted that Lebashe was a creditor and majority shareholder of BIG, but this was insufficient to establish a legal relationship between itself and the insurers. Lebashe had no right to a preferred legal process of dealing with the insolvency the insurers, even though it may have an indirect financial or commercial interest therein.
The appeal should have failed for this reason alone, but the court believed it was in the interests of justice to determine the remaining issues.
Were the final liquidation orders precluded?
With regard to whether the provisional curatorship orders precluded the final liquidation orders in respect of the insurers, the SCA held that the Insurance Act provides the PA, in conjunction with the Financial Institutions (Protection of Funds) Act and the Companies Act, with powers to deal with non-compliant insurers.
Similar to business rescue, the winding-up of a solvent company is effected either by the adoption and filing of a special resolution in terms of section 80, or a court order under section 81, of the Companies Act. The same applies to an insolvent company in terms of sections 343, 344 and 349 of the Companies Act.
Section 54(5) of the Insurance Act states that an insurer may not begin or enter business rescue or be wound-up while it is under curatorship, unless the curator applies for business rescue or winding-up.
The SCA said the High Court, in rejecting Lebashe’s argument that section 54(5) precluded the provisional liquidation orders, essentially reasoned that the expression “be wound-up” did not refer to the commencement of a winding-up but to the process of winding-up. It said this interpretation was not tenable.
Moreover, curatorship and liquidation cannot co-exist. It followed that by reason of section 54(5) and the terms of the provisional curatorship orders, the provisional liquidation orders in respect of the insurers should not have been granted.
The SCA found, however, that the liquidation applications were not themselves rendered null and void. The provisional liquidation orders were incompetent, but the applications for liquidation were not. By operation of law, they were stayed while the curatorships were in place. The liquidation applications could have been proceeded with once the curatorships came to an end, and that, in effect, was what happened in the High Court.
“While a final winding-up order is usually preceded by a provisional order and a rule nisi, calling upon interested parties to show cause why on the return date a final winding-up order should not be made, that is not invariably so, and valid provisional liquidation orders are not prerequisites for final winding-up orders,” Judge Van der Merwe said. Thus, the issuance of the final winding-up orders was not precluded by section 54(5) of the Insurance Act or by the provisional curatorship orders.
Did the curator have a duty to effect recapitalisation?
Lebashe submitted that the liquidation orders of the insurers were premature, as the curator had not yet reported on the steps taken to recapitalise them.
The SCA said the provisional curatorship orders conveyed that the curator had to take control of the businesses of the insurers, investigate their affairs and report to the High Court. Nothing was required regarding seeking or obtaining capital injections or long-term financing for the insurers. This accorded with the provisions of the Insurance Act, which provided the curator with wide powers to manage and investigate.
The curatorship was only a means to an end; by its nature, it would have been only a temporary measure. Its purpose was never to rescue the business of the insurer. If business rescue proceedings had been contemplated, the PA could have followed that route, the SCA said.
