THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

JUDGMENT
Reportable
CASE NO 519/2007
In the matter between
OVATION PRESERVATION PENSION FUND

First Appellant
OVATION PRESERVATON PROVIDENT FUND

Second Appellant
OVATION PRESERVATION ANNUITY FUND

Third Appellant
and
EXECUTIVE OFFICER OF THE FINANCIAL
SERVICES BOARD

Respondent

Coram:
Scott, Mlambo JJA and Hurt, Leach, Kgomo AJJA
Heard:
21 MAY 2008
Delivered:
02 JUNE 2008

Summary:
Appointment of a curator to take control and management of an institution under
s 5 of the Financial Institutions (Protection of Funds) Act 28 of 2001 – court having a wide
discretion and entitled to order that the costs of curatorship be defrayed from the assets of
investors held by the institution – court further entitled to restrict payments to investment
beneficiaries and disinvestment from the institution under curatorship.

Neutral citation:
Ovation v Executive Officer Financial Services Board
(519/2007) [2008] ZASCA 82 (02 JUNE 2008)

___________________________________________________________

LEACH AJA

[1] On 2 March 2007 the Cape High Court granted a provisional order in
terms of s 5(2) of the Financial Institutions (Protection of Funds) Act 28 of 2001
(the “FI Act”) placing the whole of the businesses of two companies known as
Ovation Global Investment Services (Pty) Limited (“Ovation Services”) and
Ovation Global Investment Nominees (Pty) Limited (“Ovation Nominees”) under
curatorship. Despite a number of intervening parties, including the three
appellants, having opposed certain aspects of the relief sought, the provisional
order was confirmed on 14 June 2007, albeit with certain amendments
suggested by counsel.  That judgment is now reported as Executive Officer
Financial Services Board v Ovation Global Investment Services (Pty) Limited &
Another (Ovation Preservation Pension Fund and Others Intervening) 2008 (3)
SA 69 (C). The appeal is with the leave of the court a quo.

[2] While not seeking to contest the decision to issue an order of curatorship,
the three appellants contend that certain terms of the order had been beyond the
authority of the court a quo and amount to a restriction on their rights not
authorised by the FI Act.

[3] Ovation Services is what is known in the financial world as a “LISP”,1
which conducts business by investing moneys on behalf of its clients in various
investment schemes and financial products. To the benefit of its clients, it “bulks”
or aggregates the funds invested with it when buying or selling financial products.
However, the investment of each client is administered separately with a detailed
record of investments being maintained and regular investment statements being
issued to the client.

[4] Investments made by a LISP are typically channeled through a nominee
company.   In the case of Ovation Services, its nominee was its fully owned

1 An acronym for ”Linked Investment Services Provider”.

subsidiary, Ovation Nominees. Both Ovation companies were closely associated
with two asset management companies, Common Cents Investment Portfolio
Strategists (Pty) Limited (“Common Cents”) and Fidentia Asset Management
(Pty) Limited (“Fidentia”). In particular, substantial cash investments made by
clients of Ovation Services were placed through Ovation Nominees in a cash
portfolio administered by Common Cents.

[5] It is unnecessary for present purposes to analyse precisely what went
wrong.   Suffice it to say the businesses of Common Cents and Fidentia were
plagued by alleged administrative chaos, misappropriations and other
irregularities which eventually led to them both being placed under curatorship in
terms of section 5 of the FI Act. This had a negative effect on the Ovation
companies, whose liquidity and accounting difficulties were further exacerbated
by the resignation of key directors and personnel. This unhappy picture caused
retirement funds which had invested in Ovation Services to threaten to place their
business elsewhere and the underwriters of a post-retirement annuity product
marketed by Ovation Services to instruct that no new living annuity business be
concluded. This precipitated a cash crisis and a major shareholder in Ovation
Services threatened to bring liquidation proceedings.  Fortunately, a large
insurance company was prepared to consider extending financial assistance to
the Ovation companies and the respondent, the executive officer of the Financial
Services Board, decided to apply for curators to be appointed to them under
section 5 of the FI Act, which application was successful as already detailed
above.

[6] Each appellant is a registered pension fund as defined in the Pension
Funds Act, 24 of 1956. They had each concluded an agreement with Ovation
Services to administer its business and had invested substantial funds with it.
Each had also entered into an agreement with Ovation Nominees which had
undertaken to hold assets on its behalf. The appellants viewed the terms of the
provisional order to be an unjustified interference with their rights of ownership in

their investments, and opposed the curators’ entitlement to restrict both their right
to disinvest and the payment of pension benefits to their members. They also
opposed the curators’ authority to defray the costs of the curatorship from their
investments.  Despite their opposition, the order granted on 14 June 2007
provided as follows (I quote only those portions of the order relevant to the
present debate):

‘4.2
Investments in or administered by the business or companies shall not without the prior
approval of the Registrar be withdrawn, transferred or otherwise disinvested from the
business or companies.

5.
The curators are hereby:

5.1
authorised to maintain control of, and to manage and investigate the business and
operations of and concerning the companies, together with all assets and interests
relating to such business, such authority to be exercised subject to the control of the
Registrar in accordance with the provisions of section 5(6) of the Act, and with all such
rights and obligations as may pertain thereto;

5.2
vested with all executive powers which would ordinarily be vested in, and exercised by,
the board of directors or members of the companies, whether by law or in terms of their
articles of association, and the present directors, members or managers of the
companies continue to be divested of all such powers in relation to the business;

5.3
…

5.4
…

5.5
authorised, in their discretion and depending on available resources, to maintain
payments to annuitants, pensioners and other beneficiaries who receive regular
payments;

5.6
directed to take custody of the cash, cash investments, stocks, shares and other
securities held or administered by the companies, and of other property or effects
belonging to or held by or on the instructions of the companies or any entity directly or
indirectly controlled by, affiliated to or associated with the companies;

5.7
…

5.8
subject to paragraph 7 below authorised to incur such reasonable expenses and costs as
may be necessary or expedient for the curatorship and control of the business and
operations of the companies, and to pay same from the assets held, administered or
under the control of the companies;

5.9
subject to paragraph 7 below permitted to engage such assistance of a legal, accounting,
administrative, or other professional or technical nature, as they may reasonably deem
necessary for the performance of their duties in terms of this order and to defray
reasonable charges and expenses thus incurred from the assets held by or under control
of the companies;

…

6.
… (T)he costs of these proceedings, as between attorney and own client, and the costs
and remuneration of the curators shall be payable by the companies, jointly and
severally, and to the extent that the assets of the companies are insufficient for that
purpose, and only to the extent of any such insufficiency, out of the assets or investments
of investors administered by or under the control of the companies pro rata the value of
such assets or investments of each investor in relation to the total value of investors’
assets or investments administered by or under the control of the companies on 2 March
2007;  ...

7.
In funding the expenses and costs of curatorship referred to in paragraphs 5.8 and 5.9
above and the applicant’s costs of this application  … the curators shall first utilise the
resources of the companies, jointly and severally, and only if those resources are
insufficient for that purpose, and only to the extent of any such insufficiency, out of the
assets or investments of investors administered by or under control of the companies pro
rata the value of such assets or investments of each investor in relation to the total value
of investors’ assets or investments administered by or under the control of the companies
on 2 March 2007...’.

[7] In this court, the appellants essentially seek to impugn the competency of
the court a quo to grant the relief set out in paragraphs 4.2, 5.5 and 5.6 of the
order (and certain of the ancillary terms related thereto) as well as those

provisions (eg in paragraphs 5.8 ,6 and 7) entitling the curators to seek to
recover costs from the assets and investments of investors. I interpose to
mention that it is common cause that the appellants’ investments in the Ovation
companies constituted “trust property” as defined in s 1 of the F1 Act, and were
protected by s 4(5) which provides that “trust property” as so defined “invested,
held, kept in safe custody, controlled or administered by a financial institution or
nominee company under no circumstances forms part of the assets or funds of
the financial institution or such nominee company”. It was accepted by all parties
that the appellants’ investments therefore remained their property and were not
assets in the Ovation companies. In the light of this, the appellants’ first
contention was that as their investments were not assets of the Ovation
companies, the curators were not entitled to recover any costs from them.
Secondly, the appellants argued that the curators’ function was no more than to
take control of and to manage the business of the companies. They therefore
argued that the terms and conditions of the administration and nominee
agreements remained of full force and effect, and that not only were the curators
obliged to pay whatever benefits were due to them and their clients as and when
they fell due under these agreements, but that they could withdraw their
investments if they were contractually entitled to do so and that the court a quo
had not been entitled to restrict any such payment or withdrawals.

[8] The origin of the form of curatorship arising in cases of this nature appears
to have been s 6 of the Financial Institution (Investment of Funds) Act 56 of 1964
which provided in certain circumstances for the appointment of a curator, acting
under the control of the court, to take control of and to manage the whole or part
of the business of a financial institution.   That Act was replaced by the Financial
Institution (Investment of Funds) Act 35 of 1984, s 6 of which was in similar terms
to s 6 of the 1964 Act.  In turn, the 1984 Act was in due course repealed and
replaced by the current FI Act, s 5(5) of which reads as follows:
‘The court may make an order with regard to –
(a)        the suspension of legal proceedings against the institution
for the duration of the curatorship;

(b)        the powers and duties of the curator;
(c)        the remuneration of a curator appointed provisionally
under subsection (2) (a) or finally under subsection (4);
(d)        the costs relating to any application made by the registrar
under subsection (1);
(e)        the costs incurred by the registrar in respect of an
inspection of the affairs of the institution concerned in
terms of the Inspection of Financial Institutions Act, 1998
(Act 80 of 1998); or
(f)         any other matter which the court deems necessary.’

[9]   Sections (5)(b) and (f) are open ended and extend a wide discretion to the
court.   The reason for this is clear.   A wide range of persons fall within the
definition of an “institution” which may be placed under curatorship in terms of s
5. The definition in s 1 of the FI Act refers, inter alia, to a “financial institution”
which is, in turn, defined as including not only a medical scheme but also any
other person or institution referred to in the definition of a “financial institution” in
s 1 of the Financial Services Board Act 97 of 1990. The latter definition includes
pension funds, friendly societies, unit trust schemes, participation bond schemes,
stock exchanges, registered insurers, insurance brokers and  mutual banks (this
list is not exhaustive).

[10] In the light of the array of “institutions” as defined which could be placed
under curatorship, even the wisdom of Solomon would have been taxed in both
anticipating what would arise and need to be addressed in every case and
drafting an exhaustive list of powers that curators would require. In enacting s
5(5)(b) and (f) the legislature therefore granted the court a wide discretion to craft
out an appropriate order to meet the exigencies of each individual case.

[11] The essential feature of an order in terms of s 5 is that it vests in the
curator the management and control of the business of the institution. The order
neither changes the nature of the trust assets held by the institution nor

extinguishes the institution’s contractual rights and obligations, and certainly
does not vest ownership of the trust assets in the institution. But that does not
mean that the enjoyment of the full rights of ownership in the trust assets will not
be affected.   By its very nature, the order impacts 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. Cf. Conze v Masterbond
Participation Trust Managers (Pty) Ltd 1996 (3) SA 786 (C) at 798A-C.

[12] Bearing that in mind, I turn now to consider the submission that the court
was not authorised to order that any portion of the costs of the curatorship be
defrayed from trust assets, this being the aspect of the appeal which attracted
the most attention during argument.  As I have said, simply put, it is the
appellants’ argument that as the trust assets vest in them and not in the Ovation
companies, the curators should not be entitled to look to such assets for that
purpose.

[13]    While not necessarily axiomatic, it stands to reason that in many cases in
which an order of curatorship is required, the institution concerned will be in poor
financial shape.   This the legislature must have appreciated, and it is significant
that while s 6(8) of both the 1964 and the 1984 FI Acts provided for the curator to
be remunerated out of the funds of the institution under curatorship, this provision
was not carried over to the current FI Act and s 5(5) leaves it up to the court to
make an order with regard to the curator’s remuneration. As the funds of the
institution under curatorship will often be insufficient to defray the costs and
expenditure incurred in the curatorship, including the curator’s renumeration, the
question may be asked from what source did the legislature envisage the
additional funds would be forthcoming?

[14] In seeking to answer this question, it was argued by the appellants that
the respondent is to be held responsible for whatever expenditure the institution

under curatorship could not meet, particularly as the curator acts under the
control of the respondent and may have to apply to him for instructions in regard
to any matter arising out of or in connection with the control and management of
the institution’s business.2 This argument was founded on s 3 of the Financial
Services Board Act 97 of 1990 (“the FSB Act”) which provides that one of the
respondent’s functions is to supervise compliance with laws regulating financial
institutions and the provision of financial services. It was argued that  the costs of
the curatorship were incidental to this function and that, as s 16(1)(b) of the FSB
Act entitles the board to raise money, inter alia, by way of levies imposed on
financial institutions, and as s 16(3) of the FSB Act obliged the board to utilize its
funds for the “defrayal of expenses incurred by the board in the performance of
its functions”, the respondent could use those funds to pay the costs of
curatorship.

[15]   In my view, this argument cannot be upheld. It is clear that the funds
obtained by the Financial Services Board by way of levies are to be used by the
board in the performance of its functions, and while those functions involve the
supervision of compliance with laws regulating financial institutions and the
provision of financial services, they do not include the running of an institution
under curatorship.  While the respondent, as executive officer of the board, is
entitled to apply for an order appointing a curator, the curator and not the
respondent, thereafter administers the institution. The costs and expenses
incurred in running an institution under curatorship are a product of that
curatorship. They cannot be construed as being expenses incurred by the board
in the performance of its functions, and a court cannot order the board to bear
them.

[16] The answer to the question who should bear the costs of the curatorship
should the institution’s own funds be insufficient for that purpose, is, I think, clear.
The curatorship is there to protect the assets of investors, and I can see no

2 S 5(6) of the FI Act.

reason why, when necessary, those investors should not bear any costs in
respect of the curatorship intended to benefit them. Indeed, I can see no reason
why any person other than the persons in whose favour the curatorship was
granted should bear any costs related thereto in the event of the institution’s
funds being insufficient. 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.

[17] I turn to deal with paragraph 4.2 of the court’s order.  As I have said, the
court was endowed with a wide discretion under s 5(5)(f) to make an order
regarding “any other matter which (it) deems necessary”. Drastic times require
drastic measures, as was recognized by the legislature in s 5(5)(a) which
specifically authorises the issue of an order suspending legal proceedings
against an institution for the duration of its curatorship, a moratorium which
would render it impossible for a third party to seek to enforce a right to disinvest. I
can therefore see no reason why an order authorizing a restriction on
disinvestment could not have been countenanced.

[18] There are also sound policy reasons justifying a restriction on
disinvestment. Common experience teaches us that even a vague suggestion of
financial instability on the part of an institution will inevitably result in it being
flooded with investors seeking to withdraw their investments, thereby threatening
its very existence. Of this the legislature must have been aware, and must have

envisaged a court, granting an order of curatorship, taking steps to guard against
such an outcome.  Bearing that in mind, I have no difficulty in concluding that the
court a quo was entitled to impose restrictions upon disinvestment during the
period of curatorship.

[19] By a process of similar reasoning, I conclude that s 5 also entitled the
court a quo to place restrictions upon the payment of pension benefits to
members of the appellants’ pension funds. Even if the members are paid less
than what they are entitled to receive, their contractual rights remain extant and
are not extinghuished by the order of curatorship which will allow them to claim
any unpaid balance after it has been lifted. But in preserving the trust assets of
an institution in financial distress, it might at times be necessary to place
restrictions on an outflow of funds to avoid the institution’s demise. This
conclusion is reinforced by the specifically authorised moratorium in respect of
legal proceedings.  If the legislature contemplated that a person entitled to a
benefit could not sue to recover benefits, it must also have envisaged a court
placing a temporary restriction on payment of those benefits.

[20] Accordingly, 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.   The
appeal must fail, with costs.

[21]   I make the following order:

The appeal is dismissed with costs, such costs to include the costs of two
counsel.

____________________
L E LEACH
ACTING JUDGE OF APPEAL

CONCUR:

)
SCOTT JA

)
MLAMBO JA
)
HURT AJA
)
KGOMO AJA

THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

From:
The Registrar, Supreme Court of Appeal

Date:
02 June 2008

Status:
Immediate

OVATION PRESERVATION v EXECUTIVE OFFICER OF THE FINANCIAL
SERVICES BOARD

Please note that the media summary is intended for the benefit of the media
and does not form part of the judgment of the Supreme Court of Appeal

In June 2007, the Cape High Court granted an order under s 5(2) of the
Financial Institutions (Protection of Funds) Act 28 of 2001 placing Ovation
Global Investment Services and its subsidiary, Ovation Global Investment
Nominees, under curatorship. The appellants, three pension funds, contended
that certain conditions of that order interfered with their rights in their
investments in those companies. To that extent they appealed against these
conditions which restricted both disinvestment from the companies and the
payment of pension benefits to their members. They also appealed against an
order that the costs of the curatorship could, if necessary, be defrayed from
their investments.

The Supreme Court Of Appeal dismissed the appellants’ contentions. It held
that the High Court had wide powers under s 5 and that the conditions
appealed against had been within its powers to impose.The appeal was
therefore dismissed.