A recent Supreme Court of Appeal (SCA) case is of interest to the insurance industry, especially intermediaries, since it deals with the liability of medical schemes brokers and trustees, where they received 'remuneration' in excess of that laid down in terms of the Medical Schemes Act.
The Supreme Court of Appeal (SCA) case in question is Afrisure CC and another (de Villiers) v Watson NO and another (PHS) 2009 SCA. Publiserve Healthcare Scheme (PHS) was a registered medical scheme, which was placed in liquidation on the 30th May 2001, whereupon Brian Watson (Watson) was appointed as the liquidator. Afrisure CC, a close corporation, is a broker and Etienne de Villiers (De Villiers) its sole member. From 25th August 2000 to 28th May 2001 De Villiers was also a member of the board of trustees of PHS. During the period October 2000 to January 2001, PHS paid De Villiers amounts totalling R5.5 million.
After his appointment, Watson in his capacity as liquidator, instituted an action against Afrisure CC and De Villiers, jointly and severally, for repayment of this amount. Both the Close Corporation and De Villiers were sued, albeit for different reasons. The High Court had ruled in favour of Watson and PHS, holding both Afrisure CC and De Villiers jointly and severally liable.
The case under discussion is the appeal by Afrisure and De Villiers against the High Court decision. Afrisure and De Villiers, for convenience sake, can be regarded as the defendants and Watson NO and PHS as the plaintiffs.
The PHS story
Before considering the legal arguments and court decision, it is necessary briefly to set out the facts. PHS, which was registered as a medical scheme in 1995, was in financial difficulties long before the defendants became involved. PHS was supposed to provide for the needs of the Public and Allied Workers Union (PAWUSA), a union with 20 000 members of which only 3 000 became members of PHS. PHS had no staff of its own. Its administrative services were provided by Metropolitan Health (Pty) Ltd (Methealth). During 1997, it suffered a financial setback from which it never recovered. By May 2001, when it was placed in liquidation, its liabilities exceeded its assets by R11 million. Because of its financial position the Council for Medical Schemes (CMS) became involved.
The recovery plan
The then principal officer was dismissed and another appointed. A recovery plan which required that the membership be increased to 6 200. The CMS was not at all optimistic that this increased membership could be achieved. However, things changed considerably when Methealth advised about advanced negotiations with a large brokerage which had 9 000 members and was looking for a registered scheme to which to bring these members. This brokerage was Afrisure CC. De Villiers had over the years built up the membership of Afrisure CC to a substantial number, which at the time was placed with Meddent. Afrisure CC was in the market to move this business to another registered scheme and with this in mind, PHS, via Methealth, became a candidate. The combined membership appeared to be the solution to PHS's limited membership base.
A problem with the merger, which did not seem to be fully appreciated, was that the Afrisure CC business was unprofitable. Meddent had proposed an increase of 57%, prompting the move of the business away from Meddent. The Afrisure CC scheme was losing R1.5 million per month. Merging two unprofitable businesses does not result in a profitable merged business. Oddly this aspect receives virtually no attention at all in the judgement. As things transpired PHS agreed, at a meeting of trustees, to take on Afrisure CC's scheme.
Substantial commission
Brokers can earn a commission even on loss making business. The agreed fee was a placement fee of R250 per existing member (estimated at 3% of the premium), R225 per new member, and an ongoing service fee of R100 per month per member. The service fee was, of course, the problem, since it would result in the payment exceeding the 3% laid down in the medical schemes legislation. The agreement arrived at, at the trustees meeting, was never converted into a signed contract, but in July 2000 Afrisure started moving clients to PHS. In August 2000, De Villiers became a 'trustee' of PHS, resigning in May 2001, two days before the liquidation. In terms of the agreement, Afrisure CC was paid R5.5 million. De Villiers once again moved the Afrisure CC business to another medical scheme whereupon, once again, he received payment.
The litigation
Once Watson was appointed as liquidator, he set about recovering amounts from Afrisure CC and De Villiers. It is important to divide the R5.5 million into two components, R1.9 million representing the placement fee and R3.6 million, representing the service fee. The SCA concluded that the R3.6 million was not a service fee at all, but was commission, and as such was illegal, exceeding the 3% laid down in the commission regulations.
It was then argued that even if the R3.6 million was contrary to the commission regulations, this had no bearing on the R1.9 million, which fell within the 3%. The SCA rejected this on the grounds that Afrisure CC would not have agreed to the transaction for the 3% and accordingly the transaction could not be divided. If one part was illegal, the entire undivided transaction paid the price. In line with this finding, the entire R5.5 million became repayable. Since R5.5 million was paid to Afrisure CC, it is clear that as a consequence of the judgement, Afrisure CC became liable to refund this amount.
Personal liability
The possibility exists, of course, that Afrisure CC would not have the money to make the repayment. At this point the liability of De Villiers becomes important. In dismissing the appeal, De Villiers became jointly and severally liable in his personal capacity. The reason for this aspect is of considerable interest to individual intermediaries and trustees of medical schemes.
As noted, De Villiers became a trustee of PHS. His liability was based on the fact that he was a trustee of PHS, not because of his relationship to Afrisure CC or being its sole member, although the court repeatedly referred to De Villiers as the alter ego of Afrisure CC. The argument accepted by the court goes as follows: De Villiers was a trustee of PHS and as such owed PHS a fiduciary duty. This duty included stopping it from making illegal payments to Afrisure CC. Since he did not stop PHS from paying Afrisure CC, he was in breach of his fiduciary duty. He thus became jointly and severally liable with Africure CC, but for completely different reasons.
The SCA accordingly dismissed the appeals of Afrisure CC and De Villiers whereupon both became jointly and severally liable to repay the R5.5 million plus the legal costs of the litigation. In my opinion, however, this judgement is not free from criticism.
Get the latest issue of FAnews