The concept of Ponzi schemes is one that is not new across the globe and has been around for decades.
According to Wikipedia "a Ponzi scheme is a fraudulent investment operation where the operator, an individual or organisation, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator". In recent years Ponzi schemes have become prevalent in South Africa and have been used as a tool by operators of the schemes to defraud naïve individuals. The bottom line is that the nature and underlying purpose of these schemes is contra bones mores and unlawful.
The Dafel case
In the matter of The Registrar of Banks v Gerritje Dafel, Kampstone Financial Services CC and Moffit Properties (Pty) Ltd (Gauteng Division of the High Court), the court had to make a determination whether the business rescue of a corporation conducting an illegal scheme, which otherwise ought to be wound-up, will perpetuate the illegal nature and operations of the scheme.
The applicant, the Registrar of Banks (Registrar), moved for a provisional order of sequestration against Ms Gerritje Dafel and for the liquidation of Kampstone Financial Services CC (Kampstone) and Moffit Properties (Pty) Ltd (Moffit Properties), (collectively referred to as the Dafel entities). The applicant relied primarily upon legislative provisions and upon a solvency report as a foundation for the applications. The three applications were opposed. Kampstone and Moffit Properties filed counter-applications for business rescue. The Registrar of Banks opposed the applications contending that the two entities do not have the necessary locus standi to apply for their business rescue.
During September 2009 the South African Reserve Bank was advised through a confidential report that Kampstone and its sole member, Ms Dafel, may be conducting the business of a bank in contravention of the Banks Act 94 of 1990 (the Banks Act). It was alleged, inter alia, that:
- Ms Dafel issued letters to the general public soliciting investments.
- Kampstone received funds as a result of these investment solicitations and such funds were then transferred to Ms Dafel's personal bank account, which she used for private purposes.
- The business practices of Kampstone and Ms Dafel were tantamount to deposit taking in contravention of the Financial Advisory and Intermediary Services Act 37 of 2002.
The South African Reserve Bank directed Kampstone and Ms Dafel to furnish information to the South African Reserve Bank. The Dafel entities failed to respond to two section 82(1) directives. In consequence the South African Reserve Bank appointed temporary inspectors to conduct an inspection into the financial affairs of the Dafel entities to establish whether the business of the bank was being conducted in contravention of the provisions of the Banks Act and/or the Mutual Banks Act.
The inspection revealed that Ms Dafel obtained investments from friends and clients to fund the development of properties of Moffit Properties. The investments were channelled through Kampstone’s bank account, into which personal loans to Ms Dafel were also paid. Rental income from properties owned by Moffit was diverted to SHS Properties, a rental agency of Ms Dafel’s daughter. Ms Dafel’s living costs were also paid from the Kampstone account. Commission earned on insurance transactions by Ms Dafel and/or Kampstone were paid into the Kampstone account. Some investments were channelled through the bank account of Thunderstruck Invest 123 (Pty) Ltd.
The Registrar was satisfied that Ms Dafel had obtained money by conducting the business of a bank without being registered as a bank in terms of section 17 of the Banks Act, or without being authorised in terms of the provisions of section 18(A)(1) of the Banks Act to carry on the business of a bank.
On 27 May 2013 the Registrar issued a directive in terms of section 83(1) read with section 84 of the Banks Act against Ms Dafel, and any related entities to repay all monies obtained from investors in so far as such money has not yet been paid. Section 83 stipulates that any person presumed to carry the business of a bank, who fails to repay the money so obtained, shall be deemed not to be able to pay the debts owed by such a person or to have committed an act of insolvency.
The Registrar also appointed Estelle Naude to manage and control the repayment of the monies obtained by Kampstone and/or Ms Dafel in compliance with the directive issued. On 8 October 2013 the manager filed a solvency report concluding that the Dafel entities were factually and commercially insolvent. The Dafel entities disputed the correctness of the solvency report that the entities conducted the business of a bank. The entities contended that the inspection report was a mere opinion of the author thereof to which the court was not bound. They, however, did not take the report on review.
Insolvency and liquidation
On the facts before the court and according to the solvency report, Ms Dafel was insolvent. The court then turned to the question whether there were sufficient grounds to wind up Kempstone and Moffit Properties and in this regard reference was made to the court's powers to grant a winding-up order, derived from and defined in section 344 of the Companies Act 61 of 1973 which, inter alia, provides in section 344(f) that a company may be wound up if it is unable to pay its debts as described is section 345 of the Act.
In a repayment plan dated 30 August 2013 the Dafel entities conceded that Moffit Properties and Kampstone were presently insolvent. This justified the winding-up of Moffit Properties and Kampstone in terms of section 344(f), read with section 345, of the old Act.
Lastly, the court dealt with the counter-application filed by the Dafel entities to place Moffit Properties under business rescue, which was opposed. For this purpose and as a starting point the court considered the spirit and purpose for which the business rescue provisions were adopted in Chapter 6 of the Companies Act 71 of 2008. Section 7(k) of the Act states that one of the purposes of the Act is "to provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders". Consequently, business rescue proceedings should result in a better return for creditors and other stakeholders than would result from immediate liquidation.
In the present case, the court found that business rescue proceedings would extend the unlawful deposit taking activities of Ms Dafel while preventing investors from enforcing their rights against the Dafel entities, albeit temporarily.
In order to enable a court to exercise its discretion in favour of making a business rescue order, a draft rescue plan that has objectively ascertainable evidence that there is a reasonable prospect of rescuing the company concerned must be provided at the time of the application.
In the present case, according to the repayment plan submitted for consideration by the Dafel entities, the only viable medium-term measure to repay the deposits of long-term investors would be to attract a further investment of ZAR5 million to complete a pending fixed property development, which would take 12 to 18 months. The court found that the first difficulty with this suggested repayment plan was that business rescue proceedings could not apply to companies conducting unlawful business.
Secondly, in terms of section 132(3) of the Act, the business rescue proceedings should terminate within three months unless the period is extended by the court on application. Moffit Properties required three months merely to consider and compile a business rescue plan. It was the court's view that on the facts before the court there was no reasonable prospect of Moffit Properties being rescued and becoming solvent. The application for business rescue of Moffit Properties was accordingly dismissed.
In summary, it must always be borne in mind that the primary purpose of business rescue is to aid a distressed company by providing the company with certain statutory tools to facilitate its rehabilitation. From the facts of the matter it is clear that the Dafel entities' primary business was of an unlawful nature. A financially distressed company that is conducting an illegal operation could never be regarded as one that deserves the assistance of legislation to trade out its financial woes. In my view, the court was correct in its judgment and reasons therefor.