Analysis

Sizwe In Sound Financial Position, No Need For Curatorship – Judge

THE attempt by the Registrar of the Council for Medical Schemes (CMS), Dr Sizwe Kabane, to have Sizwe Medical Fund placed under curatorship was thwarted by Judge NB Tuchten when he dismissed the application with costs last week. 

At the time of the urgent curatorship application in July 2020, Sizwe Medical Fund and Hosmed Medical Scheme were in the process of concluding an agreement to merge their businesses which would have placed the merged scheme in the top 10 biggest medical schemes, with contributions of R4billion and solvency of 33% and reserves of R1.37 billion. 

While Sizwe and Hosmed claimed at the time, that the decision was a sinister plot by the CMS to obstruct a merger that would make significant impact on the beneficiaries of both medical aid schemes, Judge Tuchten put it more diplomatically last week. He said it was “without evidence”, contradictory and was precipitated by the “entirely justifiable refusal” by the two medical schemes to halt their intended merger against Kabane’s instructions. 

The Judge found no sound grounds on which the Registrar based the decision for the appointment of a curator. He rejected all seven irregularities posited by Kabane for the application for curatorship as unsubstantiated and “no additional particulars were provided to support these sweeping charges’. The Judge found that the Registrar had not used his powers to investigate areas of concern but used curatorship as a way of scrutinising the proposed amalgamation agreement and that was not appropriate. 

Why the Urgent Curatorship Application?

The Judge rejected the Registrar’s assertion that the urgency of the curatorship application was due to the “possible prejudice” to the members of Sizwe. “The urgency, according to the Registrar was ‘exacerbated’ by the fact that the Schemes were anxious to conclude the amalgamation. The Registrar concluded that a curator would be “better placed” to investigate the proposed amalgamation, determine whether amalgamation was in the best interests of members of Sizwe and then report back to the Registrar.

Judge Tuchten found the assertion “was not supported by any evidence and was significantly undercut, if not destroyed, by the concession made by the Registrar in his answering affidavit in the appeal that:

‘[The Council] has always supported consolidation and in fact schemes have been consolidating in recent months. There is no denying that the two schemes are better off merged'”

The Judge found the two Schemes had followed proper procedure following the amalgamation agreement: “The Schemes prepared, approved and published an exposition document dated April 2020 and lodged it with the Registrar. It is not suggested that any of the formal requirements detailed in s 63 were not complied with or that the Registrar required any information which the Schemes had not provided to him.”

What seems to have sparked the events that led to Kabane’s urgent application for the curatorship were Sizwe’s financial statements ending 31 December 2019, which found their way to him in May 2020. It is the contents of this auditor’s report, the Judge argued, that formed the grounds upon which the Registrar relied for his application and not the allegations of October 2019, in which members of Sizwe are said to have complained about being ill treated at an annual general meeting of the Scheme. Reference to the allegations, Judge Tuchten concluded, was “unnecessary” and “[the allegations] do not within themselves provide material evidence as opposed to assertions”. 

Sizwe Medical Fund Is Financially Sound And Willing to Abide By Industry Codes of Discipline

The Judge found Sizwe to be in a financially sound position, co-operative and willing to abide by industry codes of discipline. “This is not a case of a scheme setting itself in opposition to the regulator or refusing to abide by industry codes of discipline. Sizwe is in a sound financial position. Its members’ health and their economic investments are not at risk because of the policies or conduct of Sizwe and its board of trustees. It is important in this context that where irregularities occurred and were identified, Sizwe and its board of trustees showed themselves willing and able to take corrective action,” Judge Tuchten added. 

This is not a case of a scheme setting itself in opposition to the regulator or refusing to abide by industry codes of discipline. Sizwe is in a sound financial position. Its members’ health and their economic investments are not at risk because of the policies or conduct of Sizwe and its board of trustees.

When the Registrar, in a letter dated 5 June 2020, requested the medical schemes to halt or suspend their amalgamation process, reasons given being that the previous allegations levelled at Sizwe by its members were not “appropriately addressed” and citing the auditor’s report as further reason, Sizwe was not recalcitrant. On the contrary, it responded with a letter requesting an urgent meeting with the Registrar. The Judge said of the letter: “Of great significance, to my mind, in the present context is the tone of Sizwe’s letter dated 11 June 2020. Sizwe’s tone was anything but intransigent. Sizwe acknowledged the appropriateness of the Registrar’s concerns and applauded the Registrar’s diligence in protecting the interests of scheme members. Sizwe tactfully suggested that its written responses, if properly understood, would set the Registrar’s mind to rest and allay his concerns. Sizwe concluded its letter with an urgent request for a meeting, to be held at a time which suited the Registrar’s convenience.” 

It is only when Kubane hadn’t responded by June 17 2020, that Sizwe turned to its attorneys whose letter of June 17 2020 to the Registrar was less conciliatory. 

On the Registrar’s claims that “Hosmed would lose their accreditation and that, Hosmed’s members who are municipal workers would lose their premium subsidy”, the Judge said:

“In fact, in the exposition which the Registrar was asked to confirm, the Schemes made it a suspensive condition of their amalgamation agreement that accreditation be obtained. Despite this, the Registrar persisted with his contention that the question of accreditation somehow justified his opposition to the proposed amalgamation. During argument, counsel for the Registrar was unable to offer any ground upon which it might be said that making accreditation a suspensive condition did not solve the problem. I, similarly, can think of no such ground. After all, a suspensive condition means that the agreement will not come into operation unless and until the condition is fulfilled.

“Furthermore, as I shall show, the Registrar had other administrative tools available to him if he was genuinely concerned about the impact of the accreditation question on members of Sizwe.

“Be all of that as it may, the urgent curatorship application came before Avvakoumides AJ on 14 July 2020 and was struck from the roll for lack of urgency.

 

Events Following Failed Urgent Curatorship Application

Excerpts from Judgement by Judge AB Tuchten

    • 30 July 2020, Kabane declined to confirm the exposition. The reasons given were that the amalgamation was not in the interests of the members of Hosmed and Sizwe because of the accreditation issue and because of the irregularities which the Registrar believed had been brought to light pursuant to the complaints made in October 2019 and the auditors’ report.decision was communicated to the Schemes on 31 July 2020. 

    • 5 August 2020 The Schemes launched an appeal against the Registrar’s decision by notice of motion. 

    • 19 November 2020 The curatorship application and the appeal were then allocated to Judge Tuchten to be heard together as a special motion. 

    • Counsel for Sizwe identified seven grounds upon which the Registrar based the case for the appointment of a curator. Counsel for the Registrar identified fourteen such grounds but Judge Tuchten found the grounds advanced by counsel for the Registrar either did not fall within the grounds identified in the founding affidavit or overlap with other grounds. He then decided to consider the seven grounds identified by counsel for Sizwe. These were:
    • “Late Collection of Contributions not that they were not collected at all. It is difficult to understand what, in the real world, Sizwe could have done better in this regard and no practical suggestions were advanced on behalf of the Registrar. 
       
      It would have been impractical for Sizwe to have issued summons against its employer members. The only conceivable solution would be to cancel the membership of employers who pay late. That would for obvious reasons not have advanced the purposes of the Medical Schemes Act”. 
       
    • “Failure to pay accounts within 30 days

      This complaint seems to be directed at the failure to record details of claims delayed and the nature of the delay. Sizwe explained in the answering affidavit that over 500 000 claims per month were paid on time during the relevant period. Sizwe identified 15 claims in total were paid late over the period in question. Sizwe explained that the cause of late payment could be ascribed to queried, erroneous or incomplete claims and referred to its process for resolving these matters. The claims in question range from R16,87 to a few thousand rands. In my view the evidence on this ground is not indicative of a material irregularity or of a practice or policy of persistent late payment or of financial weakness. It is not suggested by the Registrar that patently good claims were not paid at all”.

    • “Withholding payment

      The complaint is that claims were submitted for processing and payment four months after service date. Sizwe however explained that the auditors had misunderstood the position: this was not a case of withholding payment but of paying claims that were submitted late. Sizwe satisfied itself that the claims were good and then paid them. There is no reason why, if they were good claims, they should not have been paid”.

    • “Investment with prohibited entities

      It is common cause that investments with these entities can be made with permission from the Registrar. Permission had been previously granted by the Registrar in respect of the entities in question but the certificate of permission had lapsed and had to be renewed. The complaint is that Sizwe had been non-compliant for period of nine months. This is a purely administrative matter and the non-compliance has been remedied. Sizwe maintains that it had applied in good time for a fresh certificate and that the fault for the late renewal lay with the office of the Registrar”.
       
    • “Benefit options not financially sustainable

      The auditors noted five non sustainable benefit options. Sizwe explained that it deals with such problems on an ongoing basis. In the nature of its business, it can only identify a non-sustainable benefit when it has accumulated data only the performance of the benefit. Sizwe claims that it can therefore only identify non-sustainable benefits in retrospect and that it has adequate financial reserves to cover such problems”.

      “Pre-payment of fees for marketing services might not be in members’ best interests

      It is not clear how this speculative complaint can justify the appointment of a curator. On the auditors’ logic, the pre-payment might equally well be in the interests of members. The auditors reported that there were problems with the marketing company, which the auditors said charged exorbitant fees and did not deliver value.

      Trustees remuneration inconsistent with remuneration policy

      It is common cause that Sizwe’s trustees should have received R7 500 for first six meetings in any year and thereafter R5 000 for additional meetings in same year. However, the trustees received R7 500 throughout the year. In addition, the Registrar averred, consultancy fees had been disguised as consultancy fees. On the strength of this overpayment, the Registrar concluded that Sizwe’s principal officer was not fit to hold office, that no proper books had been kept, that no proper systems had been employed, that the Board of Trustees had not ensured that Sizwe’s rules, operation and administration of the scheme complied with the MSA and that the board of trustees had not acquainted themselves with applicable policies. No additional particulars were provided to support these sweeping charges.

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