In a recent judgment delivered by the Johannesburg High Court, the Prudential Authority ("the Authority") instituted provisional sequestration proceedings in terms of sections 83(3)(b) as read with 84(1A)(c) of the Banks Act, 1991. The estate sought to be provisionally sequestrated belonged to Adelaide Musa Duma ("Duma"), the respondent.
An investigation was conducted by the Authority into the business practices of Travel Venture International and/or TVI Express and/or related persons- "The TVI Schemes" which are said to have been South Africa's biggest pyramid scheme. The TVI Schemes' business model consisted of marketing the sale of travel vouchers with substantial discounts for international travel and accommodation. The discounts were provided by TVI Schemes' alliance partners. However, the Authority's investigation revealed that the relationship the TVI Schemes had with these partners was fraudulent.
According to the Authority, the TVI Schemes constituted a deposit-taking arrangement falling within the definition of "the business of a bank" as defined in section 1 of the Banks Act. After the Authority's investigations, Duma was identified as a related person to the TVI Schemes. Following the investigation, the Authority obtained a warrant in terms of section 5(1)(b) of the Inspection of Financial Institutions Act ("the IFI Act"), to enter Duma's premises and obtain any documents relating to the affairs of the TVI Schemes.
The documents obtained, which included Duma's bank statements, revealed that Duma had actively participated in the TVI Schemes by receiving and paying out monies from investors. In particular, Duma had 254 incoming transactions amounting to ZAR2,574,072.54 and 959 outgoing transactions amounting to ZAR2,569,456.58. A further account in Duma's name, trading as TVI Simply the Best, showed that, Duma had 312 inflowing transactions amounting to ZAR2,093,819.48 and 618 outflowing transactions amounting to ZAR2,093,819.48.
According to the Authority, Duma's conduct constituted "bank business practice", which required Duma to be registered as a bank or obtain authorisation in terms of section 18A(1) of the Banks Act and Mutual Banks Act, 1993. Section 11(1) of the Banks Act provides that "no person shall conduct the business of a bank unless such person is a public company and is registered as a bank in terms of the Act". The 'business of a bank' includes receiving deposits from the public as a regular feature of the business in question.
On 20 February 2015, the Authority issued notices in terms of section 83(1), read with section 84, of the Banks Act, directing Duma to repay all the monies obtained through the TVI Schemes ("the section 83 Notice"). The section 83 Notice was served on Duma on 5 December 2016, informing her that she had acted in contravention of the Banks Act and that the Authority demanded repayment of the monies obtained, including interest. The section 83 Notice also stated that the failure to comply with the Notice could result in Duma being found guilty of an offence and she would be deemed unable to pay her debts and/or to have committed an act of insolvency in terms of section 83(3)(b) of the Banks Act further read with section 8 of the Insolvency Act.
The relevant part of Section 83 (3) of the Banks Act, which is to be read with section 8 of the Insolvency Act, provides that: "Any person who refuses or fails to comply with a direction under subsection (1)... (b) shall for the purposes of any laws relating to the .... to the sequestration of insolvent estates, be deemed not to be able to pay the debts owed by such person or to have committed an act of insolvency, as the case may be, and the Authority shall, notwithstanding anything to the contrary contained in any law, be competent to apply for the ........ for the sequestration of the estate of such a person, as the case may be, to any court having jurisdiction."
Duma failed to repay the Authority the sanction issued in terms of the Section 83 Notice, thereby resulting in her being deemed to be unable to pay her debts and committing an act of insolvency. On 30 November 2016, a rule nisi order was granted to search Duma's premises and attach her property. The assets were attached as a preservation measure. On the return date of the rule nisi, the order was confirmed. A solvency report prepared indicated that Duma was factually insolvent as against the indebtedness. Her assets amounted to approximately ZAR77,350.00, whilst her debts amounted to ZAR2,978,529.83.
Duma did not deny her involvement in the TVI Schemes and admitted that she received deposits from the public into her bank accounts. However, she argued that she had no intention to conduct the business of a bank and that the monies she received were immediately paid on to other investors.
Considering Duma's admissions, the Court remarked that there was no dispute that Duma willingly participated in the TVI Schemes and conducted the business of a bank. This was in contravention of the Banks Act. The Court also noted that the amounts received were not repaid to the people that deposited those amounts.
Considering the aforementioned facts, the Court concluded that provisionally sequestrating Duma in terms of the Insolvency Act would be more advantageous to creditors than a trial. This meant that the requirement envisaged in section 10 of the Insolvency Act, which required a court to establish a prima facia view that a sequestration will be to the advantage of creditors, was met.
Consequently, the Court ordered, inter alia that, Duma be placed under provisional sequestration and a rule nisi was issued calling on persons who have a legitimate interest to advance reasons, why a final sequestration order should not be granted. The costs of the application were ordered to be costs in the administration of Duma's insolvent estate.
Individuals involved in business should avoid using their personal accounts to carry out business transactions, and should instead make use of the business banking services offered by registered banks.
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