Issue: Mar - May 2014
Tribunal decides in bank’s favour. Rule of union fund spotlighted. Curator could have cancelled agreement timeously, not waited until after its benefits had been enjoyed.
The protracted R500m dispute between Standard Bank and Tony Mostert, as curator of the SA Commercial Catering & Allied Workers Union national provident fund (SNPF), has ultimately been resolved. The ruling of the Arbitration Appeal Tribunal in favour of the bank comes at a cost to the fund, in legal expenses awarded against the curator, of perhaps over R15m.
At their present-day value, R500m represents the approximate worth of the MTN shares that the bank would have had to return to the curator had it lost the arbitration. They were part of an agreement between the bank and the fund, later placed under Mostert’s curatorship, to run for five years until 2007.
The agreement was essentially for the value of the fund’s portfolio to be protected from possible downside by exchanging possible upside. On maturity of the agreement, the bank had not delivered to SNPF the MTN shares that it had sold in exercising its call option; the MTNs had by then exceeded the ceiling price defined in the agreement, incurring a neat profit for the bank. Had the price of the MTNs instead tumbled below the defined floor, the curator could have implemented the agreement in the fund’s favour by forcing the bank to buy the shares at their fallen price (TT Sept-Nov ’13).
Worthwhile fight won
The basis of the curator’s claim was that hedging of the MTN shares, undertaken by the bank in terms its agreement with SNPF, had not been executed in compliance with a rule of the SNPF that relevant documentation be signed by three trustees and not under an authority that they had delegated to the principal officer.
Thus, the fund’s agreement with the bank was void from the start. Accordingly, the curator demanded return of the MTN shares whose price had appreciated significantly during the period to maturity of the agreement. The bank countered that compliance with the rule was a matter for the fund’s internal management.
Alternatively, it argued, non-compliance with the rule rendered the transaction “voidable but not void”. Under those circumstances, during its term the curator was entitled to ratify or to avoid the transaction. He had in fact ratified it.
Even if the transaction was voidable for noncompliance with the rule, the bank added, the curator had a duty to elect within a reasonable time whether he wanted to avoid the transaction. “Such failure to avoid would, of course, justify the inference that the transaction will not be avoided and therefore that it is confirmed,” the tribunal stated.
Non-compliance with the rule having rendered the transaction voidable, said the tribunal, the onus was on the curator to prove that he had avoided it. All he pleaded was that, when the bank demanded his signature on the confirmation forms, he had refused to sign. In reply to the allegation that he had failed to fulfil the duty to elect within a reasonable time whether to continue adhering to the transaction, noted the tribunal, his only response was to repeat the statement that he had refused to sign.
This was the “high point” of the curator’s case. He maintained his position that there was no enforceable agreement but that he was prepared to keep the door open for an arrangement with the bank if there was a way to advance the interests of the fund.
Mostert had refused to sign, he said, because he did not want to consummate the transaction and prejudice the fund. The bank, for its part, stressed features inconsistent Mostert’s stated intention subsequent to his final appointment as curator in March 2003.
Under cross-examination, Mostert said that he’d made it clear to the bank that the agreement was invalid but conceded that he hadn’t asserted it was unenforceable. He explained that summons was only issued because the prescriptive period had almost expired and he had been unable to find out from the erstwhile trustees what had led to conclusion of the transaction.
The tribunal doubted this explanation: “Confronted with having reported to the Registrar of Pension Funds that he ‘might not necessarily wish to attack the validity of the transaction, the curator said that he was trying to find ‘some sort of resolution’ i.e. that suited the fund. Following on that, he was asked if the MTN share price had fallen below the floor level whether his decision would have been not to attack the transaction. He said he could not speculate but he might well have made that decision.”
In response to a further question, Mostert said that if it were in the interest of the fund he would not have attacked the transaction. “The last two answers and his report (to the Registrar) constitute damaging concessions”, the tribunal believed. “So do his enquiries as to what ‘unwinding’ would cost. They do not support the curator’s evidence that he regarded the transaction as unenforceable and that he indicated as much to the bank. They indicate the opposite.”
The tribunal went further. Apart from the refusal to sign the confirmations, the curator conducted himself in relation to the transaction – prior to the issue of summons against the bank – as if the agreement was binding and as if his intention was to see it through to its termination. He knew all the while about the bank’s dealings in the MTN shares and that the transaction was being implemented according to its terms.
In his reports to the Registrar, he had certified as correct the statement by the fund’s actuary that the fund’s shares were subject to the transaction. He had signed the fund’s annual financial statements to this same effect.
Whether or not his actions were known to the bank, said the tribunal, they conflict with the attitude that he claimed persistently to have conveyed to the bank that the transaction was invalid. His evidence that he had communicated this view finds no support in the documentation on record. “Had he taken up that attitude one would have expected that the bank would have reacted by demanding that he choose to confirm or resile, and not leave the bank to go on spending time and money on a contractual relationship that might at any moment be set at nought.”
The tribunal considered it reasonable to accept that, until Mostert’s final appointment in March 2003, he would not have been overly concerned to decide whether to adhere to the transaction or to avoid it.
“But his conduct for more than two years after that, taken together with his evidence, shows that he had been waiting to see if the investment encompassed by the transaction was going to turn out well or badly for the fund. The most plausible inference consistent with all the proved facts is that, far from having decided to avoid the transaction, he would have gone on waiting even longer but for the need to institute action before the prescriptive period expired,” the tribunal found.
In the result, the tribunal held that the onus resting on the curator to show that he had avoided the transaction was not discharged. The transaction continued to bind him and, through him, the fund until the transaction’s maturity. Non-compliance with the rule led to nothing more than the voidability of the transaction. Were voidability to be equated with illegality, it would have led to the “untenable result” that the curator would become party to an illegal act by not having avoided the transaction.
Greybe . . . get real
In a letter to TT from law firm Mostert Attorneys, writing on behalf of Tony Mostert in his personal and official capacities as well as the firm representing SNPF in the shares claim, a number of points are made. They’re reported without comment: