By Koketso Maseloa and Clement Marumoagae
In this case, the Registrar of medical schemes rejected Genesis’s annual financial statements because they did not correctly reflect its financial position. Further that Genesis’s accounting records mistakenly reflected the personal medical savings account (PMSA). The PMSA forms part of the contributions received by Genesis from its members who selected the benefit options that include medical savings accounts, thereby allowing members to set aside funds to meet healthcare costs that the particular benefit option they chose does not cover.
In rejecting the statements, the Registrar relied on the judgement of Registrar of Medical Schemes v Ledwaba NO (hereafter Omnihealth). In this case, the liquidators of an insolvent medical scheme argued that its PMSA funds fell into its insolvent estate to be divided to the creditors. In contrast, the Registrar argued that PMSA funds constituted ‘trust property’ and did not fall within the medical scheme’s pool of assets for distribution to its creditors. The court agreed with the medical scheme.
Based on Omnihealth, the Registrar rejected the medical Genesis’s financial statements because it believed that it incorrectly reflected PMSA funds as its assets in its books of account and understated its interest liability. Genesis approached the High Court for relief. The High Court reviewed and set aside the Registrar’s decision and held that Omnihealth judgement was wrongly decided. The Registrar appealed to the Supreme Court of Appeal (SCA). In the SCA, the minority judgement upheld the High Court’s decision. But the majority judgement preferred the Omnihealth decision and disagreed with the reasoning and conclusion of the court a quo.
Genesis appealed to the Constitutional Court, where the majority judgement held that the Registrar’s decision was solely influenced by the Omnihealth judgement and if Omnihealth was incorrect then the Registrar’s decision was therefore incorrect. The majority held that the definition of the phrase ‘business of a medical scheme’ in the Medical Schemes Act must be evaluated to establish whether medical schemes hold PMSA funds in trust. This Act defines the business of a medical scheme as the business of undertaking in return for a contribution and the liability associated with one or more of the activities listed in the section such as obtaining health services, defraying expenditure in connection with health services or rendering health services. In interpreting this definition, the majority held that first, a medical scheme should not be profit driven, even though it is expected to keep solvent in a competitive insurance industry. Second, the scheme undertakes liability in return of contributions. Third, it envisages a contractual relationship between the medical aid and its member.
In determining whether medical schemes hold any portion of their members’ contributions in trust for them as trustees, the majority applied the Financial Institutions (Protection of Funds) Act (hereafter FIA), which defines the phrase ‘financial institution’ to include any medical scheme established under the Medical Schemes Act. This Act provides that financial institutions must keep trust property separate from assets that belong to it and in its books of account must clearly illustrate trust property as property that belongs to a specific principal. The majority pointed out that FIA most importantly, provides that trust property held by a financial institution must not form part of the assets of the financial institution. Further that the right holder of the trust property is not the financial institution but the principal. The majority confirmed certain trite trust principles:
- Generally, despite being the legal owner of trust assets, the trustee holds such assets for the benefit of beneficiaries and not for its own interest.
- Once established, a trust creates a fiduciary obligation on the trustee towards the beneficiary.
The majority opined that since a trust can be created by agreement between the parties, nothing stops a particular medical scheme, with the Registrar’s approval, from agreeing with its members to hold certain funds it received in trust for them. It was held further that for medical scheme members’ contributions to be trust property, the scheme must hold a member’s contribution as an asset for or on behalf of that member as principal. The majority held that because medical schemes provide specific services and in return receives contributions there is no trustee and beneficiary relationship. In that the relationship is commercial and not fiduciary. Further that trust obligation does not arise in relation to medical schemes’ bank accounts and money deposited thereto because they are required to establish bank accounts under their direct control where all the contributions will be paid in respect of their members.
The majority emphasised that a medical scheme does not receive members’ contributions as a trustee or fiduciary. The majority held that the funds allocated to a PMSA are no different and no question of fiduciary arises. It was further held that if a medical scheme was to be obliged to render PMSAs as its liabilities without holding them as its assets, it will be prohibited from borrowing money without prior approval of the council. The majority concluded that the PMSA are part of the ordinary receipt and payment business of a medical scheme. In reversing the SCA order, the majority held that PMSA constitute part of the medical scheme’s assets.
The first minority judgement differed with the majority judgement and held that Omnihealth was not the only reason for the Registrar’s rejection of the scheme’s financial statement. According to this judgment, the rejection was based on five grounds which includes, ‘failure to comply with Omnihealth, the prescribed paragraphs 13, 14 and 15 in the auditors’ assurance report; the relevant circulars and the accounting standards determined by SAICA.’
The second minority judgment held that the trust relationship in this case was created when the medical scheme created and allocated funds to a PMSA of a particular member. Further that once that relationship was created, the medical scheme became the holder of funds as trust property. Further that while the medical scheme as a trustee administered the trust property, the members as beneficiaries retained beneficial interest in the trust property. The fourth judgment agreed with the majority judgment. This judgment rejected the reasoning provided by the first minority judgment. Should you require legal assistance regarding medical aid schemes related disputes, feel free to contact us.
