FSRA’S BID TO LIQUIDATE LIKHWANE FAILS

MBABANE – Judge Bonginkhosi Magagula has dismissed the FSRA’s application to liquidate Likhwane Beneficiary Fund.

The judge said it was reasonable that before the Financial Services Regulatory Authority (FSRA) could decide to apply for the liquidation of Likhwane on the strength of Section 73(2) of the FSRA Act of 2010, it must account on how it fulfilled its objectives of supervising the safety and soundness of ESW Investment, formerly Ecsponent Eswatini. The application was dismissed yesterday. The court also discharged the order for the provisional liquidation of Likhwane, which was issued on August 16, 2023. The judge further ordered the FSRA to bear the costs of the application. Judge Magagula said this matter pertained to an unfortunate and concerning state of events.  He said at the heart of this litigation were orphaned minors, whose livelihood and sustainability hung in the balance. The judge stated that the inaction or ineptitude of the parties concerned in the matter led to unfortunate cash flow challenges that Likhwane found itself in.

interest

The court, according to Judge Magagula, has a duty to uphold the best interest of all minors at all times. The main function of Likhwane is to distribute funds to its beneficiaries, mostly minors. The parents of the children were in their lifetime the beneficiaries of the pension funds, which invested in Likhwane. Likhwane invested E20.2 million, and later E42.7 million, in Ecsponent Limited Eswatini, which later became known as ESW Investment Group.  Other entities and individuals invested a total of about E340 million in Ecsponent, which went under.
Likhwane, which was represented by Mlungisi Khumalo of Khumalo Attorneys, also invested E10 million in a South African company called Lingedla (Pty) Ltd. On August 16, 2023, FSRA approached the court on a certificate of urgency and ex-parte for Likhwane to be provisionally wound up and Joseph Waring to be appointed as the provisional liquidator, with such powers set out in the FSRA Act, Companies Act and Insolvency Act. Likhwane opposed the application.

Seven pensions fund, represented by Sidumo Mdladla of SV Mdladla and Associates, joined the proceedings as respondents with Likhwane. They are Eswatini Civil Aviation Authority Provident Fund, Eswatini Electricity Company Pension Fund, EswatiniBank Pension Fund and Eswatini Revenue Service Provident Fund. Others are Eswatini National Provident Fund Staff Pension Fund, Umfuso Umbrella Fund (Municipal Council of Mbabane) and Eswatini Sugar Association Staff Provident Fund.  They also opposed the liquidation of Likhwane.

circumstances

Judge Magagula said the circumstances of the case, viewed in its totality, were such that it was not in the best interest of Likhwane, the intervening pension funds and mostly the beneficiaries of Likhwane (minors), that the provisional liquidation order be confirmed. The judge also said FSRA was not in a position to point an accusing finger to Likhwane when it had not accounted for the role it played in discharging its supervisory powers to both Likhwane and ESW Investment Group, the party that currently holds the investments, which had ultimately affected the liquidity of the beneficiary fund. “It is common cause that ESW, formerly Ecsponent, is a financial service provider, licensed by the applicant (FSRA). It is also common cause that the first respondent (FSRA) invested its funds in ESW. It is common cause that the second to eighth respondents (intervening pension funds) are stakeholders in the industry. It is, therefore, not unreasonable that before the applicant could decide to apply for the liquidation of the first respondent on the strength of Section 73(2), it must account on how it fulfilled its objectives of supervising the safety and soundness of ESW Investment, also how it protected the first to eighth respondents as stakeholders,” said Judge Magagula.

The judge mentioned in the judgment that during the arguments of the matter, the court posed a specific and pointed question to Kenneth Simelane, who represented FSRA,  on which three grounds did FSRA rely for the liquidation application. Judge Magagula said Simelane’s answer was premised on that, as per Section 73 (2) (b)(i)and (ii) of the FSRA Act. Subsection 2 (b) allows three instances on which FSRA can apply for the compulsory liquidation of an authorised financial services provider. Part (b)(i) states that: ...is engaging on fraudulent or questionable practices in the conduct of its business, which endangers its reputation authority solvency and (ii) ...is conducting business in an unsafe or unauthorised manner.

unlawfully

FSRA stated in its application that Likhwane, acting through its management Board, acted unlawfully when it invested E10 million of its assets outside Eswatini, which was above the five per cent threshold. Judge Magagula said the court accepted that probably the investments may have been outside the five per cent threshold. “However, to then say such is fraudulent is another issue. Fraud is a different kettle of fish. It must involve certain specific acts of criminal conduct by the officers of the first respondent. Such have not been particularised in the founding affidavit. I, therefore, find that the averment of unlawful does not support the basis for liquidation as may have been anticipated in Section 73(2)(b)(i) of the FSRA Act,” said the judge.   

The court stated that in so far as the urgency was concerned, even if the investment of E10 million was fraudulent, ‘in order for such to justify the urgency of approaching the court ex parte, it is key to probe the date on which the applicant became aware of such unlawful conduct’. During the submissions, the court was advised that Likhwane submitted quarterly reports to FSRA about its affairs and investments. “Then the question that begs an answer is, when did the applicant realise that the unlawful investment of E10 million has occurred? What steps did it take immediately thereafter? If one considers the audit report, findings were made in February 2022. Why then did the applicant fall into slumber until August 16, 2023?” the judge wondered. According to the court, FSRA did not state when it realised that Likhwane was no longer able to pay its beneficiaries. The other glaring factor, according to the court, was how the intervention of the liquidator and the appointment thereof, would alleviate the anomaly.

default

Judge Magagula said it was common cause that Likhwane’s financial circumstances had continued to worsen and it was in default of its present and future obligation to beneficiaries. According to the judge, FSRA did not disclose that Likhwane had filed a complaint against it before the Ombudsman of Financial Services, which is pending. Judge Magagula said this was crucial. He said the appointment of the liquidator may hamper the pursuance of the complaint. “It is unlikely that the liquidator can pursue with vigour a matter against the applicant, which recommended his appointment. The court is mindful that the suggested liquidator is a professional and an officer of this court in high standing. However, the conflict appears from the role that he may be required to play in pursuing the applicant. It is a perceived conflict.” The judge also said the master of the High Court should have been cited because parents of the children who are beneficiaries were in their lifetime beneficiaries of the pension funds. That narrative, according to the court, unequivocally brings to the forefront the Office of the Master of the High Court.

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