The Financial Services Tribunal (FST) has upheld the Prudential Authority’s decision to decline a microlender’s application to register as a mutual bank, based on its assessment that its proposed chief executive breached the Companies Act by authorising another company of which he was a director to make loans to him while it was insolvent.
The decision reinforces the rigorous standards for the “fit and proper” test under section 1(1A)(a) of the Banks Act, incorporated into the Mutual Banks Act, and Joint Standard 1 of 2020 (“Fitness, Propriety and Other Matters Relating to Significant Owners”), highlighting that personal financial dealings can disqualify individuals from key roles in financial institutions.
Statutory background
Registering a mutual bank involves a two-stage process under the Mutual Banks Act. First, an authorisation to establish a bank is sought under section 11, followed by an application for registration under section 13.
The PA may refuse a section 13 application under section 14(2) if it believes “the interests of potential depositors with or borrowers from the institution concerned will be detrimentally affected by the manner in which the institution proposes to conduct its business, or for any other reason”.
Although the Banks Act does not apply to mutual banks, section 1(1A)(a) of the Banks Act, incorporated via section 1(2) of the Mutual Banks Act, governs the “fit and proper” assessment of directors and executive officers, evaluating their probity, competence, and diligence. Joint Standard 1 of 2020 further requires significant owners to demonstrate honesty, integrity, competence, and financial standing.
Barko’s application and the PA’s refusal
Barko Financial Services (Pty) Ltd, a microlender under the National Credit Act, sought to register as a mutual bank. Having received initial authorisation to establish a mutual bank under section 11 of the Mutual Banks Act, Barko filed its registration application in September 2022.
In August 2024, the PA refused the application, citing section 1(1A)(a) of the Banks Act, due to concerns about the fitness and propriety of the proposed chief executive, Jacobus Ignatius de Wet, who was also a significant owner.
The PA’s refusal was primarily based on its assertion that De Wet breached section 45(3)(b)(i) of the Companies Act by allowing Barko Developments, where he was the sole shareholder and director, to advance shareholder loans to him while the company was insolvent.
Loans to fund divorce settlement
In 2018, De Wet faced what he described as a “black swan event” when his divorce settlement required him to pay R166.5 million to his former wife. To meet this obligation, he arranged resolutions for Barko to provide a R500m unsecured credit facility to Barko Developments on 1 July 2018, with an initial advance of R223m at 7.5% interest. Simultaneously, Barko Developments advanced a R100m shareholder loan to De Wet, with interest terms.
A subordination agreement, signed on 3 August 2017, with addenda in 2018 and 2020, prioritised creditors’ claims. By 1 July 2020, the loan to Barko Developments increased to R270m at 6% interest, and inter-company debt reached R412m, later rising to R500m, sometimes at zero interest.
Two loans were advanced to De Wet: R166.5m in October 2018 and R169.5m in 2020.
Barko Developments’ 2019 financial statements showed assets of R498m and liabilities of R521m, while its 2020 statements showed assets of R595m and liabilities of R634m. Based on a “balance sheet test”, Barko Developments was factually insolvent after both loans.
Legal framework for solvency
Section 45 of the Companies Act regulates financial assistance to directors. Section 45(3)(b)(i) stipulates that a company’s board must be satisfied that, immediately after providing such assistance, the company meets the solvency and liquidity test.
The solvency test is defined in section 4, which requires that a company’s assets, fairly valued, equal or exceed its liabilities, fairly valued, taking into account all reasonably foreseeable financial circumstances. This assessment must be based on accounting records and financial statements prepared in accordance with sections 28 and 29 of the Act, ensuring accuracy and compliance with financial reporting standards.
The Tribunal reviewed Barko Developments’ financial statements for 2019 and 2020, which disclosed the company’s insolvency. In 2019, total assets were valued at R498m against liabilities of R521m, resulting in a deficit. In 2020, assets were R595m, while liabilities stood at R634m, further confirming a negative financial position.
The Tribunal stated: “Based on a ‘balance sheet test’, Barko Development was therefore factually insolvent after the first and second shareholder loans were advanced to Mr De Wet during Barko Development’s 2019 and 2020 financial years.”
Barko’s arguments on fair value
Barko contested the insolvency finding, arguing that the fair value of Barko Developments’ biological assets – citrus orchards – was not reflected in the financial statements.
Barko asserted that if these assets were properly valued, the company’s assets would exceed its liabilities, satisfying the solvency test.
The Tribunal rejected this argument, finding that the fair value of the biological assets could not be reliably determined.
The Tribunal pointed to inconsistencies in Barko’s evidence. The 2019 financial statements described the biological assets as “mature citrus trees”, yet subsequent valuations indicated no such trees existed. The 2020 financial statements explicitly noted: “Biological assets comprise citrus orchards held for use in production. These biological assets are carried at cost less accumulated depreciation and any accumulated impairment losses, as the fair value of these biological assets cannot be reliably determined without undue cost or effort.”
Barko submitted additional valuations to support its position, including farm valuations from 2018 and 2019 and an expression of interest from ANB Investments in 2021.
The Tribunal dismissed these as irrelevant or unreliable. The 2018 valuation assigned no additional value to the biological assets, while the 2019 valuation covered only 46 hectares of orchards, with just 9.4 hectares irrigated – far less than the scale Barko implied. The 2021 ANB Investments offer assumed 285 hectares of citrus, a figure the Tribunal deemed “completely unreal” given Barko Developments’ actual holdings.
Barko also relied on a 2017 business plan prepared by a horticultural expert, which suggested an additional R100m in asset value. The Tribunal found this plan unpersuasive, noting that its key assumptions had not been fulfilled by the time of the loans. The Tribunal stated: “Mr De Wet knew in October 2018 and thereafter that the main assumption of the business plan had not been fulfilled and he could, accordingly, not have honestly relied on it when he made his decision to lend himself the money via the companies.”
Subordination agreement
Barko further argued that a subordination agreement with Barko Financial Services supported its solvency by altering the valuation of assets and liabilities.
The Tribunal clarified that subordination affects liquidity, not solvency, under the Companies Act. Barko’s position was that subordination, combined with a re-valuation of assets, would satisfy the solvency test. However, since the Tribunal rejected the asset re-valuation as unreliable, this argument collapsed.
Tribunal’s findings on fit and proper
The Tribunal found that De Wet’s decision to advance loans from an insolvent Barko Developments to himself violated section 45 of the Companies Act and demonstrated a lack of probity and sound judgment.
“The fact that Barko did not disclose the indirect loans to Mr De Wet when it filed its application for registration is telling. To say, as was argued, that the PA could have asked for the information is somewhat cynical because one cannot ask for something that one does not know exists,” the FST said.
It said the companies confirmed in a document signed on 1 December 2023 by De Wet that their transactions were not at arm’s length. “There was no security, and the interest rate varied (sometimes as low as 0%) and was less than the rate Barko Developments or Barko had to pay its banker. The repayment of capital and interest was exclusively dependent on a decision by Mr De Wet either on behalf of Barko or Barko Developments. And through addenda, no interest or capital has been repaid by Mr De Wet to Barko Developments or by Barko Developments to Barko. This problem Mr De Wet wishes to address through restructuring if a banking licence is obtained.”
“We accept the submission by the PA […] that the sole purpose of the loan was to benefit Mr De Wet to extinguish his divorce debt and was thus not financially fair and reasonable to the company.”
