This blog was co-authored by Shawn Barnett, Director and Hishaam Khan, Candidate Attorney
On 20 October 2021 the Supreme Court of Appeal upheld the appeal of JP Markets (Pty) Limited against an order of the High Court which placed it in liquidation. The SCA found that it was not just and equitable to place JP Markets in liquidation. (Read the full judgement here.)
JP Markets operated as an over-the-counter (OTC) derivative provider (ODP). The Regulations to the Financial Markets Act (FMA) categorises a person as an ODP where such person, as a regular feature of its business and transacting as principal, originates, issues, sells or makes a market in OTC derivatives.
The SCA had to determine whether the FSCA had the appropriate power to institute an application for liquidation and, if so, whether it made a proper case for the winding-up of JP Markets.
The FSCA brought the liquidation application in terms of section 38B of the Financial Advisory and Intermediary Services Act (FAIS Act) and Section 96 of the FMA.
Section 38B of the FAIS Act provides that the FSCA is empowered to apply to the court for the sequestration or liquidation of a financial services provider (FSP), irrespective of whether the FSP is solvent, if it is in the interests of the clients of the FSP. The SCA held that the winding-up application was not about the conduct of JP Markets as an FSP nor about the protection of the interests of its clients or the public in respect of financial advisory of intermediary services, the FSCA’s reliance on section 38B of the FAIS Act was misplaced.
In terms of section 96 of the FMA, after an investigation has been conducted and the FSCA is in a position to decide whether to approach the court for a liquidation order, it may apply to the court under section 81 of the Companies Act for the winding up of such respondent as if the FSCA was a creditor of the respondent.
The SCA was faced with the question of whether “an investigation has been conducted” considering that at the time of the liquidation application, the FSCA had not concluded its investigation into JP Markets. Finding that section 96 of the FMA does not introduce any element of finality by requiring the FSCA’s investigation to be concluded, the SCA held that the FSCA correctly relied on section 96 of the FMA to bring the liquidation application against JP Markets.
Section 96(a)(i) of the FMA provides that the FSCA may, in order to achieve the objects of the FMA, apply for the winding-up of a respondent under section 81 of the Companies Act of 2008, as if it were a creditor of the respondent. Section 81(1)(c)(ii) of the Companies Act required the FSCA to show that it was just and equitable for JP Markets to be wound up.
A winding-up under section 96 of the FMA must be aimed at achieving the objects of the FMA. The determination of whether it would be just and equitable to order a winding-up is therefore inextricably linked to the achievement of the objects of the FMA.
The SCA was unable to determine whether any of the complaints were valid. The complaints were concerned with JP Markets’ alleged failure to make payments that were due to clients and that due to interrupted access to its online trading platform, clients were allegedly unable to close their positions, with resultant losses.
JP Markets also altered the spreads offered to particular clients. The adjustment of spreads took place in respect of “toxic” clients who were suspected of engaging in questionable trading practices. The SCA held that, because clients were free to accept or decline the spreads offered to them, it was not objectionable to quote differentiated spreads to clients that were regarded as “toxic”.
In its assessment, the SCA considered that JP Markets is a solvent company, employs 70 permanent staff at a monthly cost of more than R1 million, paid in excess of R1 billion to thousands of clients during the three years preceding the liquidation application and held R220 million in cash. Having considered JP Markets’ interactions with the FSCA, the SCA held that it was not guilty of obfuscation.
The SCA concluded that JP Markets did not constitute a systemic risk to its clients or to the financial market. The only remaining factor was that JP Markets had conducted ODP business without a licence.
It was found not to be just and equitable to liquidate JP Markets and the appeal against the order of the High Court succeeded. Despite finding that JP Markets was erroneously placed in liquidation, the SCA does not disagree that JP Markets was unlawfully operating as an ODP without the appropriate licence.
The judgment does not permit JP Markets to conduct ODP business without an ODP licence. The FSCA has confirmed that JP Markets’ ODP application will now be considered and it remains prohibited from conducting ODP business until such time as the FSCA reverts on the application.