Edition: December 2015 / February 2016


Personal liability kicks in

Fund officials hit hard. Ruling will hurt their pockets.
Registrar wins on fiduciary duty.

The principal officer and trustees of the SA Local Authorities Pension Fund have been thrashed by a decision of the FSB Appeal Board.

Not only has the appeal been struck from the roll, and dismissed with costs on the punitive attorneyclient scale, but it was ordered that these costs be paid jointly and severally by the fund, its principal officer and the trustees who’d authorised the appeal. Moreover, the fund must fully recover these costs from the principal officer and relevant trustees in their personal capacities.

Let this sound a warning to any fund embarking on litigation that’s “vexatious”, as found here by the Appeal Board sitting under retired judge L T C Harms with J Damons and L Makhubela.

“Persons who are in a fiduciary position and litigate in their own interests, in the name of say an estate agent or trust, ought to be held personally liable for the cost of the litigation,” Harms stated. “The (SALA fund’s) board members and the principal officer stand in such relationship to the fund.”

The matter was between the SALA fund on the one side with the Registrar of Pension Funds and Fairsure Administration on the other. The fund’s appeal had to fail at the outset because the fund had no interest in the decisions of the registrar (in effect, the deputy registrar) that were under attack. Only the fund, which was not aggrieved, had appealed. The principal officer and trustees had not appealed against any decision, and the fund could not do so on their behalf.

What happened, in brief, was that the fund had entered into an agreement to buy all the shares in Fairsure from MEB Holdings for R40m (the intention of the fund being to appoint Fairsure as its administrator). The agreement was subject to certain suspensive conditions such as obtaining the registrar’s prior consent.

Although the registrar had not granted consent, the fund paid for the shares. MEB did not repay the R40m and the fund has to recover its loss.

The question that concerned the registrar was whether the fund’s board, in concluding the purchase contract, had fulfilled its fiduciary duty. That the fund had paid for the shares, before fulfilment of the suspensive conditions and before ownership of the shares had been transferred, “created avoidable counter-party risk and prejudice which the fund has suffered”.

Harms . . . clear message

Where the registrar has reason to believe that a principal officer or trustees are no longer fit and proper to hold office, he/she may disqualify them.

In this case, the (deputy) registrar had submitted to them a series of questions that were met with what the Appeal Board described as “diversionary tactics”.

Where the registrar has reason to believe that a principal officer or trustees are no longer fit and proper to hold office, he/she may disqualify them.

For example, they wanted the information to be requested in 10 official languages and insisted that the trustees be represented by the fund’s lawyers or by lawyers paid for by the fund. They also contended bias. “The consequences of the bias issue were not spelt out but presumably meant that, because the deputy registrar might be biased, she was not entitled to use her powers of interrogation,” Harms said. He considered the contention of bias to be “nonsense”.

Counsel for the fund submitted that the “key issue” was misdirection of the payment by Fairsure, presumably relating to the manner in which Fairsure administered the fund’s affairs after the fund’s takeover of Fairsure (e.g. by paying for the shares from the fund’s moneys). The fund had demanded, and been denied, sight of communications between the registrar and Fairsure.

To which Harms retorted: “The fund has not said why this information (was) required to answer the (deputy registrar’s) questionnaire, and a perusal of the questions shows why it could not have been said. The alleged post-contract wrongdoings of Fairsure have nothing to do with the conclusion of the purchase-share contract.”

In such a morass, yet another indication of fund misbehaviour is almost incidental. It had purported to note an appeal against the deputy registrar’s decision not to supply the fund with the Fairsure communications. But the noting of an appeal was “out of time” which, the fund knew, the Appeal Board had no power to condone. In fact, it hadn’t even applied for condonation.

The purpose of the litigation, according to the deputy registrar, was only to delay her duty (under the Pension Funds Act) in considering whether certain officials of the fund should be debarred. The Appeal Board found in her favour:

“(The principal officer and trustees had) decided to proceed with the litigation in their own personal interest without any regard to the interests of the fund, hiding behind the fund to shield them against any adverse litigation consequences. This is a serious breach of their fiduciary duties and justifies a cost order against them personally, not only for the registrar’s costs but also for those of the fund. The fund will be obliged to recoup its own costs from those responsible for this litigation.”

• N Arendse SC acted for the fund and M A Chohan SC for the registrar. Fairsure did not participate in the proceedings but gave notice that it disputed the allegations of misconduct made against it by the fund.