4 February 2008

Secret profits and bulking – a duty to disclose

Pension fund administrators have in the past been able to make secret profits through various practices.

One such practice is known as bulking - where an administrator consolidates the credit balances of pension fund bank accounts under their control and manages to obtain a higher rate of interest from the bank. The interest yielded was not always passed proportionately to the pension fund, as the administrators in some instances retained any additional interest without disclosure to the fund.

As pension funds may increasingly be at the receiving end of this improper conduct, it is important to consider the liability of such defaulting administrators.

Administrators fall within the ambit of the Financial Institutions (Protection of Funds) Act 28 of 2001, and are obliged to observe the utmost good faith, and exercise proper care and diligence when administering the funds of another. The administrator may not pledge, hypothecate, invest, alienate or make use of the funds in a manner calculated to gain any direct or indirect advantage to the prejudice of the fund. Any person who contravenes a section of the Act is guilty of an offence and liable on conviction to a fine or imprisonment.

Where the administrator has breached his position of trust and failed to observe the utmost good faith in administering the monies of the fund, the administrator must place the fund in the position it would have been had the breach not been committed.

The fullest exposition in our law on the duty to make good, is found in the case of Robinson v Randfontein Estates Gold Mining Co 1924 AD 151 where the court held as follows:

Where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other's expense or place himself in a position where his interests conflict with his duty…nor can he make any profit from his agency save the agreed remuneration…all such profit belongs not to him, but to his principal.

Case law further dictates that the term "profit" should be interpreted widely, especially when used in connection with accountability for the breach of a fiduciary duty, and should include not only money but also every other gain or advantage made by the wrongdoer. The amount of damages awarded will be such as to put the fund in as good a position as if the administrator had carried out his or her duties properly. In the case of Atmore v Chadwick (1896) 13 SC 205 the court held that the beneficiaries were entitled to claim either the proceeds of the wrongful investment or the sums that a proper investment would have realised.

Board members of pension funds called upon to retrospectively ratify the actions of the administrators should be aware that they may themselves be held personally liable for failing to act with due care and diligence or to act in the best interest of the fund's members.

The administrator stands in a position of trust vis-à-vis the pension fund. Where the administrator acts in breach of such relationship by making a secret profit, the fund has a right to claim such profit and a right to be put in the position it would have been had there been no breach of duty.

Owen Barrow and Lyle Cupido

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