The limitation by the court to the application of retirement fund rules: Withholding of pension benefits in terms of the PFA
The limitation by the court to the application of retirement fund rules: Withholding of pension benefits in terms of the PFA
The High Court in Johannesburg in the case of Hansen & Genwest (Pty) Ltd v Corporate Selection Umbrella Retirement Fund NO2  ZAGPJHC 102 (6 February 2023) dealt with the question of whether the trustees of a pension fund can be ordered to withhold pension fund benefits where there is an allegation of a member’s liability to an employer for damages caused by reason of theft, dishonesty, etc
At a glance
- The High Court in Johannesburg ruled in favor of the applicant, Hansen & Genwest (Pty) Ltd, in a case involving the withholding of pension fund benefits of a member accused of liability for damages caused by theft or dishonesty.
- The court found that the applicant met the requirements for an interim interdict and demonstrated the application of Section 37D of the Pension Funds Act, which allows for the deduction of amounts owed by a member to an employer for damages resulting from the member's wrongdoing.
- The court emphasized the importance of the pension fund trustees assessing the validity of the employer's claim and not dismissing it without proper consideration, as the burden of proof lies with the employer to establish the claim's legitimacy.
The court in this case found in favour of the applicant on the basis that it successfully proved the requirements for an interim interdict as well as the application of the provisions of section 37D of the Pension Funds Act 24 of 1956 (PFA), read with the applicable rule of the fund.
Section 37D of the PFA provides for a retirement fund to deduct any amount due by the member to an employer in respect of the damages suffered by the employer arising from the employee’s wrongdoing. It is, however, worth noting that this provision is solely applicable to an employer who is able to prove that the damages arose from the employee’s conduct.
A summary of the facts is set out below.
Mrs Claudia Wilkinson and her husband, Mr Shaun Wilkinson, the third and fourth respondents in the matter, were both employed by the applicant, Hansen & Genwest (Pty) Ltd. Mr Wilkinson was employed as a service technician who resigned from his employment in December 2021. Mrs Wilkinson was employed as the applicant’s assistant financial manager until she was dismissed on 26 May 2022 following a disciplinary enquiry in which she was charged with and found guilty of misconduct. At the time that the application was heard, Mrs Wilkinson had not challenged the fairness of her dismissal.
In April 2022, the applicant instituted action against Mr and Mrs Wilkinson as joint wrongdoers together with Seloane Industries (Pty) Ltd, the fifth respondent, a company of which Mr Wilkinson was a director. The applicant sought to inter alia obtain an order requiring Mr and Mrs Wilkinson to pay damages in the sum of R1,360,030.63, arising out of alleged breaches by Mr and Mrs Wilkinson of their contractual and fiduciary duties in assisting the fifth respondent to compete with the applicant.
The damages amount was calculated on the basis that it represented the gross profit that the applicant would have earned had it exploited 10 specific transactions that it contends were unlawfully diverted to the fifth respondent.
The applicant contended that the damages that it claimed from Mrs Wilkinson were caused to it “by reason of any theft, dishonesty, fraud or misconduct” on her part as contemplated in section 37D(i)(b)(ii)(bb) of the PFA read with rule 12.4.5 of the fund’s rules. It further contended that the PFA and the rules of the fund would be the governing principles upon which the fund would be entitled to deduct the amount of damages found to be payable from Mrs Wilkinson’s pension benefit and to pay them over to the applicant.
On 30 November 2022, the fund indicated that, while it had decided to withhold Mr Wilkinson’s pension benefits in terms of its rule, to the value of R449,219.30, it had elected not to withhold the pension benefits of Mrs Wilkinson to the value of R387,926.98 on the basis that the condition stipulated in rule 12.4.5 had not been met.
Rules of the fund
Rule 12.4.5 of the fund rules provides that:
“Where the employer or the fund seek to recover an amount referred to in section 37D(1)(b)(ii)(bb) of the Act by obtaining a judgment in value against the member from any competent court, notwithstanding anything to the contrary stated in these rules, the fund shall be entitled to withhold the amount to be recovered until the earlier of the date on which proceedings are determined, settled or withdrawn, provided that:
(a) the board of trustees is satisfied that the employer or fund has established a prima facie case against the member;
(b) the board of trustees are of the opinion that the employer or fund has a reasonable chance of succeeding in the proceedings instituted against the member; and
(c) the employer or fund has taken all reasonable steps to enter the case on the rolls of the court at the earliest possible date and is not responsible for any undue delays in the prosecution of the proceedings.”
In this regard Mrs Wilkinson opposed the application on the basis that the applicant had not shown that its damages claim against her was based on the kind of conduct contemplated in section 37D(1)(b)(ii) of the PFA, namely “any theft, dishonesty, fraud or misconduct”. Essentially, this echoes the reason given by the pension fund for declining to accede to the applicant’s request.
Secondly, she argued that the amount of damages claimed from her was “excessive and inflated” because (i) a number of the allegedly diverted corporate opportunities never in fact resulted in work or services being rendered by the fifth respondent; (ii) “the total sum of work and/or services rendered by the fifth respondent for the period of complaint and having regard to the profits made reflects a more realistic amount of not more that R200,502.79”; and (iii) the pension benefits of Mr Wilkinson in the amount of R449,219.30 were already being withheld.
Thirdly, she argued that the applicant had already admittedly withheld the sum of approximately R62,963.45 (net after tax) from her in respect of accrued leave pay as well as an amount of R10,908.65 in respect of tax deductions which were not due.
In response to Mrs Wilkinson’s contention that these amounts had both been unlawfully withheld, the applicant contended that it was entitled to withhold these sums pursuant to clause 4.4 of her employment contract, which authorised the applicant to deduct from her remuneration “all amounts which may be due by the employee to the employer for any reason”.
Finally, Mrs Wilkinson contended that the effect of the order would be to allow the applicant to “jump the queue” of creditors and become a preferential creditor to the detriment of other creditors in the event that damages were awarded against her in the application and she was unable to satisfy the judgment.
The issues before the court
It had to be determined whether the court was permitted to grant the applicant the relief it sought, which was an interim order “interdicting and restraining” the pension fund from paying out the whole or part of Mrs Wilkinson’s pension benefit pending the outcome of the final interdict.
The court also had to consider if the conduct the applicant sought to rely upon was recorded in paragraph 18 (read with paragraphs 16, 17 and 19) of the particulars of the claim.
In paragraph 18, it was alleged that Mrs Wilkinson “assisted” the fifth respondent, a competitor of the applicant, “by processing [its] invoices and submitting them to its customers; and following up with [its] customers regarding payments and other matters relating to [its] business”. In particular, the applicant’s case was that by engaging in this conduct, Mrs Wilkinson “assisted” her husband to divert corporate opportunities to the fifth respondent which ought to have been available to and secured by the applicant, unlawfully making use of customer connections established during her employment with the applicant, providing the fifth respondent with the applicant’s confidential intellectual property, and giving the fifth respondent an unlawful advantage in competing with the applicant.
The court found that an applicant seeking relief of this nature can logically not be entitled to an order restraining a greater sum than it is able to show (albeit merely on a prima facie basis) that the employee is likely to be ordered to pay in the action. If the employee is able to demonstrate serious doubt regarding the quantification of damages in the claim, the amount that the court may order to be withheld should be reduced accordingly.
In this regard, employers such as the applicant participate voluntarily in pension funds and may at the least be assumed to be well aware of their rules, if not bound by them. As such, the court did not consider that it would ever be appropriate to grant an order compelling the fund to undertake conduct that would involve a breach of its own rules.
Apart from requiring the employer to satisfy the board of trustees that it has established a prima facie right to recover damages from the member, the rule in question provides that the fund may only accede to a request to withhold the amount to be recovered under section 37D(1)(b)(ii)(bb) of the PFA, where the board of trustees is “of the opinion that the employer has a reasonable chance of succeeding in the proceedings instituted against the member” and the employer has “taken all reasonable steps” to advance its claim and is not responsible for any undue delays in the prosecution thereof.
In considering paragraph 18 of the applicant’s pleadings, the court found that the fund did not act reasonably when it refused the applicant’s request to withhold any portion of the third respondent’s pension benefits. Its contention that the misconduct relied upon by the applicant was limited to allegations that the third respondent “used company time to issue invoices or follow up on outstanding payments in respect of her husband’s business”, was unreasonable in light of the content of the particulars of the claim, and was an indication that it failed to properly consider the request.
The court, however, found it extremely unlikely that Mrs Wilkinson would be liable for 100% of the applicant’s damages arising from the diversion of the corporate opportunities and consequently held that any apportionment of damages based on Mrs Wilkinson’s degree of fault would be very unlikely to exceed 20% of the damages suffered by the applicant flowing from the diverted transactions in which she had been implicated.
This judgment accords with the prevailing law as set out in section 37D of the PFA, which provides for the board of trustees to withhold the employee’s benefits after assessing whether the employer holds a claim that may possibly stand in court. It goes without saying that when an employer makes an application to the pension fund for the deduction of the employee’s benefit, based on allegations of theft, fraud or misconduct, the burden of proof rests on the employer to show that the claim is valid and that it is the legitimate victim of the dishonourable acts by the employee, which was done in this case.
The fund should be wary of not simply dismissing an employer’s request without applying itself, the PFA and the rules of the fund to the facts before it. Failure to do so may expose the fund to being dragged to court to force it to do so.
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