Case Law Update 2018 Alec Freund SC Karin

Case Law Update 2018 Alec Freund SC Karin Mac. Kenzie

CASES (Alec) o The Chemical Industries National Provident Fund v Tristar Investments (Pty) Ltd (960/2016) [2017] ZASCA 184 (6 December 2017) o Municipal Employees Pension Fund v The Natal Joint Municipal Pension Fund (Superannuation) and Others [2017] ZACC 43 o RFS Administrators (Pty) Ltd v National Fund for Municipal Workers and Others (Case No: 3275/2016; judgment 14/12/2016) o Pather v Financial Services Board [2017] ZASCA 125 (28 September 2017)

The Chemical Industries National Provident Fund v Tristar Investments (Pty) Ltd • Core issue: the validity of an agreement between the Fund and Tristar, an investment consulting company. This turned on whether the Fund’s trustees had taken a valid decision to conclude the agreement. • The Fund is managed by a board of trustees, half appointed by the employers and the other half appointed by the members. • The minutes of a trustee meeting held on 15 and 16 November recorded that, despite strong objections having been raised by certain trustees, “…the agreement was reached on finalising the appointment of Tristar…” cntd

The Chemical Industries National Provident Fund v Tristar Investments (Pty) Ltd • The principal officer and chairperson subsequently signed the contract. • Rule 13. 6. 8 : all decisions of the trustees shall require the support of at least two-thirds of each of the employer and member trustees. • No voting took place when the decision to appoint Tristar was taken. • A few months later the trustees took a decision by a vote of more than two-thirds to cancel the appointment of Tristar sued for damages for breach of contract. • The Fund argued that, in the absence of a vote, it was not possible to establish whether the requisite two-thirds of the trustees had been met in the November meeting. cntd

The Chemical Industries National Provident Fund v Tristar Investments (Pty) Ltd • The SCA held: “It is not disputed that historically, decisions of trustees have been adopted consensually, without a formal vote. Thus, even though some trustees might speak against a resolution and have reservations about it, if ultimately they are prepared to ‘live with it’ so to speak, then it is carried. The appointment of Tristar was no different…It is therefore apparent that the Board was able to establish the requisite two-thirds satisfactorily without a formal vote. ” • The SCA therefore held that the Fund’s representatives had the authority to sign the agreement on its behalf and upheld the contractual damages awarded by the High Court to Tristar.

Municipal Employees Pension Fund v The Natal Joint Municipal Pension Fund (Superannuation) and Others [2017] ZACC 43 • An appeal to the CC against an SCA decision we discussed last year. • It turns on the proper interpretation of provincial legislation and regulations applicable in KZN (excluding Durban and Pietermaritzburg). • The essential issues were whether the affected local authorities and their employees are obliged to be associated with one of four funds established by the legislation (“the KZN funds”); and whether their employees are entitled to prefer to join a different fund (in this case, the MEPF). cntd

Municipal Employees Pension Fund v The Natal Joint Municipal Pension Fund • The SCA held that, properly interpreted, the regulations obliged the local authorities to associate as employers with the KZN funds. If they did so, nothing prohibited them from also associating with another fund too. • The CC (3 judges dissenting) dismissed an appeal by the MEPF. • All the judges agreed that the SCA’s interpretation of the regulations was correct. • An argument that the regulations amounted to an unconstitutional violation of employees’ freedom of association was not upheld. The majority (per Mhlantla J) noted that the employees and trade unions concerned were not before the Court and held that the MEPF had not demonstrated its legal standing in relation to this issue. They also expressed the view that the SCA’s interpretation had preserved the employees’ freedom to associate. cntd

Municipal Employees Pension Fund v The Natal Joint Municipal Pension Fund • 3 judges (per Jafta J) would have upheld the appeal, on the basis that, on a proper construction of the empowering provision relied upon, the MEC did not have the power to oblige affected local authorities to associate with the KZN funds (i. e. the regulations were ultra vires). (The majority did not regard this as an issue properly raised. )

RFS Administrators (Pty) Ltd v National Fund for Municipal Workers and Others (Case No: 3275/2016; judgment 14/12/2016) • This case concerns whether a “whistle blowing” pension fund administrator is legally protected against having its administration contract terminated by the fund. • The administrator in this case, RFS, alleged in its particulars of claim that its contract with two related funds had been terminated because it had exposed to the Registrar misconduct on the part of their principal officer and the chairperson of their boards of trustees. • It alleged that this termination was unlawful and void, relying, firstly, on certain provisions recently introduced into the Pension Funds Act (”PFA”) and, secondly, on certain common law principles. cntd

RFS Administrators (Pty) Ltd v National Fund for Municipal Workers and Others • The defendants excepted to the particulars of claim, arguing that even if the facts alleged by RFS were true, this would not disclose a valid legal cause of action, on either of the alternative bases pleaded. • Section 13 B(10) of the Pension Funds Act (“PFA”) provides that, “When an administrator becomes aware of any material matter relating to the affairs of the fund, which in the opinion of the administrator may prejudice the fund or its members, the administrator must inform the Registrar of that matter in writing without undue delay. ” • Section 9 B(1) of the PFA requires the Registrar to provide a process for the submission of disclosures “by a board member, principal officer, deputy principal officer, valuator or other officer or employee of a fund or an administrator”, which (inter alia) provides appropriate measures for the protection of disclosures. cntd

RFS Administrators (Pty) Ltd v National Fund for Municipal Workers and Others • Section 9 B(2) provides : “In addition to what is provided in sections 8 and 9 of the Protected Disclosures Act, a disclosure by a board member, principal officer, deputy principal officer, valuator or other officer or employees of the fund or administrator to the registrar constitutes a protected disclosure. ” • Section 9 B(3) provides that such a person who makes a protected disclosure may not suffer any occupational or other detriment. • RSF relied on s 9 B but the defendants argued that provision does not apply to it. They argued that provision only protects employees or other officers of a pension fund or administrator, and does not cover the situation where a juristic person, such as an administrator, makes a disclosure about a pension fund which it administers. cntd

RFS Administrators (Pty) Ltd v National Fund for Municipal Workers and Others • The Court held that the purpose of s 9 B(2) was to afford protection beyond that afforded under the PFA. Whilst it could be interpreted as not protecting an administrator who has statutory duties under s 13 B(10), “to expose to reprisal administrators when other officers are protected, in my opinion, ignores the mischief identified by the legislator and fails to advance the appointed remedy. ” The court held that to interpret s 9 B in the manner proposed by the defendants ‘would weaken the intended protection of administrators in circumstances where protection will often be required. ” • The exception to the first cause of action therefore failed. • The second cause of action was that, even at common law, the termination of the contract was contrary to public policy, unlawful and invalid, because its purpose was to frustrate RFS’s investigation into malfeasance or as retaliation for investigating and reporting on that malfeasance. cntd

RFS Administrators (Pty) Ltd v National Fund for Municipal Workers and Others • The defendants pointed out that, as required by an FSB board notice, the contract was terminable on 90 days’ notice. They argued that no administrator could claim a contractual right to provide administration services in perpetuity; and that the reasons for a termination are irrelevant to the question as to whether it was validly terminated. • The court saw nothing wrong with the clause entitling either party to terminate the contract on three months notice; but the question, in its view, was whether its enforcement in the present case could be said to be immoral or contrary to public policy. • The court held: “The motive in implementing or enforcing a contractual term can infect it with illegality and render it void if it results in an unconscionable termination of the contract contrary to public policy. ” cntd

RFS Administrators (Pty) Ltd v National Fund for Municipal Workers and Others • It added: “Where there is evidence that a pension fund has exercised its contractual rights to terminate an administration contract in order to thwart or render nugatory the role conferred on the administrator by public policy, the exercise of those rights must be in breach of public policy…” • It followed that the second exception also fell to be dismissed.

Pather and Ah Vest Limited v Financial Services Board • This case concerned administrative financial penalties imposed by the FSB’s Enforcement Committee on a listed company and its CEO, for contravening a provision in the Securities Services Act, No. 36 of 2004, which prohibits publishing false or misleading financial statements. • It is relevant because administrative penalties can also be imposed in respect of contraventions of the Pension Funds Act. • Though the applicable legislation is in the process of being replaced, the same underlying issues will still apply in respect of the legislation soon to take effect. • Pather and Ah Vest were found by the Enforcement Committee to have published false or misleading financial statements. It imposed financial penalties of R 1. 5 m on each of them. An appeal to the FSB’s appeal board failed. cntd

Pather and Ah Vest v Financial Services Board • The applicants took the EC’s decision on review to the High Court. Amongst the points they raised were the following: • - the EC had applied the “balance of probabilities” (civil) standard, whereas it should have applied the “beyond reasonable doubt” (criminal) standard; alternatively • - the legislative scheme authorizing the imposition of the penalties was unconstitutional and invalid, because the finding against them was “akin to a finding of criminal guilt”, which finding only a court of law (and not an administrative body like the EC) is competent to make. • The review was dismissed by the High Court. The applicants appealed to the SCA. cntd

Pather and Ah Vest v Financial Service Board • Underlying both of the applicants’ arguments were provisions in s 35(3) of the Constitution which protect the rights of “accused persons”. These include the right of such persons to be presumed innocent and the right to a public trial before an ordinary court. • The applicable legislation (ss 102 - 105 of the Securities Services Act) showed quite clearly that the Legislature regarded and intended the penalties to be administrative and not criminal. (See now ss 6 A to 6 I of the Financial Institutions (Protection of Funds) Act, 28 of 2001, as amended; and the Financial Sector Regulation Act, 9 of 2017, not yet in force, particularly s 167(1) thereof) • However, relying on a line of case-law of the European Court of Human Rights, the Hong Kong Final Court of Appeal and other jurisdictions, the applicants argued that in substance the financial penalties imposed on them were punitive, and that they should therefore have been afforded the constitutional protections afforded to “accused persons”. cntd

Pather and Ah Vest Limited v Financial Services Board • If their arguments had been accepted, this might have rendered all administrative financial penalties unconstitutional. Such penalties are generally intended to be deterrent and therefore to some extent punitive. If this feature attracts the constitutional protections of s 35(3) of the Constitution, only a court of law - and not an administrative agency- may impose them. • However, the SCA rejected the argument that the penalties are criminal in substance, if not in form. In reaching this conclusion it had regard, in particular, to a line of Canadian cases. Its conclusion was that proceedings before the FSB’s enforcement committee “do not lie within the criminal sphere and cannot be classified as criminal in nature” • It followed that the applicable standard of proof was the civil standard; and that the provisions in issue were not unconstitutional. • An application for leave to appeal to the Constitutional Court was subsequently dismissed.

CASES (Karin) Democratic Alliance and others v Minister of Public Enterprise and others Magabane v Municipal Employees Pension Fund v Mudau M v M and Another

Democratic Alliance and others v Minister of Public Enterprise and others (unreported (HC, GP) case nos 33051/2017, 34568/017 and 34042/2017 dated 25 January 2018) this is the Eskom / Molefe golden handshake of a R 30 million pension benefit to the Eskom CEO, who voluntarily left service after only 15 months due to serious allegations of corruption

Democratic Alliance THE FACTS IN THE JUDGMENT 1 October 2015 – Molefe appointed CEO of Eskom – open ended contract, but advised Minister requires fixed term contract 7 March 2016 – new fixed-term contract supersedes earlier open-ended one, operative from 1 October 2015 to 30 September 2020

Democratic Alliance 9 February 2016 - pension side deal (to compensate for impending fixed-term contract): Eskom and Molefe agree on balloon payment through Eskom Pension and Provident Fund • Early retirement benefit available • Eskom to fund pensionable service as if age 63 (Molefe then 50) • Eskom to fund cost of early retirement penalties did not advise Minister of Public Enterprise or obtain her approval as required and arrangement was contrary to Eskom fund’s rules

Democratic Alliance in summary: Molefe’s annual salary was R 7. 6 million he would, at most, serve a 5 year contract he was only 49 when his contract commenced his exit benefit would be calculated as if he had been 63 years of age when his employment terminated (at most he could have been 54) • Eskom would fund the additional pensionable service and waiver of penalties • • when Molefe’s employment did in fact terminate after 14 months of employment Eskom paid the fund R 30. 1 million. Compare this to his 14 months’ service at an annual salary of R 7. 6 million…

Democratic Alliance 2 November 2016 - Public Protector releases the State Capture Report – heavily implicating Molefe in the looting of Eskom to the benefit of the Gupta family 11 November 2016 – Molefe makes televised announcement that he was voluntarily leaving Eskom in the interests of good governance same day – he triggers the pension side deal by applying for early retirement, Eskom agrees and submits claim to fund Molefe receives R 30 million benefit, takes R 10 million in cash

Democratic Alliance all was quiet on the Western front…. UNTIL 16 April 2017 – the Sunday Times broke the story of the R 30 million pension payout Panic, chaos and disorder… the Minister intervenes Eskom hatches a new plan to “rescind” the retirement agreement and reinstate Molefe as CEO subject to repayment of pension benefits

Democratic Alliance 15 May 2017 - Molefe returns to Eskom after a brief interlude as a Parliamentarian Minister still not satisfied – directs Eskom to rescind its “rescission” of the retirement agreement – in other words his earlier resignation stands 2 June 2017 – Molefe is informed that his reappointment has been reversed and he is no longer employed he institutes action in the Labour Court, which is stayed pending the outcome of the High Court case

Democratic Alliance DA, EFF etc approach High Court for an order: • setting aside Molefe’s reinstatement as CEO of Eskom • declaring that the pension payout was invalid • directing Molefe to repay any pension benefits received. THE FINDINGS the Court found: • Molefe was employed in terms of a fixed-term contract, which, through its express terms, terminated his original open-ended contract

Democratic Alliance • he was not eligible for membership of the Eskom fund since he was a temporary employee • his employment terminated through resignation or retirement • Eskom’s decision to reinstate Molefe was ultra vires since it did not have the consent or approval of the Minister • the contention that Molefe’s original contract of employment did not come to an end was contrived and manifestly false

Democratic Alliance in relation to the Eskom fund rules and the side-deal: “Temporary Employee” is a person who is appointed for a specific purpose and whose employment will end when that purpose has been accomplished, or who is appointed for a specific period and whose employment will end at the end of that period – Mr Molefe was therefore a temporary employee “Eligible employee” means an employee who […] is not a Temporary Employee – Mr Molefe was accordingly not even a member of the fund

Democratic Alliance rule 21. 4 – provides for special payment by Eskom to the fund to add to the pensionable service of an employee (note KM – this can be used to populate the formula with additional pensionable service to increase the benefit, but this rule cannot be used to add actual service to bypass the eligibility provisions) rule 24 – early retirement rule – employee must have been in Eskom’s employment for 10 years and must be 55 or more – cannot be applicable; rule 28 – retrenchment rule – termination must be for operational requirements – also inapplicable;

Democratic Alliance knowing that Molefe was a temporary employee and thus not eligible to be a member of the Eskom fund, Eskom nevertheless advised the Eskom fund that Molefe’s early retirement had been approved “in terms of Rule 28 and 21. 4 and that penalties will be waived and potential service to age 63 had been granted to him. ” the Court held that the side deal was invalid and unenforceable – it was common cause that it was contrary to the fund rules

Democratic Alliance The Court accordingly: • set aside Eskom’s acceptance of Molefe’s early retirement proposal (the side deal) • set aside the Minister’s decision to reinstate Molefe as CEO (the Minister claims this was the board’s decision not hers) • declared any payment under the purported pension agreement to be invalid • directed Molefe to repay any benefits he had received in terms of it.

Democratic Alliance the Court summarised the early retirement deal as follows: “There is a strong inference to be drawn from the above factors that the early retirement agreement was a deliberate scheme devised by Eskom with the involvement of Mr Molefe to afford him pension benefits he was not entitled to. The scheme was started soon after Mr Molefe’s permanent employment and was deployed after he had publicly stated that he was voluntarily leaving Eskom’s employ. ”

Democratic Alliance the Eskom fund was also criticised for its passive role and lack of vigilance – commenting on the fund’s contention that it relied on information furnished by Eskom, the Court stated: “This explanation extends incredulity… The fund failed to independently assess whether Mr Molefe’s application for early retirement fell within Rule 28. The Constitution of the fund stipulates that its operations shall have as its main objectives, among others, sound governance and faultless administration. The fund has failed to comply with the Pension Funds Act or with its rules. ”

Magabane v Municipal Employees Pension Fund unreported (HC, GP) case no 81389/15 dated 10 April 2017) Effect of rule amendment with retrospective implementation date – can it apply to a benefit which has already accrued prior to registration of the rule amendment?

Magabane seemingly no direct authority until now on how a retrospective rule amendment impacts a benefit entitlement which has accrued prior to registration of the rule two HC cases (Magabane and Mudau) have now dealt with this issue but have gone in opposite directions the diagram below uses the dates and facts in the Magabane case, but the principle is universally applicable

Magabane Hlkjhljhljh; l

Magabane the member became entitled to a withdrawal benefit on his resignation from service on 30 December 2013. The fund rule as it stood at that date entitled him to a benefit of his contributions plus interest in respect of his pensionable service multiplied by 3 the fund did not pay out this benefit for reasons that are not clear (other than the obvious one of withholding until it could implement a reduction through a rule still to be registered)

Magabane 1 April 2014 - the registrar approves a rule amendment with retrospective effect to 1 April 2013 which reduces withdrawal benefits to interest multiplied by 1. 5 15 April 2014 - the fund pays the member a lesser benefit calculated in terms of the new rule the adjudicator upheld the member's complaint that the rule could not apply retrospectively to an accrued benefit

Magabane the applicant applied to court to enforce the determination, but the Court refused, holding that the adjudicator's position was 'clearly wrong', and the benefit had to be calculated in accordance with the amended rule – ie a retrospective rule amendment can affect a benefit which has already accrued the reasoning is not clear – it seems to be based on the fact that s 12 permits rules to be registered with retrospective effect – there is no discussion of any distinction between vested rights and unaccrued benefits both the result and the approach are questionable – the adjudicator’s finding was more compelling

Municipal Employees Pension Fund v Mudau (unreported (HC, GP) case no 61555/14 dated 29 March 2017) the facts were almost identical to the Magabane case, but here the court concluded that the retrospective rule amendment could not apply to the member's benefit since he had been given no notice of the amendment although the outcome is probably correct, there is no basis for requiring a member to be notified of a rule amendment prior to registering it or applying it

M v M and Another (5403/2016) [2017] ZAECGHC 75 (20 June 2017) anti-dissipation order to interdict fund from paying out accrued benefit to member pending finalisation of divorce proceedings

Mv. M divorce proceedings were pending between the parties and the applicant (the spouse of the member) obtained an ex parte interim order on an urgent basis preventing the fund from releasing the member's benefit to him the applicant alleged that the respondent was dissipating the asset but no proper evidential basis was laid the court refused to confirm the interdict and formulated the approach to be adopted as follows:

Mv. M 'The applicant seeks an order in the nature of an antidissipation order. The effect of such an order, in the form of an interdict, is to prevent a respondent from freely dealing with his own property to which the applicant lays no claim. An applicant needs to show a particular state of mind on the part of the respondent - that is, that he is getting rid of the funds or he is likely to do so, with the intention of defeating creditors' claims. '

Mv. M the significance of this case lies in the stricter approach adopted to pension benefits in divorce proceedings anti-dissipation orders are frequently granted as a matter of routine without proper enquiry into the justification for such a departure from the ordinary consequences of ownership this case refers to the standard that should be applied – it suggests that it can only be in exceptional circumstances that the courts should intervene to prevent someone from dealing with their own asset, which would include an accrued pension benefit.

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