NEW LEGISLATION MAKES DIRECTORS PERSONALLY AND CRIMINALLY LIABLE FOR PAYMENT OF COMPANY CONTRIBUTIONS TO RETIREMENT FUNDS

Wednesday, August 06, 2014
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Section 13A of the Pension Funds Act, 1956 (PFA) requires, for example, that employers must pay contributions for a particular month within seven days after month-end, that they must provide member schedules in respect of contribution payments to the fund and must pay compound interest on late contributions.

Despite these legislative efforts, many funds find it very difficult to collect employer contributions and related interest from employers who are in arrears. In an effort to increase the efficacy of contribution payments, the recently promulgated Financial Services Laws General Amendment Act, 2013 (FSL" Act), most of which took effect on 28 February 2014, attempts to improve timely employer contribution payments by effectively lifting the corporate veil.

For employers that are constituted as companies, the new section 13A(8) of the PFA requires that, "every director who is regularly involved in the management of the company’s overall financial affairs" will be personally liable for the company’s payment of contributions and related compliance with section 13A. Clarity may be needed on which directors will fall into this scope, but the language is wide enough to potentially include all executive directors of a company.

In addition, a new section 37(1) of the PFA will criminalise non-compliance with section 13A by "any person" (thereby including the employer company and certain directors) with up to 10 years imprisonment, a fine of up to R10 million, or both.

Business rescue

Despite the statutory noose tightening, there appears to be a misperception that section 13A does not apply to a company that has been placed under business rescue in terms of Chapter 6 of the new Companies Act, 2008 (Companies Act).

Section 136 of the Companies Act, however, expressly prohibits the unilateral cancellation or alteration of employees’ terms and conditions of employment during business rescue proceedings. An employer’s contributions to its employees’ retirement funding vehicle are made pursuant to the employee’s terms and conditions of employment, and the same is true of the deduction of employees’ contributions and remittal.

Section 144(5) of the Companies Act further states that additional protections specifically awarded to employees during business rescue proceedings shall be in addition to any rights arising or accruing in terms of any law, contract, collective agreement, shareholding, security or court order. It thus seems clear that section 13A of the PFA continues to bind companies during business rescue proceedings.

The continued obligation to pay contributions raises the question of whether interested parties will have a concomitant right to enforce contribution payments through legal process while business rescue proceedings are ongoing. Section 133 of the Companies Act imposes a general moratorium on legal proceedings against a company in business rescue, with limited exceptions, including:

the consent of the business rescue practitioner to bring legal proceedings against the company; and

criminal proceedings being instituted against the company and any of its directors or officers.

The Pension Funds Adjudicator considered this question in her 2013 determination, YN Landman v Wilenri Appliance Service Provident Fund and others (PFA/KZN/6286/2011/SM). Specifically, the adjudicator confirmed that "the fact that the [employer] has been placed under business rescue did not absolve it from its statutory duty to pay outstanding contributions".
While we agree with her conclusion, it is regrettable that the adjudicator reached this conclusion without the benefit of substantive engagement around some of the following issues:

  • no reference was made to the provisions of Chapter 6 of the Companies Act (the business rescue regime);
  • whether fund rules are contractual by nature, and if so, the implications in business rescue proceedings; and
  • whether the general moratorium on legal proceedings against a fund extends to the adjudicator’s office.

As adjudicator determinations are deemed to be civil judgments of a court of law, the adjudicator’s ability to continue to hear complaints in respect of non-payment of contributions against companies placed in business rescue, is crucial to protect members’ benefits. With the introduction of both personal and criminal liability provisions in situations of non compliance with section 13A of the PFA, members can now proceed to lodge personal liability claims against individual directors, to whom the business rescue moratorium does not appear to extend, and lodge criminal complaints against such directors.

Members of retirement funds now have additional avenues of recourse and companies and directors will be under additional pressure to comply with their obligations in terms of section 13A of the PFA. The effect of the amendments remains to be seen, but in principle, employers can no longer afford to withhold contribution payments, whether or not the company is in business rescue.