The withholding of retirement benefits is a common recourse against employees who caused damage to their employers by committing theft, dishonesty, fraud, or misconduct. The recourse available to an employer is sanctioned by section 37D(1)(b)(ii) of the Pension Funds Act (PFA) and in many cases is augmented by the rules of a retirement fund.
Section 37D(1)(b)(ii) of the PFA provides that a retirement fund may deduct any amount due by a member to his or her employer for any damage caused to the employer by reason of theft, dishonesty, fraud, or misconduct by the member and in respect of which the member has in writing admitted liability to the employer or judgment has been obtained against the member.
In the case of Highveld Steel & Vanadium Corporation Ltd v Oosthuizen, the Supreme Court of Appeal held that although section 37D(1)(b)(ii) only expressly refers to the deduction of retirement benefits after there has been an admission of liability, or a judgment has been obtained, it must (in view of its purpose, which is to protect an employer’s right to recovery of money misappropriated from it) be interpreted to mean that a retirement fund also has the discretion to accede to a request by an employer to withhold payment of a member’s benefits pending an acknowledgement by the member or a determination by a court that he or she is liable to the compensate the employer in respect of any damage caused to the employer by reason of theft, dishonesty, fraud or misconduct.
The question arises: what grounds must an employer satisfy to interdict a retirement fund from paying out a member’s benefit pending the outcome of proceedings instituted against a former employee to recover damages? The High Court in Johannesburg provided clarity on this issue in a case it considered earlier this year.
Background to the case
A summary of the facts, as provided in the judgment, is set out below.
Claudia Wilkinson and her husband, Shaun Wilkinson, the third and fourth respondents in the matter, were employed by the applicant, Hansen & Genwest (Pty) Ltd.
Mr Wilkinson resigned in December 2021.
Mrs Wilkinson was employed as the applicant’s assistant financial manager until she was dismissed in May 2022 following a disciplinary inquiry in which she was found guilty of misconduct.
In April 2022, Hansen & Genwest instituted action against the Wilkinsons as joint wrongdoers with Seloane Industries (Pty) Ltd, the fifth respondent, a company of which Mr Wilkinson was a director.
Hansen & Genwest sought, inter alia, to obtain an order requiring the Wilkinsons to pay damages of R1 360 030 arising out of alleged breaches of their contractual and fiduciary duties in assisting Seloane Industries to compete with it.
The amount was calculated on the basis that it represented the gross profit that Hansen would have earned if it had exploited 10 transactions that it contended were unlawfully diverted to Seloane Industries.
Hansen contended that the damages it claimed from Mrs Wilkinson were caused “by reason of any theft, dishonesty, fraud or misconduct” on her part as contemplated in section 37D(1)(b)(ii)(bb) of the PFA read with rule 12.4.5 of the rules of the Corporate Selection Umbrella Retirement Fund No. 2.
In its particulars of claim, Hansen alleged that Mrs Wilkinson “assisted” Seloane “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”.
It also alleged that Mrs Wilkinson unlawfully used customer connections established during her employment and provided Seloane with Hansen’s confidential intellectual property.
In November 2022, the umbrella retirement fund indicated that, although it had decided to withhold Mr Wilkinson’s retirement benefit of R449 219, it had elected not to withhold Mrs Wilkinson’s retirement benefit of R387 926 because the conditions stipulated in rule 12.4.5 had not been met.
The trustees said the fund was not entitled to withhold Mrs Wilkinson’s benefit because the allegations against the member were that of misconduct which the Pension Funds Adjudicator “has expressly indicated is not covered by section 37D […] the fact that the member used company time to issue invoices or follow up on outstanding payments in respect of her husband’s business does not constitute fraud, theft or dishonesty as provided for in the Act”.
Hansen approached the High Court on an urgent basis seeking an order “interdicting and restraining” the retirement fund from paying out all or part of Mrs Wilkinson’s benefit pending the outcome of the action.
Requirements for withholding a member’s benefit
The High Court’s judgment set out the requirements for an interim interdict to withhold a member’s benefit.
It held that the relief sought by Hansen fell within the “exceptional category of applications for interim relief pending ‘quasi-vindicatory’ actions”. In these claims, the applicant (employer) does not have to prove irreparable damage, because the loss is presumed irreparable subject to a rebuttal by the respondent (the former employee). Thus, the employer does not have to establish the absence of other satisfactory remedies.
Second, the relationship between the prima facie right to obtain possession of the benefit and the amount to be withheld by the retirement fund must be established. To do so, the facts set out by the employer and those established by the former employee that are common cause and not disputed are considered first. Thereafter, the facts in dispute must be analysed to determine whether the former employee has cast serious doubt upon the employer’s version. If the former employee, however, merely contradicts the employer’s case or tenders an unconvincing explanation, the matter should be left for determination at trial, and the employer’s right should be protected in the interim.
Third, the balance of convenience must be demonstrated to favour withholding the retirement benefit in the meantime.
Finally, the employer must demonstrate that its request to the retirement fund to withhold payment of the benefit has been unreasonably refused.
Fund did not act reasonably
Acting Judge Richard Moultrie said Mrs Wilkinson’s conduct identified in Hansen’s particulars of claim would, if proved, constitute conduct contemplated in section 37D(1)(b)(ii), even when applying the standard set by the High Court in Moodley v Scottburgh/Umzinto North Local Transitional Council, where the word “misconduct” was interpreted in context as requiring an element of dishonesty.
He said the retirement fund “did not act reasonably” when it refused Hansen’s request to withhold any portion of Mrs Wilkinson’s benefit.
“Its contention that the misconduct relied upon by the applicant is 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’ is unreasonable in light of the content of the particulars of claim and is an indication that it failed to properly consider the request.”
Quantifying the damages
Nevertheless, Acting Judge Moultrie said, in his view, Hansen only has a reasonable chance of establishing that Mrs Wilkinson was involved in dishonestly assisting her husband and Seloane to a very limited extent, and it was “extremely unlikely” that she would be held liable for 100% of Hansen’s damages.
“Although it is undoubtedly dishonest conduct when viewed in context, the processing and submitting invoices and following-up with customers regarding payments and other matters relating to the fifth respondent’s business can hardly be described as being the key activities involved in diverting corporate transactions to it.
“In my view, any apportionment of damages based on the third respondent’s degree of fault would be very unlikely to exceed 20% of the damages suffered by the applicant flowing from the three diverted transactions in which she has been implicated.”
Earlier in his judgment, Acting Judge Moultrie said he was satisfied that Hansen had only succeeded “at this stage” in demonstrating that it has a reasonable chance of implicating Mrs Wilkinson in diverting three of the 10 transactions.
As a result of the court’s view that Mrs Wilkinson had established serious doubt about the damages claimed, Acting Judge Moultrie significantly reduced the amount the retirement fund was interdicted from paying her to R76 000, or 20% of R380 000, which was Hansen’s total lost profit in relation to the transactions.
Law firms’ comments
Cliffe Dekker Hofmeyr (CDH) said the judgment accords with the prevailing law as set out in section 37D of the PFA, which provides for trustees to withhold an employee’s benefit after assessing whether the employer has a claim that may possibly stand in court.
When an employer makes an application to a retirement fund for the deduction of an 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.
“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,” CDH said.
Bowmans said the clarity provided by the High Court that proceedings aimed at interdicting a retirement fund to withhold payment of a member’s benefit fall within an exceptional category of applications for interim relief is an advantage to employers because the requirement to prove that the injury is irreparable and that no other satisfactory remedy is available is relaxed.
