A court ruling holding private company directors personally liable for unpaid pension contributions sends a clear message: non-compliance will not be tolerated from the C-suite
By Rob Rose
It’s no longer just inept municipal councillors in the firing line for deducting pension contributions from staff salaries and failing to pay them over to the fund; now, company directors are in the dock too.
This emerges from a case in January, where Cape Town high court acting judge AJ Parker spoke of the damage to society of this scourge. The introduction of the two-pot system in September, which allows people to access a portion of their retirement savings, has brought the issue to the fore.
“The recent two-pot system introduced in South Africa has highlighted the dilemma employees find themselves in,” said the judge. “It has been reported that about 7,770 employers have defaulted on paying their pension fund contributions.”
This is an issue which has been much in the news in recent months following the arrests of five officials for this infraction at three municipalities – in Kamiesberg, Renosterberg and Kai !Garib. It has fired up regulators too, with Financial Sector Conduct Authority (FSCA) commissioner Unathi Kamlana telling Today’s Trustee that executives who fall foul of this law must go to jail.
But the Western Cape High Court case is a new development, since it involves a private company, now in liquidation, and the issue of whether its directors ought to be held personally responsible for failing to pay over deductions.
This matter involved an air conditioning and ventilation company called Installair, which opened its doors in 1966, and, over the years, scored several high-value contracts, including at the Reserve Bank building and the Karl Bremer hospital, before it fell on hard times.
Installair and its two directors, Paulo Orso and Sandra Orso, were taken to court by two funds – the Engineering Industries Pension Fund and the Metal Industries Pension Fund – which claimed it had deducted R93,715 from workers’ salaries between January and April 2020, and failed to pay this over to the funds.
In court, Paulo Orso said the deductions had been used to pay employee salaries, evidently because Installair was battling financially.
Orso argued that when directors are unable to meet their obligations “due to reasons beyond their control”, and where they haven’t acted negligently or recklessly, their personal liability should be assessed based on the specific context and their level of responsibility for the situation.
While Orso said the payments weren’t made during the Covid lockdown, the judge said the pandemic “is not an excuse for the non-compliance”.
‘Far-fetched’
The upshot, Parker said, was that “the employee members did not receive any pension and provident fund benefits, despite receiving a net salary which excludes their pension and provident fund contributions”.
Orso’s response, said the judge, reveals a fundamental misconception: “it is not a bonus for the employees if the employer matches their monthly contributions – the employer is statutorily obliged to pay over contributions for which it is liable.”
Their defences, the judge said, are “far-fetched” and must be rejected.
“Given the high interest in withdrawal claims from the two-pot retirement system, which has exposed the failure of employers to pay pension contributions, this is but just another example of how retirees and those who thought they could readily access their benefits, suffer.”
In what may be seen as an indication of how seriously this sort of infraction is treated in the business sector, neither Paulo Orso nor Sandra Orso appeared in court, nor did their lawyers.
But that didn’t stop Parker from ordering that they pay the legal costs of the two pension funds, an order which is usually an indication of the court’s displeasure. It wouldn’t be fair, Parker said, for the “members of the funds, who have to fight to access benefits and face unwarranted reduced benefits”, to carry the costs.
It’s a landmark ruling, and now that the seal has been popped, expect many judgments in a similar vein in coming years. And, hopefully, a few convictions too.
