Secondary

criminal-charge

Fund cannot withhold a benefit if an employer has only instituted criminal charges

The Financial Services Tribunal (FST) has reiterated that a retirement fund cannot withhold a benefit if only a criminal case has been instituted against a member. In fact, even if the member has been criminally convicted, it may not do so unless the court has also awarded compensation.

The tribunal’s decision provides guidance on whether, in the absence of an admission of liability by a member, a fund can withhold a benefit based on potential or actual legal proceedings against that member.

In this matter, the FST dismissed an application by Tape Aids for the Blind (TAB) for the Pension Funds Adjudicator to reconsider her determination setting aside the FundsAtWork Umbrella Provident Fund’s decision to withhold the withdrawal benefit of a former TAB employee accused of fraud.

This was TAB’s second reconsideration application relating to its withholding of the ex-employee’s R400 000 withdrawal benefit.

In October last year, the FST set aside the Adjudicator’s determination in favour of the fund member and referred it back to her for reconsideration.

Read: Section 37D of Pension Funds Act ‘is also designed to protect employers’

But in January this year, the Adjudicator made the same order as she had before. This time, the tribunal upheld her determination.

The tribunal disagrees with the tribunal

The deputy chairperson of the FST, Judge Louis Harms, took issue with aspects of the ruling made by the reconsideration panel last year.

He said the panel had based its decision on the fund member’s not contesting, before the fund, the allegation that he defrauded TAB, and that TAB would be prejudiced if the withdrawal benefit were paid.

The fund decided to withhold the benefit in January 2020. It was only in July that the fund asked the member to respond to TAB’s allegations, which was a month after he filed a complaint with the Adjudicator. (According to the first determination, the member undertook to respond but did not.)

Judge Harms said it was difficult to understand how the tribunal based its finding on the absence of a denial by the member, because the fund had not asked the member for his version before he complained to the Adjudicator.

Last year, the panel stated that one of the purposes of section 37D of the Pension Funds Act (PFA) is to protect employers from loss suffered at the hands of employees: “It would serve no purpose if employees were allowed to defraud employers, where they simply resigned and claim their pension benefit.”

But Judge Harms said this statement did not apply, because the complainant did not “simply resign”; instead, TAB dismissed him in December 2019 following a disciplinary hearing.

Legislative context

As one might expect, the tribunal’s latest decision addressed the application of section 37D(1)(b)(ii) of the PFA, as well as the provisions in the FundsAtWork Umbrella Provident Fund’s rules governing the withholding of benefits.

It also looked at how section 300 of the Criminal Procedure Act (CPA) could apply in respect of section 37D(1)(b)(ii) and compliance with those rules.

Section 37D(1)(b)(ii) allows a fund to deduct from a benefit any amount due by a member to his or her employer on the date on which he or she ceases to be a member of the fund, to compensate the employer for damages arising from theft, dishonesty, fraud or misconduct, and where the member has admitted liability in writing to the employer, or a court judgment has been obtained against the member.

The fund’s rules state that the fund may withhold a member’s benefit to give effect to a section 37D(1)(b)(ii) deduction until the matter has been finally determined by a court, but only if:

  • The participating employer informs the fund in writing of a potential claim against the member no later than 30 days after the member’s termination of service, including the estimated amount, that it requires the fund to withhold; and
  • The trustees in their reasonable discretion are satisfied that the participating employer has instituted or will institute legal proceedings against the member within a reasonable period and has not caused any unreasonable delays in bringing it to finalisation.

Lack of procedural compliance

The fund’s administrator, Momentum, submitted the following:

“On 2 January 2020, the employer informed the fund that the complainant had been dismissed due to fraudulent activity, that they were in the process of finalizing an SAPS affidavit and requested that the fund withhold payment to the complainant pending finalization of legal proceedings against the complainant.”

Judge Harms said this did not comply with rule (a), because was there was no “estimated amount”.

Although TAB did inform the fund of the estimated amount on 6 March, this was more than 30 days after the employee’s services had been terminated.

Judge Harms also took issue with the following statement in the tribunal’s previous decision:

“Insofar as the failure to stipulate the amount the following submissions were made: the fund was advised that there was substantial fraudulent activity, and it was indicated that the quantum was large enough to place [a] hold on the entire fund benefits.”

He said he could not find a reference in the record on which the panel could base this finding.

The Adjudicator found that the fund afforded the complainant an opportunity to give his side of the story only after he complained to her office and after the fund had decided to withhold his benefit. The Adjudicator said the fund had no reason to exclude the complainant from proceedings that affected his right to his withdrawal benefit and engage with TAB only.

Last year, the tribunal took the view that the fund’s requesting the member to respond to the allegation only in July “may not have been timeous, but it was certainly not extensive [sic]”.

But Judge Harms said he agreed with the Adjudicator that this did not answer the question whether the fund applied its mind appropriately, impartially and in a balanced manner before taking a decision that affected the member’s rights.

“There was either compliance with the audi [alteram partem] rule or there was not.”

Criminal conviction does not quantify compensation

The tribunal found that a criminal judgment alone cannot justify the withholding of and/or deduction from a member’s benefit by a fund.

Quoting from his decision in the case of FundsAtWork Umbrella Provident Fund v EE Ngobeni and Another, Judge Harms said the Supreme Court of Appeal, in Highveld Steel and Vanadium Corporation Ltd v Oosthuizen, did not hold that a fund is entitled to withhold payment because a criminal case has been opened, or even upon conviction.

“A conviction is not a judgment against a member that quantifies compensation in respect of damage caused, and costs are not awarded against persons convicted,” Judge Harms wrote on behalf of the tribunal.

TAB did not inform the fund that it intended to institute a civil claim against the complainant. It stated that it intended to, and later did, file criminal charges against him.

After the tribunal’s decision in October last year, TAB was advised by its attorneys to state that it intends to use section 300 of the CPA to obtain a judgment which was civil in nature after conviction.

If the criminal matter is not concluded within three years after the employee’s dismissal, TAB intends to institute civil proceedings against him, before prescription kicks in, to recover its losses.

Section 300 of the CPA provides that where a person is convicted of an offence that has caused damage to or loss of property (including money) the court may, on the application of the injured person or of the prosecutor acting on the instructions of the injured person, award the injured person compensation for such damage or loss. Such an award has the effect of a civil judgment.

Judge Harms said such an award may entitle the fund to withhold paying benefits, “but we do not have such an award, and it is unlikely that there will be one before the claim becomes prescribed”.

He added that it was doubtful whether fraud, as alleged by TAB, was covered by section 300 considering the judgment in S v Liberty Shipping and Forwarding (Pty) Ltd and Others.

But even if it was, this did not mean that the requirement, in terms of rule (b), for the fund to be satisfied that TAB “has instituted or will institute legal proceedings” had been met.

“Criminal proceedings are instituted by the State through the prosecuting authorities. Laying a charge has no legal consequences. It does not begin legal proceedings. Legal proceedings may or may not follow, depending on the decision of the prosecutor.”

Judge Harms said TAB had applied for reconsideration on the basis that it would be prejudiced if the ex-employee were to be paid.

“That, obviously, applies to every employer who seeks the special remedy, but the weighing up of the interests of the parties only arises once the conditions set in the Act and the rules have been complied with. They have not.”

Click here to download the full judgment.

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