Financial distress no excuse for not paying over pension fund contributions

A company’s financial distress is not an excuse not to pay over employees’ pension fund contributions and directors are personally liable for unpaid pension contributions deducted from employees’ salaries, according to a judgment of the Western Cape High Court.

The Engineering Industries Pension Fund took a company, Installair, to court to recover outstanding pension and provident fund contributions from May to July 2020 and hold the company’s directors personally liable for the unpaid contributions.

According to Nicolette van Vuuren, partner and Tshepiso Tshshonga, trainee attorney at Webber Wentzel, the fund relied on these provisions of the Pension Funds Act:

• section 13A(1), which mandates employers pay employee and employer contributions to the retirement fund in full and on time
• section 13A(7), which provides for the personal liability of individuals responsible for ensuring the employer’s compliance with its obligations
• section 13A(8), which imposes personal liability on directors who are regularly involved in the management of the employer’s financial affairs and
• section 13A(9), which requires retirement funds to notify employers in writing of individuals who may be held personally liable, read with Regulation 33, promulgated under the Pension Funds Act but which was since repealed.

The aim of the Pension Funds Act is to protect the retirement savings and financial security of members by ensuring that contributions are properly deducted, managed and paid over to the pension fund.

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Pension fund went after directors as company was in liquidation

Installair was in liquidation and therefore the fund did not ask for any relief against the company, but instead against the company’s directors. Van Vuuren and Tshshonga say the directors acknowledged that the company deducted pension and provident fund contributions from employees’ salaries but failed to pay them over to the fund.

The directors used the deducted amounts to subsidise employee salaries due to the company’s financial distress and the directors argued that the failure to pay was due to circumstances beyond their control. They contended that they did not act recklessly or negligently.

Van Vuuren and Tshshonga say one of the directors also claimed that section 13A(8) of the Pension Fund Act should not apply to her, as she was not involved in the financial affairs of the company. The directors also argued that liability under section 13(8) arises only where directors are unable to meet statutory obligations due to circumstances within their control and where there has been reckless or negligent conduct, which they denied.

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Court finds directors clearly failed to meet their statutory obligations

However, the High Court found that the directors were actively involved in managing the company’s financial affairs and clearly failed to meet their statutory obligations under the Pension Fund Act.  The court described the directors’ defences as “far-fetched” and “untenable” and rejected them summarily.

The court accordingly held the directors personally liable for the unpaid contributions, ordering them to pay the outstanding amounts, together with accrued interest. In addition, the court dismissed the argument that the Covid-19 pandemic justified the company’s failure to pay over contributions.

Van Vuuren and Tshshonga note that the period in question (January to March 2020) preceded the national lockdown, which was only imposed on 26 March 2020.  They say that as the company was fully operational during this time, the pandemic could not be used as an excuse for non-compliance. 

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Directors had no viable defence and must pay up themselves

With no valid defence presented, the court held the directors liable for the outstanding pension fund contributions. The court also emphasised that a failure to issue an order in favour of vulnerable groups would constitute a dereliction of its constitutional duty.

In addition, the court noted that the increase in withdrawal claims under the two-pot retirement system highlighted persistent non-compliance with pension contribution obligations, a trend that threatens the financial security of retirees.

Van Vuuren and Tshshonga say this case serves as a strong reminder that enforcement of pension fund compliance is not only a legal obligation but a moral imperative to protect employee’s long-term financial interests.

“We urge employers and particularly retirement funds to implement robust financial controls and regularly review compliance policies to ensure that all pension contributions are paid promptly and accurately, in accordance with the Pension Fund Act and the rules of the relevant fund.

“This will go a long way to shield directors and companies from severe legal penalties and reputational harm. Even in the face of financial difficulty, diverting retirement fund contributions for other uses is strictly prohibited. Directors cannot rely on financial distress as a defence to escape personal liability for unpaid contributions.”

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Case underscores there is no way out of paying over pension contributions

This case underscores a crucial legal principle that employers cannot avoid their pension obligations through delay tactics or legal posturing, Van Vuuren and Tshshonga say. “The courts have made it clear that accountability in fulfilling statutory duties is non-negotiable. Companies that ignore these obligations do so at their peril.

“In today’s challenging economic climate, many companies face financial distress and even insolvency. However, recent legal developments make it clear that financial hardship is no excuse for failing to meet statutory obligations, particularly the obligation to pay over retirement fund contributions deducted from employees’ salaries.”

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