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INSIGHTS: Understanding Directorial Responsibilities: Lessons from the VBS Mutual Bank scandal

August 31, 2023 By Press Office

The success of corporate governance rests on the shoulders of directors, who have immense responsibilities in safeguarding the interests of all stakeholders. However, the VBS Mutual Bank scandal serves as a sobering reminder of how the often-blurred line between shareholders, directors and management can have disastrous results.

Though the VBS scandal occurred in South Africa, the similarities of the applicable legal framework allow us to use this as an important case study to underscore the gravity of director responsibilities.

The shocking revelation of the bank’s downfall brought to light not only financial improprieties but also glaring lapses in corporate governance, with the directors and in particular the chairman at the centre. Issues including a lack of segregation of roles, abuse of systems, negligence, mismanagement, and regulatory and legal violations are a few of the irregularities that caused the downfall of what promised to be the Peoples’ Bank. The collapse of the bank not only sent shockwaves throughout the financial sector but also led to financial losses, job cuts and dented public confidence.

In terms of the Companies Act (section 127), “the business affairs of a company shall be managed by, or under the direction or supervision of the board of the company.” The board has all the powers necessary for managing and directing the management of the company. The board is responsible for the ethical leadership, strategy, values, and culture of an organisation. These values, ethics and strategy then flow top down in a business and are the basis of the corporate integrity of an organisation. A failure at the board level ultimately results in a managerial failure.

Below we explore some of the director’s responsibilities as set out in the Companies Act and the Pula Governance Code:

Fiduciary Responsibility

From the date of appointment onto a board, a director, though part of a “board” stands individually in a fiduciary relationship to the company. A fiduciary is “someone who agrees to act on behalf of and in the best interests of another person in the exercise of certain powers which will affect the legal, financial, or other interests of that person (here the company).

In accordance with section 130 of the Companies Act, this therefore requires that from the date of appointment, a director must act in utmost good faith towards the company and all dealings on its behalf and not use any information obtained for personal gain or benefit. This requires that each director, at all times be: –

Informed: At a minimum, this requires that directors read the information provided to them in board packs and through management. Additionally, it requires directors to be knowledgeable about the business of the company, its transactions, its plans, regulatory framework applicable to it. A director cannot act in the best interests of the company without this knowledge that enables correct assessment, analysis and the making of sound decisions. From a company perspective, this requires proper onboarding and continued training and development of directors to enable directors to keep abreast of industry trends.
Sceptical: Test everything presented by management to ensure that the actions proposed are in fact in the best interests of the company.
Independent: As this is an individual duty, a director must at all times act independently of management and fellow directors to ensure that every decision he/she makes in the best interests of the company is without influence. A director cannot simply rely on the skills, expertise, or reasoning of other directors.

As this is an individual duty owed by each director to the company, each director may be held personally liable for a breach of this broad duty. The compromise of this fiduciary duty was the foundation of a pillaging plan undertaken over a 3-year period in VBS Mutual Bank. This resulted in countless instances of personal gain by directors to the detriment of the company, shareholders, depositors, and other stakeholders.

Skill, care, and diligence

In line with section 158 of the Companies Act, this requires each director to exercise “the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances” when undertaking their duties.

The test is both subjective and objective in that the minimum standard is that of a reasonably prudent person, however, a director who possesses greater skills, knowledge or experience is expected to give the company the benefit of those greater skills. Directors are entitled to request all such information as may be necessary to enable them to properly discharge their duties. By being informed in this manner, a director is able to fully accept responsibility for the decision he/she makes on behalf of the Company.

While there is no limitation on the number of directorships an individual may hold, it is important that a director ensure that they have sufficient time to devote to properly carrying out their duties and responsibilities owed to each company. A basic failure of this duty arises when directors attend board meetings without having studied the board packs and obtained a clear understanding of the decision that the board will be asked to make and their potential impact on the company. By failing to apply the diligence and care that a reasonable person ought to have applied, the chairman was essentially allowed to usurp management power which allowed irregularities to fester unchecked, leading to the bank’s eventual downfall.

Acting within the powers granted

Every director is obligated in terms of section 130 of the Companies Act “to exercise their powers in accordance with the Companies Act and with the limits and subject to the conditions and restrictions established by the company’s constitution.”

Directors may only act within the scope of their express and implied authority and may use their authority only for the specific purpose for which those powers are conferred. The powers of individual directors are undefined, however, by implication from the power of management granted to the collective board by the Companies Act, it is implied that directors have such powers as are necessary to enable them to manage the company and direct its affairs. Neither the chairman nor the directors are individually empowered to manage or direct the affairs of the Company as seen in the VBS scandal. The abandonment of the duty to act within the powers granted often results in a blurred and confused line between management and the board and results in an overly operational board to the detriment of the oversight and risk management required of the board.

Ethical leadership

Maintaining the foundation of trust through transparency. Establishing confidence among stakeholders requires transparency above all else. Directors must ensure the disclosure of relevant, accurate and timely information at all times. In the VBS scandal, the lack of transparency contributed to the erosion of public trust, emphasising the critical nature of this responsibility.

Conflict of Interest Management

This duty is tied intrinsically to the fiduciary duty. Due to the trust placed in a director, directors have the responsibility to always put the company’s interests before their own and to disclose any conflicts of interest that could jeopardise their impartiality. Conflict of interest is the tension between multiple competing interests whether personal or financial. Section 130 of the Companies Act makes clear the restrictions on a director’s ability to use company information for any other purpose than as permitted, to not compete with the company and to account to the company for any monetary gain or value or advantage obtained by them in connection with their position as director.

Where a director acts in competition with the company on which he serves as a director, conflict is inevitable. This can arise where a director takes up an opportunity that could have been taken up by the company or where the director holds directorships in rival companies or has an interest in service providers and/or clients of the company be it through shareholding, directorship or any other direct or indirect interest.

In the VBS case, the looting was undertaken through the financing of entities directly or indirectly related to some members of the board. These financing facilities were granted in breach of policy and remained unpaid resulting in a “cash hole” that saw the crippling and pillaging of the bank. The starting point of this downward spiral was a failure of fiduciary duties and management of conflict of interest by the board which had ripple effects.

Conclusion

The VBS Mutual Bank scandal is a sobering reminder that directors and leaders are not above the law. Fraudulent and negligent conduct resulting from a dereliction of your duties is punishable civilly and criminally. Mervyn King, suggests that where a company wants to apply sound governance, directors should, amongst others, ask themselves these four questions before making any decision that could affect the future of the company: –

Is there any conflict (personal or financial) between the director and the company in relation to the decision to be made?
Does the director have all the facts to make the decision?
Is the decision rational?
Is the decision in the best interest of the company?

Upholding directorial responsibilities has far-reaching consequences for an organisation’s stakeholders, reputation, and financial well-being. The financial and reputational implications of the VBS matter serve as an example of how failing to uphold these obligations can have irreparable results for companies and directors in their personal capacities

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Should you require any assistance with the development and application of Corporate Governance strategies and frameworks please feel free to contact us at info@peolegal.co.bw or +267 3975779.

The information contained in this Legal Brief was intended for our clients and correct to the best of the authors’ knowledge at the time of publication. Before making any decision or taking any action, you should consult the contacts listed here.

Green Conveyancing The future of Real Estate in Botswana

August 9, 2023 By Press Office

According to the Knight Frank report, 2023, the global property market is expected to grow by 3,6% between 2022 and 2023 with Africa expected to be one of the fastest-growing regions. In line with this prediction and in light of the positive impact of the revised Transfer Duty Act, we anticipate the property market in Botswana to remain resilient with an increase in young homeowners being the sustaining force. With the anticipated increase in buyer power, how are local developers and the country fairing with global trends such as ESG and green buildings?

In line with the Sustainable Development Goals, Pillar 3 of Botswana’s Vision 2036 emphasises the development of a sustainable environment as a key factor in economic transformation. At a national level, the commitment is that “Botswana will have a low carbon footprint, with a society that is aware of and resilient to the consequences of climate change. Our planning and decision-making will take cognisance of vulnerabilities and provide for the implementation of appropriate mitigation and adaptation measures.” These sentiments are aligned with Botswana’s undertakings in terms of the Paris Agreement 2015, the aim of which is to develop actions by countries in order to address building-related emissions or improve energy efficiency.

During the life and maintenance of a building, buildings use energy, materials, water, generate waste, and emit potentially harmful atmospheric emissions. From 2017, CO2 emissions from buildings and construction globally have been on the rise, a decline was seen from 2020 due to the pandemic and reduced construction globally but not as a result of any long-term decarbonising strategy in the sector. To address this, there is a need for climate-compatible development, particularly in urban areas known as “green conveyancing.”

Green conveyancing requires the incorporation of environmental considerations into property transactions with the aim of reducing the environmental impact of property transactions. This is achieved by considering a property’s energy efficiency, carbon emissions, and other environmental factors. It involves additional tasks such as checking for energy efficiency certificates, assessing a property’s sustainability credentials, and taking into account how one can reduce the environmental impact of their property. The aim being to avoid increasing levels of carbon emissions, waste generation, refurbishment and alterations of the property, water and energy consumption.

Green conveyancing allows developers, investors, buyers and renters to consider any property transaction’s environmental, social and governance elements. The focus is on conducting business ethically in all three areas. Governments globally, including Botswana are introducing policies, standards and regulations to promote environmental sustainability in the property sector. We have seen numerous developments across the world employing environmentally responsible and resource-efficient materials throughout the building life cycle.

To ensure sustainability is measurable, a critical aspect of green conveyancing is the adoption of green building rating tools which are utilised to assess and recognise a building meeting sustainability standards. The World Green Building Council has developed rating standards adopted and utilised globally by regional and country-specific green councils. Though Botswana is yet to adopt its own certification standards, through the utilisation of the South African Green Council standards, the Botswana Green Building Council has certified as green buildings, 3 buildings being Mashatu Terrace, Prime Plaza and the PWC headquarters.

Although it may be some time before Botswana fully implements the development of green buildings, we have seen some encouraging developments in the area of green energy an aspect of sustainability in the sector. Two key examples are Airport Junction Mall and Sebele Mall. This use of solar energy has been facilitated by the Botswana Power Corporation rooftop installation programme (BPC RTS Programme) in its efforts to create sustainable development.

The BPC RTS Programme allows domestic, commercial and industrial consumers to install grid-tied ground or rooftop-mounted solar systems on their properties and allows consumers to generate electricity for their own use from solar panels and sell any excess back to Botswana Power Corporation. The applicable capacity limits on the BPC RTS Programme are as follows:

Property type	Capacity
Residential	35 KW
Commercial and Industrial	1 MW

Any excess power generation through a consumer’s rooftop installation will be sold to BPC and credited to the consumer’s next bill. A further example is the Botswana Innovation Hub building which through design elements has incorporated sustainability. By using a concept known as an “energy blanket” roofscape the roof design incorporates large overhangs to passively shade the building’s interior volumes, mechanisms to collect and reuse water, and both passive and active photovoltaic systems to harness solar energy.

Though Botswana’s building laws still focus primarily on structural integrity and safety, with increased global and national pressure on ESG and sustainability we foresee more developments from both a policy and legislative point. Through sectoral partnerships and collaborations, the Botswana Green Building Council aims to have high-performance buildings and to drive the adoption of green building certification in Botswana. Working with the Botswana Bureau of Standards, the Botswana Green Building Council has an ongoing project to redevelop the Botswana building standards, especially around energy standards.

Even in the absence of any legislative obligation, it is clear that long-term sustainability must be at the forefront of every new development and the maintenance of all existing developments. If your internal policies do not require this, it is likely that from an ESG perspective, your funders, investors, customers and tenants may place that obligation on you as a developer. Therefore, you must familiarise yourself with global trends in this area of sustainability and ensure compliance.

Further information on the BPC RTS Programme may be obtained at https://rts-applicationform.azurewebsites.net/ and https://www.bera.co.bw/downloads/Electricity/Botswana%20Rooftop%20Solar%20Guidelines%201-Pager.pdf

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Should you require any assistance and information regarding this growing trend and property-related transactions please feel free to contact us at info@peolegal.co.bw or +267 3975779.

The information contained in this Legal Brief was intended for our clients and correct to the best of the author’s knowledge at the time of publication. Before making any decision or taking any action, you should consult the contacts listed here.

Understanding Suretyship Agreements: Protecting your interests

August 2, 2023 By Press Office

In our daily lives, we enter into agreements or loans that require our signature. Often more than not, we do not take the time to understand what we are agreeing to by signing on the dotted line. A common agreement in many financial or loan transactions is a suretyship agreement.

What is a suretyship agreement?

“Suretyship” is an accessory contract by which a person (the surety) undertakes to the creditor of another (the principal debtor), that the principal debtor, who remains bound, will perform his obligation to the creditor and, additionally, that if and so far as the principal debtor fails to do so, the surety will perform it, or failing that, indemnify creditor.”

Essentially, a surety agreement is a legally binding promise by one party to take responsibility for another party’s debt if the borrower defaults. a person can choose to agree to be a surety for a portion of the debt or to be a surety and co-principal debtor which is to be jointly and severally liable with the principal debtor. This means in the event of default by the debtor, the creditor/ the bank can elect to sue the debtor or sue the debtor and the surety or sue the surety alone.

In Makuluba v National Development Bank (NDB) and Others, Masunga Meat Market (Pty) Ltd (the Meat Market) had failed to honour its payment commitments to NDB. NDB instituted legal action against Makuluba and 2 others in their capacity as sureties to the Meat Market. Makuluba argued that as NDB had taken security in the form of immovable property belonging to the Meat Market, NDB was obliged to first execute against the security before it can bring any action against him as a surety. The High Court held that Makuluba had not just bound himself as a surety but also as a co-principal debtor and had renounced the benefit of excursion. By renouncing the benefit of excussion, NDB was permitted to pursue the surety before realising any security held by NDB.

This raises a question of benefits and exceptions that are available to sureties and what it means to waive or renounce them. Let’s consider some key exceptions and benefits common in surety agreements:

Exception non numeratae pecuniae: This is the defence that sums of money claimed were in fact never advanced to, or received by or on behalf of, the debtor. This means that a defendant can claim that the plaintiff has not paid the money to him and that therefore the obligation is not owing.
Exception non-causa debiti: This is the defence that there is no cause or reason for the obligation.
Exception – error calculi: This is the defence that the amount claimed has been incorrectly calculated.
Exception – revision of accounts and no value received: These exceptions entitle the debtor to a revision of accounts.
Benefit -excursion: This is a benefit open to a surety by which he can compel the creditor to proceed against the principal debtor first and obtain all he can from the debtor’s estate before proceeding against the surety.
Benefit – divisionis: the right of a surety sued by a creditor to compel the creditor to also sue the co-sureties. This right also ensures the surety is liable only for his or her proportionate share of the debt.
Benefit – de doubus vel plubris reis debendi: This benefit applies when there are two or more principal debtors who are jointly liable but not severally which means each debtor is liable for his own portion of the debt. This benefit can be called upon by a debtor in instances where the creditor claims the whole debt from such a debtor.

The above exceptions and benefits where they have not been renounced or waived by a surety, can be used as defences to any claim brought against them. Once the above exceptions and benefits are renounced or waived, they are no longer available to the surety and entitle the bank/creditor to, for instance, pursue the surety before exhausting all security granted by the principal debtor as was done in the case of Makuluba.

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Should you require any assistance with the implications and application of the surety agreements please feel free to contact us at info@peolegal.co.bw or +267 3975779.

CONDITIONAL CONTRACTS: WHAT YOU NEED TO KNOW

July 25, 2023 By Press Office

Did you know that not every contract comes into force or effect on signature?

Some contracts are subject to conditions which can either suspend their coming into force until a later date or the occurrence of the condition can extinguish or terminate the contract on the occurrence of a future event.

Here are some conditions you need to be aware of:

Condition Precedent (Suspensive Condition)
A condition precedent is a clause in a contract that provides that the performance of the contract or certain obligation will only come into effect on the completion or waiver of a future uncertain event within an agreed time period. Therefore, assuming the essential elements of a contract have been satisfied, a binding contract may be formed but the performance of the contract or certain obligations in the contract will only become due on the fulfilment or waiver of the condition precedent.

Examples of conditions precedent
– Obtaining regulatory approvals- e.g., Competition and Consumer Authority, Botswana Stock Exchange
– Obtaining change of control approvals- required in terms of contractual terms or licensing requirements
– Securing of bank funding
– Obtaining Botswana Unified Revenue Service clearance

2. Condition Subsequent (Resolutive Condition)

A condition subsequent is a clause in a contract which has come into force, which provides that on the occurrence or non-occurrence of a future uncertain event, the contract or a specific clause in a contract will terminate. From the onset, the parties agree that the contract is effective and in force, but should an agreed event happen or not happen at an agreed time, the contract or certain clauses will terminate.

Examples of conditions subsequent
– registration of a lease in notarial form
– regularisation of non-material regulatory submissions
– regularisation of a company’s minute book

It is critical to understand the types of contracts, their conditions and their effects before making any decision or taking any action.

Should you require any assistance please feel free to contact us at info@peolegal.co.bw or +267 3975779.

The Four Essential Elements of a Contract. – What you need to know

July 6, 2023 By Press Office

A contract is a promise that is legally binding. It can be written or oral. When two parties make a contract, one party agrees to do something for the other in exchange for something of value. For a contract to be considered legally binding, it must include four key elements, namely, offer, acceptance, consideration, and the intention to create legal obligations.

It is worth noting that an offer and acceptance do not have to be separate or formal. In most cases, people contract by signing a document with the agreed terms or by one party making an offer that the other party accepts. Acceptance can be expressed through words or actions. Because of this, it is essential to be aware of what makes a contract. You should be careful not to unintentionally bind yourself to an agreement by your actions or conduct when the intention was to only agree on initial negotiation terms.

What are the four essential elements of a contract?

Offer

An offer is a promise by one party to enter into a contract based on specific terms. To be a valid offer, the offer must be firm, complete, clear, certain, capable of being accepted and made with the intention of being bound on acceptance.

Many disputes arise because people fail to draft a comprehensive written document and no lawyers are involved in the negotiation process.

Practical tips –

Use a single document: Set out the entire details of understanding between the parties in one document. Include a clear “entire agreement” clause to ensure the document represents the entire understanding between the parties.
Approach offers carefully: Unless using corporate standard terms and conditions- avoid sending out offers which can be immediately accepted. Instead, send out an invitation to negotiate and wait for the other side to make the offer.
Share unsigned agreements: Avoid sending out signed agreements, provide a blank agreement that requires your counter signature to become binding.
Apply caveats: Use caveats such as “subject to contract” to avoid any negotiations being interpreted as a formal offer. This helps avoid misunderstandings and assumptions.
Establish expiration dates: Binding offers should have a clear expiration date. This ensures that the offer remains valid only for a set period.
Specify a particular manner of acceptance – Clearly state the preferred method in which the other party must accept the offer. Whether written response, email, or other means, clarity in acceptance methods reduces confusion and potential disputes.

Acceptance

Acceptance refers to the final and unambiguous agreement to the terms of an offer. An offer must be accepted exactly as stated for it to form an agreement. An acceptance can be explicit or implied. An express acceptance is an affirmative statement by the offeree (person who accepts or declines) that they accept the terms of the offer. An implied acceptance is when the offeree takes some action that indicates their acceptance of the offer e.g., where a supplier does not communicate acceptance but delivers the goods per the order and requests payment.

However, it is important to note that if a party accepts an offer but introduces changes to the terms or rejects certain terms, a contract is not formed as the offer has been rejected. In such cases, a counteroffer has been made and the counteroffer is open for acceptance or rejection.

Practical tips: –

Acceptance by intended recipient: The acceptance must be by the person to whom the offer was originally made. This cannot be accepted by someone else on their behalf
Follow prescribed forms: Acceptance must be in the prescribed form (if any)
Avoid conditional acceptance: Do not accept an offer (whether expressly or by conduct) with the hope that some unacceptable terms in the offer can be renegotiated later. Once accepted the offer is binding
Ensure clear and unambiguous acceptance: Once you are satisfied with the terms make sure your offer is unequivocal- do not turn the acceptance into a counteroffer by adding additional terms.

Consideration

A contract is based on the notion of reciprocity- one party cannot enforce a promise unless it has given or promised something in return. This, in legal terms, is called “consideration.” Consideration can be of any value, even if it is not equal to the promise made. It is important to note that the parties are free to make a deal that may not be beneficial to one side. In some cases, as in employee non-compete agreements, the courts may consider the fairness of the consideration.

Practical tips:

Be clear on the consideration: Always make sure the contract clearly states what consideration is being given, even if it is a small amount.

Intention to create legally binding obligations

For a contract to be valid, both parties must have the intention to enter into a legally binding arrangement. If there is no such intention, then there is no contract. In determining whether or not the intention to create legally binding obligations exists, the court will consider the parties’ conduct as a whole and not just their subjective intention.

A contract must not be against public policy to be enforceable.

Practical tips: –

Certainty: Clearly state whether the agreement is intended to be legally binding, regardless of the label attached to it, i.e. “MOU” or “heads of terms”
Be careful of labels: Be cautious of ambiguous labels and clarify the intention to create legally binding obligations.
Capacity: Ensure each party has the legal capacity to contract – whether age or mental capacity
Lawfulness: An agreement which requires the parties to engage in illegal activities makes such an agreement illegal. (The purpose of the agreement must not violate the law)

By following these practical tips, you can navigate the process of entering a contract more effectively and reduce the risk of misunderstandings and disputes. Seeking legal advice will also provide valuable guidance and ensure that you and your rights are protected.

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Should you require any assistance with the implications and application of any contract or the negotiation of a contract please feel free to contact us at info@peolegal.co.bw or +267 3975779.