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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:

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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: –

  1. Is there any conflict (personal or financial) between the director and the company in relation to the decision to be made?
  2. Does the director have all the facts to make the decision?
  3. Is the decision rational?
  4. 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

*Ends*

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.

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.

 ** Ends**

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.

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.

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:

  1. 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.

Competition Act Amendment – Five Year Review

March 16, 2023 By Press Office

In 2018, the Competition Act was amended to introduce significant changes, including:

  • Financial penalties for failing to notify a merger or prior implementation of a merger.
  • A 14-day contestation period for merging parties of rejected mergers with the Competition and Consumer Authority (CCA)
  • Criminal sanctions for  any officer or director of an enterprise who contravenes the horizontal restrictive practice provisions of the Competition Act.
  • Expansion of the general prohibition against abuse of dominance, by introducing specific conduct that amounts to abuse, including: predatory conduct, tying and bundling of products, loyalty rebates, margin squeeze, refusal to supply or deal with other enterprises (including a refusal to grant access to an essential facility.

This Act affects mergers, particularly those considered to be of “particular public interest”. Five years later and the impact of the expansion of abuse of dominance is evident in the following ongoing cases:

Competition and Consumer Authority vs Security Systems (Pty) Ltd: allegation of abuse of dominance through predatory pricing and price discrimination for alarm monitoring and response (inclusive of SMS alerts and electric fence monitoring.

Botswana Dental Association vs BOMAID and Other Medical Aid Funders: allegation of possible abuse of dominance in the form of refusal of access to an

essential facility and possible horizontal agreement through price fixing by medical aid providers. Investigation halted as BOMAID has approached the High Court of Botswana challenging the Authority’s jurisdiction.

Peo Legal provides expert counsel and representation on all aspects of competition law including mergers, horizontal and vertical restrictive practices, dominance, and the abuse of dominance.

Contact info@peolegal.co.bw for reliable counsel in your transactional matters

INTERNATIONAL WOMEN’S DAY 2023

March 8, 2023 By Press Office

On the occasion of International Women’s Day, we observe laws that have been enacted to support women’s rights.

  1. Political Representation: Women make up 17% of the country’s parliament, and the government has implemented a quota system to ensure at least 30% of political appointments are women. Women hold 61.3% of the seats in the Rwandan parliament, which is the highest percentage of women in any national legislature globally.
  2. Education: Botswana has made significant strides in promoting girls’ education, with a female literacy rate of around 88% from 80% in 2003. The government has implemented policies to ensure girls’ access to education and has also introduced programs aimed at reducing the number of teenage pregnancies.
  3. Pink Tax: Botswana voted to offer schoolgirls from poor and rural communities’ free menstrual pads to ensure consistent school attendance. It is estimated that 2/10 girls stay out of school due to their menstrual periods.
  4. Economic Empowerment: Botswana has implemented policies aimed at promoting women’s economic empowerment. These include the establishment of a Women’s Development Fund, which provides financial assistance to women entrepreneurs, and a Microfinance Policy, which aims to increase access to credit for women-owned businesses.
  5. Legal Reforms: Botswana has implemented legal reforms aimed at promoting gender equality. In 2016, the country passed the Gender Affairs Act, which aims to promote gender equality and prevent gender-based violence.

Despite these strides, there is still much work to be done to achieve full gender equality in Botswana. For example, women still face significant barriers to accessing leadership positions and face high levels of gender-based violence. Nonetheless, these efforts demonstrate the country’s commitment to promoting women’s empowerment and equity.

Under the theme #EmbraceEquity, Candidate Attorney at Peo Legal, Oratile Mpuchane expands on two interchangeable concepts and how they can be misunderstood and misapplied in the fight toward ending gender discrimination.

Equality refers to treating everyone the same, regardless of their individual needs, circumstances, or differences. In other words, it means giving everyone the same opportunities and resources without regard to their starting point, which assumes that everyone starts from the same place and has the same needs.

Equity, on the other hand, means giving people what they need to be successful, even if it means treating them differently based on their individual needs or circumstances. It recognizes that everyone starts from a different place and may need different resources or support to achieve the same outcome.

“Gender equality and empowerment should be applied as more than a quota in our society. The development of women and girls in our society benefits our nation. Engaging women is key to our development. As we recognise women business let us also take a moment to remarkable women in our lives.”  says Oratile.

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