A person who occupies a position of trust is not permitted to make a secret profit from that position
A director or any other company officer who owes it a fiduciary duty is not permitted to make a profit from his position without the company's consent.
The decision of the Supreme Court of Appeal in Volvo (Southern Africa) (Pty) Ltd v Yssel 2009 (6) SA 531 (SCA) is a leading authority on the circumstances in which an employee owes his company a fiduciary duty, with the consequence that any secret (that is to say, unauthorised) profit made by that person by reason of his position must be paid over to the company.
The facts of Volvo v Yssel
The facts were as follows.
Volvo (Southern Africa) (Pty) Ltd had needed a manager for its information technology division. A labour broker introduced a Mr Yssel as a candidate for the position, and Volvo decided to appoint him. Yssel insisted on being employed and paid via the labour broker.
Volvo reluctantly accepted this arrangement and for the next five years, Yssel worked for Volvo on that basis, that is to say, Volvo paid the labour broker for Yssel's services, plus a fee for the labour broker, and the labour broker then paid Yssel his remuneration.
Four years later, there were six other personnel in the information technology division who were all similarly employed but via a different labour broker. Yssel persuaded them to leave that labour broker and transfer to his own labour broker. Unbeknown to Volvo, Yssel had an agreement with his labour broker that he would be paid a substantial monthly commission for securing the transfer of those personnel. Later, Volvo learned of the secret commissions that the labour broker had been paying Yssel.
Volvo then sued Yssel in the High Court for repayment of the secret commissions on the ground that he had received these amounts in breach of his fiduciary duty to the company.
The judgment of the Supreme Court of Appeal
In its judgment, the court quoted from the judgment of Innes CJ in Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 168 which – nearly a century ago –articulated the general principle applicable to cases of this kind, as follows:
'Where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other's expense or place himself in a position where his interests conflict with his duty.'
Innes CJ went on to say that moneys that are secretly earned in breach of a duty of trust must be disgorged by the fiduciary and that there is little room for the latter to avoid that consequence.
The court in the Yssel case also quoted from the recent decision of the Supreme Court of Appeal in Phillips v Fieldstone Africa (Pty) Ltd 2004 (3) SA 465 (SCA) where Heher JA summarised the applicable legal principles as follows:
'The rule [that prohibits a person in a position of trust from making a secret profit] is a strict one which allows little room for exceptions . It extends not only to actual conflicts of interest but also to those which are a real sensible possibility . . . The defences open to a fiduciary who breaches his trust are very limited: only the free consent of the principal after full disclosure will suffice...'
Yssel argued that he did not owe a fiduciary duty to Volvo because he had no contract with that company, in that his only contract was with his own labour broker, and that he was therefore at liberty to arrange to earn a commission from the latter.
The criteria that determine the existence of a fiduciary relationship
The court dealt with this argument by saying that the list of fiduciary relationships is not a closed one. Contractual duties that are owed by one party to another will often go a long way toward determining whether the relationship is one of trust, but a contractual relationship is not a sine qua non in this regard.
The Supreme Court of Appeal said that, in the court below, the High Court had taken too narrow a view in ruling that Yssel owed Volvo a fiduciary duty only in relation to the specific functions that he performed. The fact of the matter, said the Supreme Court of Appeal, was that Yssel occupied the most senior position in Volvo's information technology division and the lack of a contract between them was of little consequence. The court said that it was the position to which he was appointed, rather than the nature of the contractual relationship, that defined what Volvo could expect of him. Yssel had been appointed to serve the interests of Volvo. When he arranged the matters in question between Volvo and the other staff members, he was doing so as an incident of his function as a manager of the company's information technology division and the arrangements only came about because of his position as such.
The Supreme Court of Appeal concluded that –
'Yssel was in a position of trust when he engaged himself in the matter and was not entitled to allow his own interests to prevail over those of Volvo. He is obliged in those circumstances to disgorge his secret commissions and the appeal must succeed.'
Several points are noteworthy about the judgment. Volvo was not suing Yssel for damages – in other words, it was not suing to recover financial loss that Yssel had caused the company; Volvo was suing to oblige Yssel to disgorge and pay over to the company the profit that he had made without its consent and in breach of his fiduciary duty.
Volvo therefore did not have to prove that it had suffered any financial loss. All it had to prove was that Yssel owed it a fiduciary duty and that he had made a profit from his position of trust. Once Volvo had established this, the only valid defence would be that the company had given its consent to the making of the profit, and it was undisputed that no such consent had been given.
The relevant provisions of the Companies Act 2008
The new Companies Act 71 of 2008 provides in section 76(2)(a) that –
'A director of a company must not use the position of director … to gain an advantage for the director...'
This provision of the Act states the bare bones of the relevant legal principle. It is only in judgments of the courts, such as that in Volvo (Southern Africa) (Pty) Ltd v Yssel that the underlying legal principle is articulated in all its force, and the consequences of a breach of duty in this regard are made clear.