For this reason, Parliament has created a detailed and somewhat complex legislative framework wherein municipalities are expected to operate. Part of this framework (section 32(1)of the Municipal Finance Management Act 56 of 2003) prohibits municipalities from incurring unauthorised, irregular, fruitless and wasteful (UIFW) expenditure. Section 1 of the MFMA defines UIFW. In simple terms, this refers to payments that -

• were not planned for in the municipal budget (unauthorised and irregular expenditure),
• do not comply with other legislative and planning requirements (unauthorised and irregular expenditure), or
• were made in vain and could have been avoided with reasonable care (fruitless and wasteful expenditure).

One of the concerning developments in the local government sector is that many municipalities continue to incur huge UIFW expenditure. The latest Auditor General of South Africa (AGSA) report for the financial year 2022/23 shows that UIFW expenditure accumulated to date, totalled R 261,4 billion. In the case of Nelson Mandela Bay Metropolitan Municipality, figures from Municipal Data show that for 2022/23,  the Metro incurred R 1,5 billion UIFW against its operating budget of R 16 billion. Looking at the previous four financial years, UIFW was R 2 billion in 2021/22, R 2.2 billion in 2021/20, R 1.4 billion in 2020/19 and R 4.5 billion in 2019/18. It is these trends which have influenced the public perception that no accountability exists in local government and that action must be taken to bring those responsible to book.

The Supreme Court of Appeal (SCA) recently handed down a judgment that might shift this narrative – Mbambisa and Others v Nelson Mandela Bay Metropolitan Municipality [2024] ZASCA 151. In this judgment, the Court gave a clear interpretation of section 32 of the MFMA and how it should be used to recover UIFW from officials or politicians who are responsible for such expenditure.

This matter concerned the unlawful appointment of Erastyle (Pty) Ltd as a consultant and the subsequent payments for the services rendered. The parties agreed that the appointment and payments breached the Municipality’s supply chain management policies and therefore, rendered them unlawful. At the time, three payments were made, R 5 263 179, R 1 390 800 and R 984 197, which constituted UIFW expenditure. Among other things, the Municipality approached the Court seeking to recover these payments from the responsible officials (municipal manager, chief finance officer, and the relevant senior managers) by relying on section 32 of the MFMA.

The individuals, who served as municipal officials at the time the relevant payments were made, included the chief financial officer, municipal manager, and the head of department, argued that the Municipality could not succeed with its claim because:

1. a long time had lapsed since the Municipality incurred the UIFW and  instituted its legal action to recover the money,
2. the Municipality received some services for the payments in question,
3. section 176 of the MFMA gives civil and criminal immunity to municipal officials from actions that may arise due to losses and damages suffered as a result of the officials fulfilling their duties and
4. the word "liability" in section 32 should be interpreted to mean "accountable" and it does not mean officials are liable to pay back the relevant expenditure.

All parties agreed that the three payments in question qualified as UIFW.

The SCA explained that it is clear from the wording of section 32 of the MFMA that municipal officials and politicians alike are personally liable for UIFW expenditure that they have intentionally or negligently incurred or authorised on behalf of the Municipality. This liability is in addition to other liability under common law or other legislation. The Court found that the Municipality does not need to prove that it suffered any loss or damage from such expenditure, nor is partial value received for such expenditures relevant. In other words, it does not matter whether or not the Municipality received goods or services in return for payments that amounted to UIFW. To prove a claim against an official or politician, it is enough to show that the UIFW took place under their watch.

Municipalities are not free to choose whether and when they recover UIFW from officials and politicians. The SCA stated that the Parliament gave no discretion and that these expenditures must be recovered save for two clear exceptions. First, when the UIFW expenditure is authorised afterwards in the adjustment budget, and second, when the UIFW expenditure is certified as irrecoverable and is subsequently written off by the council after an investigation by a committee of the council. Importantly, it is not a legal defence to criminal or disciplinary action if the UIFW is written off as irrecoverable by the council.

The mandate to recover all UIFW expenditure from those responsible is a firm approach taken by the Parliament, especially if one considers the number of decisions and authorisations that may pass the desk of municipal managers and chief financial officers daily. Many of them rely on the memorandums and information provided by their advisors and other senior managers. Not even to mention that a council may sometimes authorise certain decisions against the advice of the municipal manager, chief financial officer and senior managers. For this reason, the SCA highlighted the significance and application of section 32(3). The Court established that a municipal manager will not be liable for UIFW if they informed the council, mayor or executive committee in writing that a decision, if implemented, would likely constitute UIFW. Perhaps there is an opportunity to amend the MFMA to extend this exception to chief financial officers and senior managers who do the same. It only seems fair that where chief financial officers and senior managers provide fair warning to their seniors, they are protected from liability.

With the evidence before the Court, an analysis of the paper trail established that senior managers were involved in the three unlawful payments. These officials did not provide information to contradict the evidence but sought to rely on section 176(1). This provision protects municipal officials from claims that result from loss or damage which they may occur from the bona fide exercise of their powers in the course of their duties. Section 176(1) reads, " no … person exercising a power or performing a function in terms of this Act [MFMA], is liable in respect of any loss or damage resulting from the exercise of that power or the performance of that function in good faith." This means that no legal action can be taken for losses or damages incurred by any person against a municipal official for performing their functions (as prescribed in the MFMA), in good faith. The Court rejected this argument because section 176(1) protects municipal officials against actions instituted by third parties, and not those that may be instituted by the Municipality. The Court further referred to section 176(2) which reads- "without limiting liability in terms of the common law or other legislation, a municipality may recover from a political office-bearer or official of the municipality … any loss or damage suffered by it because of the deliberate or negligent unlawful actions of that political office-bearer or official when performing a function of office." Consequently, the Court found that because of their involvement in the unlawful payments to Erastyle, the municipal manager, chief financial officer and six senior managers are liable to the Municipality and ordered them to pay the value of the three payments back to the Municipality.

Commentary

This matter differs from a previous legal action also instituted in 2021 by Nelson Mandela Bay Metropolitan Municipality against its former executive director for human settlements, Mr Petuna. Firstly, the main dispute before the court was whether the payment of R 11 300 000 in question did constitute UIFW – whereas in this matter it was common cause that the payments were UIFW. Secondly, one of the defences advanced by Mr Petuna (2021 matter) was that he was no longer an official of the Municipality when the action was instituted against him. In this case, no such defence was advanced, instead, the municipal officials sought to question how section 32 of the MFMA should be interpreted. In both cases, the court found that the officials against whom the Nelson Mandela Bay Metropolitan Municipality had taken action were personally liable for the repayment of the value of the UIFW.

As discussed previously in the Bulletin, obtaining a judgment to recover UIFW against municipal officials is the first step to recovering UIFW. Such a judgment does not automatically result in immediate repayment, and often a sheriff must be called in to attach and seize assets to recover the amount. However, municipal officials often do not have sufficient personal finances to repay these large sums or know how to hide their wealth, making it difficult to recover the actual losses a municipality suffers as a result of UIFW.

Although section 32 has been part of the municipal finance management legal framework since 2003, this judgment clarifies how the provision should be used as a tool to recover UIFW expenditure. No doubt it will be invaluable in addressing material irregularities issued by the AGSA for UIFW expenditure. Without detracting from the seriousness of UIFW expenditure, care must be taken against the extreme doctrinal application of section 32. For example, what if a municipal manager or chief financial officer makes a decision based on fraudulent misrepresentations or otherwise incorrect information by another senior manager (remember, incurring UIFW negligently will also result in personal liability)?  While municipal financial health must be promoted through, among other things, a prohibition and corresponding enforcement mechanisms for UIFW expenditure, a conducive working environment in local government must equally be enhanced. This means that it is important to ensure that those individuals responsible for the municipality incurring UIFW are targeted, while not placing an unrealistic burden on municipal managers, as accounting officers. Therefore, if a misrepresentation took place, the person who made such misrepresentation must be held liable and not the municipal manager, chief financial officer or senior manager who relied on that information without being negligent. In other words, it is equally important to facilitate an environment where officials and politicians can effectively fulfil their responsibilities without fear of incurring unwarranted personal liability.

By Dr Johandri Wright, Post-Doctoral Research Fellow