The Supreme Court of Appeal (SCA) on 4 September 2023 in Bloemfontein. Picture: Gallo Images / Mlungisi Louw
Six former senior officials of the Nelson Mandela Bay Municipality will have to pay R7.6 million out of their own pockets to their former employer following a legal blow in court.
On Friday, the Supreme Court of Appeal (SCA) ruled that the officials are liable for the municipality’s unauthorised, irregular, fruitless, and wasteful expenditure related to an unlawful contract awarded to a company called Erastyle.
In 2014, Erastyle was appointed as lead consultant to develop a communication and marketing strategy for the Nelson Mandela Bay Municipality’s Integrated Public Transport System (IPTS) bus service in a deal valued at approximately R6 million.
However, it was later discovered that the company was appointed without a public tender process, violating both the municipality’s supply chain management (SCM) policy and the Municipal Finance Management Act (MFMA).
Following Erastyle’s appointment, the municipality made payments totaling R7.6 million (R5 263 179.89, R1 390 800, and R984 197.21) to the company, despite no services being rendered.
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This prompted the municipality to file a legal suit in the Eastern Cape High Court in Gqeberha in 2016 to recover the funds.
The lawsuit targeted Erastyle, along with former Nelson Mandela Bay officials, including then-municipal manager Mpilo Sakile Mbambisa, former acting city manager Mamisa Chabula-Nxiweni (deceased), former IPTS project manager Mhleli Mlungisi Tshamase, former CFO Trevor Harper, former COO Mzwake Clay, former director of communications Roland Williams, and former executive director of infrastructure and engineering Walter Shaidi.
During the proceedings, the high court heard testimony from three key witnesses on behalf of the municipality: former Deloitte forensic investigator Burt Botha, former Nelson Mandela Bay municipal manager Johan Mettler, and the municipality’s director of expenditure management, Barbara de Scande.
Botha testified that in December 2013, the National Treasury transferred approximately R2.1 billion to the municipality.
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Deloitte was appointed by Treasury to investigate irregularities in the municipality’s IPTS bus service project.
Beginning in February 2014, the investigation uncovered inflated invoices submitted to the municipality.
In one case, an invoice from Erastyle requested payment of R5.2 million, while the actual value of the alleged work was only R2 million.
Deloitte submitted its findings to the Treasury and the municipality in August 2015.
A criminal investigation into the conduct of municipal officials was soon launched.
De Scande testified that in her role as acting CFO, she refused to endorse a memorandum from Tshamase to Chabula-Nxiweni, dated 28 January 2014, recommending Erastyle’s appointment.
The memorandum proposed a 12-month contract for Erastyle valued at approximately R6 million, though the actual monthly fees totalled R3.6 million.
De Scande told the high court that she opposed Tshamase’s request to bypass the SCM policy, insisting that a 14-day tender process was mandatory.
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Initially, Chabula-Nxiweni agreed and declined to approve Erastyle’s appointment, but on 13 February 2014, she approved a second proposal for the contract based on “so-called legal advice” provided by Tshamase.
Harper assumed the role of CFO in March 2014 and signed off payments to Erastyle despite warnings from De Scande.
The former municipal officials opted not to testify and did not present any witnesses to counter the evidence presented by the municipality.
In a 2022 judgment, High Court Judge Sunil Rugunanan ruled in favor of the municipality, stating that Section 32 of the MFMA required the municipality to recover funds lost due to unauthorised, irregular, or fruitless and wasteful expenditure from municipal officials.
Rugunanan determined that Erastyle’s appointment, approved by Chabula-Nxiweni, was unlawful.
He also declared Tshamase’s decision to approve the R6 million payment to Erastyle, as well as his request for Harper to lift the cap on the contract value and increase it to R6 984 197.22, invalid.
The judge concluded that former municipal officials be held personally liable and ordered them to pay the total amount of R7 638 177.10 with interest.
He also directed them to cover the municipality’s legal costs.
Mbambisa, Harper, and Shaidi appealed the high court’s ruling to the SCA.
In their appeal, the former municipal officials’ lawyers argued that Rugunanan had erred in interpreting Section 32 of the MFMA.
They also argued that the municipality had received “significant value” for the work done under the IPTS project.
However, SCA Judge Ashton Schippers rejected the arguments advanced by the former municipal officials.
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“Section 32, construed in the context of that section as a whole and the wider context of the MFMA, makes it clear that the place and function of section 32 is to create personal liability on the part of municipal officials in particular circumstances.
“The meaning conveyed by the wording of section 32 is clear and unambiguous.
“Liability arises as soon as an official intentionally or negligently incurs unauthorised, irregular, and fruitless and wasteful expenditure: Section 32 is not conditional upon a municipality sustaining loss or damage,” the judgment delivered on 8 November 2024 reads.
The judge found that Mbambisa, Harper, and Shaidi’s argument — that a municipality can recover unauthorised, irregular, and fruitless and wasteful expenditure only if it has suffered loss or damage — would render Section 32 “meaningless”.
Schippers stated that the municipality had proven the officials were responsible for irregular expenditure due to the unlawful appointment and payments, which were made “deliberately or negligently in violation of the SCM policy”.
He also pointed out that Mbambisa, Harper, and Shaidi had chosen to “ignore the facts” and failed to present any evidence to challenge the municipality’s case.
“The submission that the municipality received value for the work done has no foundation in the evidence: it is based on a speculative response by Mr Botha in cross-examination that according to what he had been told, Erastyle may have done some work,” Schippers said.
The judge ordered that the former municipal officials, excluding Chabula-Nxiweni, be held liable for the three payments made to Erastyle.
“The appeal is dismissed with costs, including the costs of two counsel.”
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