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Dear Corruption Watch: New day, new allegations of corruption levelled against the top brass of our parastatals. Invariably, the defamed chairperson or CEO vociferously denies the allegations and threatens to sue for defamation. If he or she does decide to sue, can the state-owned company foot the legal bill?

T (for tired-of-paying-legal-bills) Taxpayer.

Dear T Taxpayer,

The answer to your question has three layers: the Public Finance Management Act; the Companies Act; and the law of defamation.

The first layer, the Public Finance Management Act (PFMA), as its name suggests, governs the management of public finances. Included within the act’s ambit are parastatals such as Eskom, the SABC, Telkom etc. The act sets a high threshold for the financial management of these entities (and organs of state generally).

Among other important obligations, the board of directors of a public entity must take effective and appropriate steps to prevent fruitless and wasteful expenditure – defined in the act as “expenditure which was made in vain and would have been avoided had reasonable care been exercised”.

This echoes section 195 of the Constitution, which requires public enterprises to promote the efficient and economic use of resources.

The second layer is the Companies Act, which is the compass to determining the authority of a board of directors (including the board of a state-owned company). In short, a company’s board is vested with authority to manage the “business and affairs” of the company.

Read together with the PFMA, this means that the board of a state-owned company is only authorised to institute legal proceedings that fall within the company’s “business and affairs”, subject to the board’s duties in terms of the Constitution and the PFMA.

The third layer is the law of defamation. In our law, the state cannot sue for defamation. The primary policy reason for this stance is that citizens should be free to express their opinions on the management of the country without fear of legal consequences. There are no South African cases dealing with the ability of a state-owned company to sue for defamation (as opposed to an organ of state, such as a government department or a municipality), but the same policy reasons ought to apply: citizens ought to be free to criticise the management of state-owned companies without fear of legal consequences. This was held to be the correct legal position in a case dealing with the Posts and Telecommunication Corporation, the Zimbabwean equivalent of the SA Post Office.

If a state-owned company itself cannot sue for defamation, then it surely has no interest in a personal defamation claim brought by its chairperson or CEO. While the state-owned company may derive some benefit from the reputation of an impeached executive being vindicated, in the eyes of the law a state-owned company simply has no reputation to protect – let alone protect indirectly through defamation claims of its executives.

Therefore, a decision by a board of a state-owned company to fund an executive’s personal defamation claim should fall outside of the “business and affairs” of the company. Further, since the state-owned company has no right in law to vindicate its (legally non-existent) reputation, footing the legal bill is fruitless and wasteful.

This does not mean that an executive of a state-owned company has no claim for defamation. It simply means that public money may not be used to fund that claim.

Nor should it. State-owned companies, and their executives, must accept their constitutional duty of accountability and the robustness of public debate that follows.

Do you face an ethical dilemma? Do you suspect corruption? If you need help to resolve such issues, write to the Corruption Watch experts at letters@businesstimes.co.za. Mark your letter ‘Dear Corruption Watch’.

• This article was first published in Sunday Times: Business Times