International Shipping Co (Pty) Ltd v Bentley

• Jurisdiction: South Africa
• Judge: Corbett CJ, Botha JA, Hefer JA, Smalberger JA and Friedman AJA
• Judgment Date: 10 November 1989
• Court: Appellate Division

Corbett CJ:

The appellant, International Shipping Co (Pty) Ltd ('International'), is a company carrying on the business of financiers and shippers and having its principal place of business in Johannesburg. It is part of the Trade and Industry Group, which operates in a number of different companies. Early in 1976 International agreed to make F certain financial facilities available to the Deals Group of Companies ('The Deals Group' or 'Deals'). These facilities included the leasing of fixed assets, the discounting of hire-purchase and rental agreements in terms of certain block discount agreements, the confirmation of overseas orders, the funding of importation of goods and the funding of local purchases. International continued to provide these facilities until the G liquidation of the companies comprising the Deals Group in April 1981. It is claimed by International that as at the time of liquidation the total indebtedness of the Deals Group to it amounted to R977 318. Of this sum R593 826 was recovered (or must be deemed to have been recovered) by International from various sources, including an offer of H compromise and a concurrent dividend in liquidation. International thus sustained a loss, alleged to amount to R383 492, together with interest thereon.

The respondent, Mr C F Bentley, is a chartered accountant and auditor, practising under the name Bentley, Bollingbroke and Company. In about November 1977 respondent was appointed auditor to the Deals Group. On 20 I March 1979 and in the execution of his duties as auditor, the respondent issued reports in respect of the financial statements of each of the companies comprising the Deals Group, as well as the Group financial statements, for the year ended 20 December 1978. In each of these reports, which were not qualified in any way, respondent stated that he J had examined the financial statements in question and had complied with

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A the requirements of s 300 of the Companies Act 61 of 1973; and that in his opinion the statements fairly represented the financial position of the company concerned as at 20 December 1978 and the results of its operations for the period then ended, in the manner required by the Companies Act.

B In April 1982 International instituted an action for damages against respondent in the Witwatersrand Local Division. In its particulars of claim International alleges in effect that the aforementioned financial statements, upon which respondent reported on 20 March 1979, were materially false and misleading in a number of respects; that in so reporting the respondent acted fraudulently or, alternatively, C negligently towards International; that the financial statements and the reports were transmitted by the Deals Group to International, which relied thereon in reviewing and deciding to maintain in part and increase in part, then and from time to time thereafter, the facilities accorded to the Deals Group; that had the 1978 financial statements fairly presented the financial position of the Deals Group and its D constituent companies and the results of their operations, International would, on receipt thereof, have terminated the facilities, have required the Group to make good its indebtedness to International and have recovered such indebtedness; that the loss sustained by International as a result of the liquidation of the companies comprising the Group and E the partial irrecoverability of the amounts owing to International by the Group constitutes damage suffered by International as a result of the aforesaid fraud or negligence of respondent; and that respondent is accordingly liable to compensate International for such loss.

The case was tried by Goldstone J, who for reasons which I shall F elaborate in due course dismissed International's action with costs. With leave of the trial Judge, International now appeals to us against the whole of this judgment.

International's action is a two-pronged one. It comprises (a) a claim for damages for fraudulent misrepresentation, and (b) an alternative claim for damages based upon economic loss caused by a negligent G misstatement. The misrepresentation under claim (a) and the misstatement under claim (b) are alleged to be the auditors' report, read together with the 1978 financial statements. (Although strictly there are a number of such reports, relating to the various financial statements within the Group, the reports are all in substantially the same terms H and I shall for convenience speak merely of a single auditors' report.) At common law, in order to succeed in this action International had to prove:

(a)

That the financial statements in question were in fact materially false and misleading;

(b)

that in reporting on the financial statements as he did the respondent acted fraudulently;

(c)

I or, alternatively to (b), that in so reporting the respondent acted unlawfully and negligently vis-à-vis International; and

(d)

that respondent's fraud, or negligence, caused International's eventual loss.

(See Siman & Co (Pty) Ltd v Barclays National Bank Ltd 1984 (2) SA 888 (A), J at 904D - G, 911B - C.) In argument before us reference was also made

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A to s 26(5) of the Public Accountants' and Auditors' Act 51 of 1951. In its original form, this subsection placed an embargo on actions against an auditor in respect of any opinion expressed or certificate given or report or statement made or statement, account or document certified by him, unless it was proved that he acted maliciously or negligently. This B provision is negative in its effect and does not appear to restrict or otherwise modify the ordinary common law liability of an auditor in any material respect. It is, therefore, necessary to examine the common law to determine positively the requisites for liability. In 1982 a new ss (5) was substituted by s 1 of Act 42 of 1982. This is far more elaborate and, inter alia, prescribes positively the grounds of liability to third C parties, but as the subsection came into effect only after the occurrence of the events with which this case is concerned, it is not of relevance.

I now proceed to consider in turn whether the four elements of International's cause of action, as listed (a) to (d) above, were established at the trial. D

Financial statements materially false and misleading

Before considering International's complaints in regard to the financial statements, I must say something about the Deals Group, its mode of trading and its financial standing prior to and during the 1978 financial year. E

At the time the Group comprised a holding company, Deals Furnishers (Pty) Ltd ('Deals Furnishers'), and four subsidiaries - Deals Rent-A-TV (Pty) Ltd ('Deals TV'), Deals Furnishers (Natal) (Pty) Ltd ('Deals Natal'), Deals Contracts (Pty) Ltd ('Deals Contracts') and Impact Furnishers (Pty) Ltd ('Impact'). The business of the Group, which was F carried on in the Transvaal and Natal, consisted of the sale, through stores, of furniture, furnishings, carpets, household appliances, television and radio sets and allied merchandise; the making-up of curtains, bedspreads etc; the execution of contracts for the supply of hotel and other major furniture, carpet and furnishing contracts; the supply and installation of TV antennae; and the rental and servicing of G television sets. The television side of the business, especially the sale and rental of television sets, was conducted by Deals TV. This was embarked upon in 1976. As it was intended in the main to lease out television sets rather than sell them, the Group, and Deals TV in particular, needed a large amount of capital and it was in these H circumstances that International was approached for financial assistance.

At the time of this approach International, acting through certain executives constituting its credit committee (which considered new applications for facilities and monitored the ongoing facilities granted to clients and the credit-worthiness of clients), made an assessment of I the Deals Group, its profitability, business reputation, the quality of its administration and its future potential. In general the assessment was a favourable one though it drew attention to 'the highly geared situation' of the Group, meaning that the ratio of outside liabilities to shareholders' equity was higher than was desirable (sometimes referred to as 'over-trading'); and it was agreed initially to provide J 'a local facility' of

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A R100 000, pending the provision by the Deals Group of further information and the completion of certain formalities.

The chairman and managing director of the Deals Group was then a Mr Brian Cunningham; and he was in effect in sole control of the Group. The shareholders at that stage were Brian Cunningham and his brother, Graham B Cunningham. Subsequently, on 30 June 1978, Graham Cunningham severed his connection with the Group and his shareholding was taken over by Brian Cunningham. All future references to 'Cunningham' will mean Brian Cunningham.

The terms upon which facilities would be granted and the amount thereof, totalling R450 000, were finally settled and recorded by the C parties in August 1976. One of the terms was that Deals would furnish International with its audited financial statements as soon as these became available after the end of each financial year and in addition with monthly operating statements of the Group and any other additional information which International might from time to time reasonably require.

D It appears that during the latter half of 1976 trading conditions in the markets in which the Deals Group was engaged became very difficult. This was attributed to the so-called 'Soweto Riots' of June 1976 and the aftermath of political unrest which ensued for some time. In February 1977 Cunningham informed International that the...