Cape Empowerment Trust Limited v Sithole

• Jurisdiction: South Africa
• Judge: Binns-Ward AJ
• Judgment Date: 28 January 2005
• Citation: 2005 JDR 0195 (C)
• Docket Number: 7176/02
• Court: Cape Provincial Division

Binns-Ward AJ

Introduction

[1] Cape Empowerment Trust Ltd, a listed black economic empowerment company, claims just under R10 million in damages from the erstwhile Cape Town partnership of auditors and accountants, Fisher Hoffman Sithole ('FSH'), in compensation for the loss it sustained as a result of allegedly having been induced, by the negligent misstatements made by one of the partners in respect of the profits supposedly earned by a business of a

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company in the Paradigm group, to ratify and approve a contract that it had concluded for the purchase by one of its subsidiaries of that and other connected businesses.

[2] Consequent upon the watershed judgment in Administrateur, Natal v Trust Bank van Afrika Bpk 1979 (3) SA 824 (A), an action for damages is available in delict under the extended lex Aquilia to a plaintiff who can establish (i) that the defendant, or someone for whom the defendant is vicariously liable, made a misstatement to the plaintiff; (ii) that in making the misstatement the person concerned acted (a) negligently and (b) unlawfully; (iii) that the misstatement caused the plaintiff to sustain loss (generally referred to as 'pure economic loss'); and (iv) that the damages claimed represent proper compensation for such loss [1] .

[3] The claim in the current case was formulated consistently with the aforementioned broadly outlined cause of action. Pursuant to an order made in terms of rule 33(4) by a judge in the Third Division, as amended by agreement between the parties immediately before the plaintiff commenced to lead evidence, only the issues in (i), (ii) and (iii) of the aforegoing formulation fall to decided at this stage of the action, it being assumed for that purpose that the

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plaintiff has suffered a loss of the nature alleged in its particulars of claim. The questions of whether such a loss has in fact been sustained and, if so, its quantum have been stood over for determination, if necessary, in a second stage trial. It was acknowledged by the plaintiff's counsel during argument [2] that the question of legal, as distinct from factual, causation also falls to be decided, if necessary, in the second stage.

[4] The narration of the facts will be assisted by first identifying the principal entities and personalities involved, as well as certain of the subject matter to which labels were attached during the trial, which I have adopted in the judgment.

4.1

Paradigm Interactive Media Ltd, which later changed its name to Paradigm Capital Holdings Ltd ('Paradigm'), was a company also listed on the Johannesburg Securities Exchange. It controlled a number of subsidiary companies. It was a party, qua guarantor in respect of the seller's obligations, to the agreement in terms of which the Intella business was purchased by a subsidiary of the plaintiff.

4.2

Intella Ltd ('Intella') was a wholly-owned subsidiary of Paradigm. Intella owned the 'Intella business' and, qua seller, it was a party to the agreement in terms of which the Intella business was sold to a subsidiary of the plaintiff. .

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4.3

The 'Intella business' comprised the businesses of AMT Technologies (Pty) Ltd ('AMT'), Infotrunk (Pty) Ltd, Voice & Data (Pty) Ltd and Everycard Data Switch (Pty) Ltd, and the entire issued share capital of (and Intella's claims against) United Technologies (Pty) Ltd (a wholly owned subsidiary of AMT).

4.4

The 'Ubunye debt' was an amount of either R10 249 800, or R10 262 224 (the difference is explained later), which was recognised in the accounting information provided to the plaintiff as attributable income (gross profit) in. the hands of AMT (and therefore in the Intella business) during the 1999 financial year, more particularly during the period 1 March to 30 June 1999. The income was ostensibly derived from an 'irrevocable order' placed with AMT by Ubunye on 31 May 1999 for the purchase of 3106 contracts for the installation of tracking and fare collection systems in minibus taxis. The ostensible transaction was supported by an invoice ('the Ubunye Invoice'), ostensibly rendered by AMT on 30 June 1999). I have used the adjectives 'ostensible' and 'ostensibly' because, as will be described in more detail later, the evidence bore out the plaintiff's contentions that the written order dated May 1999 and the invoice dated June 1999 were in fact created in October 1999 and backdated. The order had also in fact been

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placed with Taxi Link or Taxi Mate, both of which were entities in the Paradigm group, but neither of which formed part of the Intella business [3] . The non-existence of the Ubunye debt as an asset in the Intella business was fundamental to the plaintiffs claim. The characterisation of the Ubunye debt as income in the Intella business underpinned the independent reporting account's report and the profit certificate issued by the defendant in October and December 1999, respectively. The alleged negligent misstatements upon which the plaintiff relies in the action were contained in these documents.

4.5

The 'Safrican loan' consisted of a loan of R3 million by the insurance company, Safrican, to Fullimput 35 (Pty) Limited, a company in the Paradigm group, which traded under the name of Londalozi. Although the transaction had nothing to do with AMT, the R3 million was recorded in AMT's financial statements as income accrued during the 1999 financial year and was accepted as such when the FSH independent reporting accountant's report was compiled paragraph 4.8, below) made a statement confirming the extent of the profits of the Intella business, during December 1999.

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4.6

H Investments No 194 (Pty) Ltd (H194) was at all material times a wholly-owned subsidiary of the plaintiff company. It was a party, as purchaser, to the agreement in respect of the acquisition of the Intella business.

4.7

Mr Shaun Rai ('Rai') was a director and the chief executive officer of the plaintiff company. He was the principal witness in the trial.

4.8

Mr Justin '(Billy)' Nield ('Nield') was a partner in the defendant firm. He is the person alleged to have been responsible for the negligent misstatements on which the action has been founded. It. was common cause that Nield acted at all material times in the course and scope of his capacity as a partner in the defendant. Nield was registered as an accountant and auditor in terms of the Public Accountants' and Auditors' Act 80 of 1991. He was also the 'engagement partner' responsible for the audit of the Paradigm Group in the relevant period for the purpose of the consolidated financial statements required in terms of the Companies Act. In this capacity he interacted with the auditors responsible for the audits of the various subsidiary companies in the group- for the purpose of this case his interaction with the Johannesburg partnership of FSH, which was responsible for the audit of AMT was the most material.

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4.9

Mettle Limited ('Mettle') was the so-called 'corporate adviser' to the plaintiff in respect of the implementation of the agreement. A corporate adviser, in the relevant sense, is responsible to its client for the logistical management of the implementation of the agreement. Owing to the nature of the agreement and the character of certain of the principals to the agreement as listed companies, certain formalities had to be observed, including the requirements of the Johannesburg Securities Exchange ('the JSE').

4.10

Bohumi Corporate Finance (Pty) Ltd ('Bohumi') was a subsidiary of Paradigm. It was also the corporate adviser to Paradigm for the purposes of the agreed transaction.

[5] On 23 August 1999, the plaintiff, H194, Paradigm and Intella concluded a sale of business agreement.

[6] In terms of the agreement, H194 purchased the Intella business from Intella. The agreement provided for the payment of a purchase consideration in a maximum amount of R147 million. I say a 'maximum amount' because the agreement provided various formulae in terms of which the price fell to be adjusted downwards in the event of the profit warrantees provided in the contract not being met. R137 million was payable 90 days after the 'closing date' -i.e. 10 days after the last suspensive condition had been fulfilled or waived - and the balance of R10 million would be payable one year after closing date.

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[7] One of the profit warranties by Intella in the agreement (it was contained in clause 2.15 of appendix 2 to the agreement [4] ) warranted that the profits earned by the Intella business for the four month period from 1 March 1999 up to and including 30 June 1999 ('the warranty period') would not be less than R10 million ('the warranted profits').

[8] In terms of a suspensive condition, the contract was subject to approval by the boards of directors of the plaintiff and Intella. The plaintiffs board resolved to approve the agreement at a meeting held on 20 September 1999.

[9] Amongst the other suspensive conditions was one requiring the approval of the agreement by the shareholders of the plaintiff at a general meeting. For this purpose, and in compliance with JSE requirements, on 12 November 1999, the directors of the plaintiff issued a circular to shareholders. In the circular, the directors of the plaintiff stated that they believed that the agreement was fair and reasonable and to the benefit of the plaintiffs shareholders; that, qua shareholders, they intended to vote at the general meeting in favour of approving the agreement; that they had considered all statements of fact and opinion in the circular and considered them to be correct; and that they accepted full responsibility for the accuracy of the information in the document.

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