Gorfinkel v Gross, Hendler & Frank

• Jurisdiction: South Africa
• Court: Cape Provincial Division
• Judge: Friedman J
• Judgment Date: 12 March 1987
• Citation: 1987 (3) SA 766 (C)
• Hearing Date: 06 March 1987

Friedman J:

Applicant seeks an order in terms of Rule 30(5) of the Uniform Rules of the Supreme Court compelling respondent to produce certain documents in compliance with a notice served on respondent pursuant to Rule 35(12). The circumstances giving C rise to the application may be summarised thus: preparatory to the institution of an action which applicant intended to institute against respondent, a firm of chartered accountants, for the recovery of damages for professional negligence, applicant brought an application for and obtained an Anton D Piller order against respondent.

In the Anton Piller application applicant alleged that respondent had acted as auditors of a company called Video Home (Pty) Ltd ('Video Home') and had in that capacity prepared the company's financial statements as at 28 February 1985. In their report which formed part of the financial statements, E respondent stated inter alia :

'In our opinion, the statements fairly present the financial position of the company at 28 February 1985 and the results of its operations for the period then ended in the manner required by the Companies Act 61 of 1973, as amended.'

This report was signed by one of respondent's partners, one Julian Myers. At that stage applicant had already invested an amount of approximately R1 million on loan account in Video F Home. When Myers prepared the 1985 accounts and signed the auditor's report he was aware that the accounts would be furnished to applicant for the purpose of considering his existing investment and any future investment in Video Home. On the strength of the information contained in the accounts, applicant was advised to leave his investment of approximately G R1 million in Video Home. He not only did this, but in fact invested further amounts totalling R555 000 in the company.

Unknown to applicant the accounts were false in five material respects which were set out fully. These were repeated in the particulars of claim which were subsequently served on H respondent and which read as follows:

'(a)

Video cassette tapes were reflected in the financial statement as fixed assets with a value of R3 818 660 whereas in fact the value of the tapes was not more than R205 000 in total.

(b)

The debtors were reflected in the audited statements as a figure of R269 140 whereas in fact a major I portion of this sum was owed by a company known as Video Link (Pty) Ltd, the financial position of which was at all material times such that it could not possibly have paid the amount of the claim against it. Nevertheless the financial statements did not contain any provision or qualification in order to provide for J the fact that such debt was irrecoverable.

Friedman J

(c)

A The financial statements reflected video equipment as a fixed asset with a book value of R15 370 whereas in fact Video Home did not own any video equipment.

(d)

Fixtures and fittings were reflected in the audited statements as fixed assets with a value of R24 919 whereas in fact Video Home did not own any fixtures or fittings.

(e)

B The reference to the 1984 comparative figures suggested that audited financial statements were published for that year whereas in fact no such audited financial statements were published.'

Applicant alleged that respondent and in particular Myers was negligent in that, had proper auditing procedures been adopted, C it would have been discovered that the information contained in the financial statements was incorrect. In the circumstances respondent was negligent in expressing an unqualified audit opinion on the financial statement. Had applicant been aware of the falsity of the information and not been misled by the auditor's report, he would not, he stated, have left his D existing investment in Video Home but would have taken immediate steps to recover it and would not have advanced any further moneys to the company. On the strength of the audited financial statements he was, however, led to believe that Video Home was a viable and profitable concern. The company was ultimately wound up on 29 January 1986. At that stage it was unable to pay its debts and was hopelessly insolvent. Applicant E stated that he was not likely to receive any dividend in respect of his claims against the company and that he had accordingly suffered damages in an amount of some one-and-a-half million rands.

Applicant stated further that respondent would, in the course of carrying out the audit, have prepared and maintained working F papers. Those working papers, which contained vital evidence in regard to the actual auditing procedures followed by respondent, were in respondent's possession and applicant had no access to them at that stage. After the institution of the action which applicant proposed to bring, he would be able to get discovery of those documents. In the meantime, however, there was a real danger that the working papers may be hidden G or destroyed or that they may be tampered with by respondent.

The Anton Piller order, which was granted on 21 October 1986 ex parte and without notice to respondent, provided that the deputy sheriff was to attach all respondent's working papers relating to the audit of the financial position of Video Home H as at 28 February 1985. Applicant's attorneys were authorised to accompany the deputy sheriff when he executed the order. A rule nisi was at the same time issued calling upon respondent to show cause on 5 November 1986 why an order should not be granted authorising the deputy, sheriff to retain the originals of the working papers in his custody pending the trial of the action to be instituted by applicant against respondent.

I The return date of the rule nisi was subsequently extended until 6 March 1987. Respondent filed copious opposing affidavits and applicant filed replying affidavits. From these it appeared that when the deputy sheriff, accompanied by applicant's attorney, arrived at respondent's premises with the J Anton Piller order, Myers was overseas and was not due back in the Republic until 9 November 1986 and no one knew where the

Friedman J

1985 working papers were. Attempts by Mathew Paul Hendler, one A of the partners in respondent's firm, to trace Myers were unsuccessful. In his affidavit Hendler explains that the usual practice adopted by respondent's partners was to open a sub-file containing working papers for each year. These sub-files, to make them easily accessible, were of a different colour for each year. For 1985 the colour of the sub-files was B dark red. Hendler went on to state:

'The working papers have since been found, not in a distinctive file but at the back of the correspondence file.'

On his return to the Republic, Myers deposed to an affidavit on 14 November 1986 in which he stated

'... these working papers (ie the 1985 working papers) had C remained intact in the correspondence file of Video Home ever since they were prepared in 1985'.

Myers also stated, with regard to the 1984 figures:

'The 1984 figures were audited but the financial statements were not finalised because of the debate in regard to the basis upon which the video tapes should be reflected as an asset in D the account. This aspect was finalised contemporaneously with the finalisation of the 1985 interim accounts as at the end of February 1985. The 1985 accounts contain the 1984 comparative figures. The omission to have the 1984 accounts typed or signed was therefore of no significance.'

In a replying affidavit, applicant's attorney, John Ian Simon, who had accompanied the deputy sheriff when the Anton Piller order was served, stated that Hendler took them through to a E strongroom where the company files were kept. Hendler took out a file marked 'Video Home (Pty) Ltd' in which he found the 1983 and 1984 but not the 1985 working papers. He also found in the Video Home file certain correspondence relating to the draft 1985 accounts of Lions Head Video (Pty) Ltd (this being the previous name of Video Home).

In a supplementary affidavit dated 11 December 1986, Hendler F stated:

'In the presence of the deputy sheriff and his assistant I opened the Video Home file which had been located for me by our filing clerk.........'

He went on to state:

'The file consisted of a correspondence file and working papers for the year 1984. The working papers for the year, 1984, was G (sic) contained in a separate distinctive coloured folder. I expected that any working papers for the year 1985, in accordance with the usual practice, would be in a sub-file, coloured dark red.'

Arising out of the reference in Hendler's affidavit to the 1984 working papers and the correspondence file, applicant on 23 December 1986 served a...