KPMG Chartered Accountants (SA) v Securefin Ltd and Another

• Jurisdiction: South Africa
• Judge: Harms DP, Cloete JA, Lewis JA, Ponnan JA and Snyders JA
• Judgment Date: 13 March 2009
• Citation: 2009 (4) SA 399 (SCA)
• Docket Number: 644/07
• Hearing Date: 17 February 2009
• Counsel: AO Cook SC and LN Harris SC for the appellant. A Subel SC and S Symon SC (with RM Pearse) for the first respondent. No appearance for the second respondent.
• Court: Supreme Court of Appeal

Harms DP:

Introduction F

[1] This appeal relates to the existence, validity and terms of an agreement between the appellant and the first respondent. The first respondent as first plaintiff alleged that the appellant had breached the agreement and that it consequently had suffered damages for which the G appellant was liable. The claim of the second respondent as second plaintiff was in the alternative to that of the first respondent and was based on delict. It is for present purposes unnecessary to deal with the alternative claim. The appellant denied the agreement and in the alternative alleged that it was void because of error; and in the further H alternative it denied the construction placed on the agreement by the respondents. The court below agreed to decide these and other related issues separately. It found for the respondents and issued a declaratory order accordingly. This appeal is with the leave of the court below.

[2] During January 1998 the SA Mutual Life Assurance Society (also I known as the Old Mutual), a life assurance society without shareholders, decided to demutualise. This meant that it would become a company with shareholders listed on the Johannesburg Stock Exchange. Its free assets of about R29,3 billion were to be converted into share capital and the shares allocated to its members (policyholders) free of charge. To qualify for a share allocation one had to be a member and the policy had J to be in force at the time of demutualisation.

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[3] A policyholder wishing to terminate a policy could surrender the A policy in which event a surrender value was payable to the insured. In such event the policyholder lost the benefits of the bonuses that might attach to the policy since these were payable only if the policy matured. The policyholder could instead assign the policy to a third party who might be prepared to maintain the policy until it matured by continuing B to pay the premiums. The assignee may have been prepared to pay an amount over and above the surrender value as the policy had a higher intrinsic value due to the bonuses that attached to it.

[4] Some Old Mutual endowment policies permitted the insured to amend the policy conditions within certain parameters. The process is C referred to as re-engineering. The insured amount could be increased or decreased; the amount of the premiums could be changed; the maturity date could be brought forward or be extended; and the policy could be paid up. There was a limitation: the maturity date could be changed only to a date that coincided with the anniversary of the policy and this change had to be effected more than a year before the next anniversary. D Because of this it was possible to create value by re-engineering the policy purchased - increasing the insured amount and bringing the maturity date forward - thereby obtaining the advantage of earlier maturity and increased bonuses.

[5] Re-engineering requires some special skills and understanding of E insurance business. One David Alexander, the moving force behind KNA Insurance & Investment Brokers (Pty) Ltd (hereafter'KNA'), was such a person. Re-engineering also required large capital outlay. The cost of a single policy could have amounted to millions and normally exceeded the surrender value. Provision had to be made for future and increased F premiums.

[6] Alexander, with the assistance of one Stride, made contact with Mr N Kirsch, a wealthy businessman with business interests locally and overseas. Kirsch valued Stride's business acumen; Stride had been his auditor and long-time business associate. Kirsch, who saw the financial G benefits of a scheme by which policies are purchased and re-engineered, realised that it would be prudent for tax purposes to create a special offshore vehicle for this purpose. This vehicle, ultimately, was the first respondent, Securefin Ltd, a company incorporated in Jersey, Channel Islands. Kirsch was prepared to get involved only in a large scheme. For finance he sought the assistance of a bank, the second respondent, H known then as BHF-Bank AG.

[7] The bank was prepared to advance money to Securefin for a limited period but required security in the form of a cession of the re-engineered policies. This by necessary implication meant that the bank would I require the assurance that the money advanced was to be used for acquiring re-engineered policies; that the proceeds of the matured policies would cover Securefin's indebtedness; and that the policies would mature before the loan became repayable. It is accordingly not surprising that the bank insisted on a verification or overview procedure by the appellant, KPMG Chartered Accountants (SA) (KPMG), one of J

Harms DP

A the big five (subsequently reduced to four) accounting firms in the world. KNA was to act as Securefin's agent in purchasing and re-engineering the policies. The assured profit in the hands of Securefin would be the difference between maturity value and the cost of acquisition, including interest. An added advantage (referred to by Kirsch as B 'the cherry on the top'), was that Securefin would have become entitled to the relevant demutualisation shares if the policies vested in Securefin on demutualisation.

[8] Lengthy negotiations between the different parties ensued. There were negotiations between Securefin and the bank; between KNA and C KPMG; and also between Securefin, KNA and KPMG. Many drafts were prepared as the proposed structure and contractual relationships around the scheme developed and changed.

[9] Alexander, it later transpired, was an accomplished swindler who manipulated the scheme and allegedly caused the respondents a loss of D some US$40 million. Since KNA was liquidated and Alexander is in prison they wish to recoup their loss from KPMG. Alexander, understandably, was not called by either party as a witness but his absence made him a useful scapegoat.

The procurement contract

E [10] On 12 June 1998 Securefin and KNA entered into a procurement contract. It recorded the intention of Securefin to acquire a large number of policies. KNA was appointed as its procurement agent. KNA would be entitled to a commission of 5% of the aggregate acquisition price. KNA had to ensure that the necessary exchange control approval was in place F to reflect that Securefin was acquiring the policies as principal and that it could remit the proceeds of the matured policies in foreign currency used.

[11] The policies that KNA was to acquire had to be capable of being re-engineered and were to be assignable to Securefin. The re-engineered G policies were to have 'a maturity date not later than 1 January 2001' unless otherwise stipulated. The relevance of this date will become apparent in due course. The policies had to be fully paid up, and, if not, the discounted value of future premiums had to be deposited in a bank account for future use. The funds to pay for the policies and the H premiums were to be sourced from the bank.

[12] Of critical importance to the case is clause 5, which dealt with the verification procedure and the obligation of Securefin to pay KNA the 'tranche consideration' within five days after the receipt of'the verification certificate'. Clause 5.1 obliged KNA to deliver each 'policy tranche', I together with supporting documentation, to KPMG, the 'verification agent'. A policy tranche was defined in the definition clause as a batch of policies with a 'tranche consideration' of not less than US$500 000, 'verified by the verification agent'. And 'tranche consideration' in turn was defined as the sum of (i) the total acquisition price (ie the cost incurred by KNA in acquiring the policies) of the policies; (ii) agent's J commission plus VAT; and (iii) all future premiums discounted to

Harms DP

present-day values. It is apparent that the purpose of the exercise was to A verify the amount due by Securefin to KNA and which the former could draw against the bank loan. It is common cause that the percentage of the agent's commission was later amended but nothing at this stage turns on this.

[13] Clause 5.1 also provided that KPMG had to perform the verification B procedures in order to provide the 'verification certificates'. 'Verification certificate' was defined in clause 2.1.15 to mean two certificates: the one was to be given by KPMG to Securefin and the bank and had to be'in accordance with Appendix C'. The other, for which no form was prescribed, was to be 'a certificate verifying the cost to Securefin of the C tranche consideration'.

[14] The next obligation of KPMG was set out in clause 5.2. It had to deliver each policy tranche to Nedbank International to hold in accordance...