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[2019] ZAGPJHC 155
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Barloworld Logistics Africa (Pty) Ltd and Another v Ford and Others (15511/2018) [2019] ZAGPJHC 155; 2019 (5) SA 133 (GJ) (20 May 2019)
REPUBLIC
OF SOUTH AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA
GAUTENG
DIVISION, JOHANNESBURG
CASE
NO: 15511/2018
REPORTABLE
OF
INTEREST TO OTHER JUDGES
REVISED.
20/5/2019
In
the matter between:
Barloworld
Logistics Africa (Pty)
Ltd 1
st
Plaintiff/Respondent
Barloworld
Transport (Pty)
Ltd 2
nd
Plaintiff/Respondent
and
Steven
Michael
Ford 1
st
Defendant/Excipient
Robert
Arthur
Lumn 2
nd
Defendant/Excipient
Amanda
Cynthia
Fairley 3
rd
Defendant/Excipient
lain
Robertson
Douglas 4
th
Defendant
Dylan
Arthur Barrie
McNamara 5
th
Defendant
Enigma
Transport Logistics (Pty)
Ltd 6
th
Defendant
Giratime
(Pty)
Ltd 7
th
Defendant
Nyladox
(Pty)
Ltd 9
th
Defendant
JUDGMENT
Summary:
Exception
against particulars of claim on the basis of vague and embarrassing
.
Plaintiffs pleading
fraud consisting of defendants knowingly participating in accounting
treatment failing to conform to "generally
accepted accounting
practice";
Plaintiffs
failing to particularise particular standard of practice said to
comprise "generally accepted accounting practice";
Held:
SA GAAP no longer being issued by Accounting Practices Board, which
no longer exists;
Held
further: even if informal non-promulgated standards of International
Financial Reporting Standards (IFRS) have developed, and
even if
these may be referred to as "gaap", insufficiently
particularised to enable defendants properly to plead to cause
of
action.
Exception
upheld.
Van
der Linde
,
J
:
Introduction
and back
g
round
:
[1]
The first three defendants except to the
plaintiffs' particulars of claim as being vague and embarrassing. In
the summons the plaintiffs
claim money judgments against the eight
defendants. The plaintiffs also claim against the 1
st
defendant rectification of what is called
"the
separation agreement'',
and as
against the 1
st
and 2
nd
defendants, declaring each of them to be delinquent; and, in the
alternative, ordering that the two of them be declared and placed
under probation for a period of five years.
[2]
The claims are formulated in four
separate claims, the first being against the 1
st
,
2
nd
and 3
rd
defendants jointly and severally, with alternative claims against
each of the first three defendants separately. The second claim
is
against the 4
th
,
5
th
,
6
th
,
7
th
and 8
th
defendants jointly and severally, the third claim against only the
1
st
defendant, and the fourth claim only against the 1
st
and 2
nd
defendants.
[3]
The 6
th
,
7
th
and 8
th
defendants are companies and it is alleged that the 4
th
and 5
th
defendants were at all times directors of those three companies. The
case starts with the assertion that a written employment agreement
was entered into on 26 May 2011 between Barloworld Logistics (Pty)
Ltd (not one of the plaintiffs) and the 1
st
defendant in terms of which the 1
st
defendant was employed as Chief Executive Officer for that company
.
[4]
The particulars of claim then assert
that earlier, by some three years, in September 2008, the same
Barloworld company concluded
a written employment agreement with the
2
nd
defendant in terms of which the 2
nd
defendant was employed as Financial Director for that Barloworld
company
.
The
particulars of claim then assert that on 20 March 2015 the employment
of the 1
st
and 2
nd
defendants was transferred from Barloworld Logistics (Pty) Ltd to the
1
st
plaintiff in terms of
section 197
of the
Labour Relations Act, 1995
.
[5]
Then it is asserted that on 22 October 2015 the 1
st
plaintiff concluded a written employment agreement with the 3
rd
defendant in terms of which the 3
rd
defendant was employed by the 1
st
defendant as Executive: Operations.
[6]
The particulars of claim assert that the
1
st
three defendants occupied senior managerial positions within the
Barloworld group of companies
.
and
owed fiduciary duties to the plaintiffs. It is further asserted that
the 1
st
and 2
nd
defendants were at all times directors of the two plaintiffs and owed
them fiduciary duties both under the common law and in terms
of
section 76 of the Companies Act 71 of 2008 ("the Act").
[7]
The particulars of claim then assert
against the 1
st
,
2
nd
and 3
rd
defendants what is called
"the
relevant representations''
and that
these were, to the knowledge of the 1st three defendants, false.
Particulars of the alleged falsehoods, which given the
allegations
may also be described as frauds, are then asserted in paragraphs 27,
28 and 29 of the particulars of claim, respectively
in respect of the
amounts of R16 million, R3,1 million and R5,3 million.
[8]
The case which then unfolds as one for
pure economic loss resulting from fraud, proceeds to assert in
paragraph 30 that the relevant
representations were material and made
with the intention of overstating the 1
st
plaintiff's operating profit for the 2016 financial year, and to
induce the 1
st
plaintiff to pay inflated incentives to, amongst others, the 1
s
,
2
nd
and 3
rd
defendants.
[9]
Pursuant to the fraud, the 1
st
defendant paid the inflated incentives in the 2016 financial year
totalling R4 525 221, which is alleged to be made up of the incentive
paid to the 1
st
defendant in the amount of R186 726, to the 2
nd
defendant the amount of Rl99 809, to the 3
rd
defendant the amount of R124 019, and to executives, management and
employees other than the 1
st
three defendants, the aggregate amount of R4 014 667. These
assertions give rise to the various claims for repayment and
alternative
relief under section 77(2)(a) of the Act.
[10]
The claims against the 4
th
,
5
th
,
6
th
,
7
th
and 8
th
defendants are not relevant because the exception is not brought by
them.
[11]
The first three defendants' exception
focusses on the accounting treatment of the annual financial
statements of the 1
st
plaintiff's 2016 financial year which recognized an operating profit
of R16 million in respect of logistical services rendered
by the 1
st
plaintiff to the 6
th
defendant; of R3,1 million attributable to a license agreement with
Emirates; and of R5,3 million attributable to the capitalising
of
intangible assets, aggregating
R24,4
million. The plaintiffs contend that
the first three defendants knowingly participated in this accounting
treatment which was -
to the knowledge of the first three defendants
- false and, importantly for present purposes, non-compliant with
what is called
in the pleading,
"generally
accepted accounting practice."
[12]
The exception is that these averments
are vague and embarrassing on two grounds. The first ground relates
to the assertions concerning
the operating profit, the generally
accepted accounting practice, and profit shares. Two reasons are
advanced for the proposition
that the particulars of claim are vague
and embarrassing in that regard. The first is that the particulars of
claim do not explain
what
"operating
profit"
means, or how this was
required to be calculated.
[13]
It is alleged that according to the
Oxford Dictionary of English,
"operating
profit"
means
"a
gross profit before deduction of expenses",
and
that on that definition the profit shares would have formed part of
the gross profit and would as a natural consequence have
been
included in the calculation of operating profit.
[14]
The second reason why it is alleged that
these averments are vague and embarrassing is that the particulars of
claim do not set
out which principles of
"generally
accepted accounting practice"
were
offended by the inclusion of the profit shares in the calculation of
operating profit.
[15]
The second ground of objection is that
the averment that the first three defendants participated in the
accounting treatment by
recognising R3,1 million as operating profit
for the 2016 financial year attributable to a license agreement with
Emirates, and
the recognition of R5,3 million attributable to the
capitalising of intangible assets, are vague and embarrassing because
no details
are set out as to when, where, how or with whom they so
participated, and no details are set out as to when, where and how
they
so acquiesced, and the context in which they did so. Given my
conclusion in respect of the first ground of objection, it is
unnecessary
to deal with the second.
Generall
y
acce
p
ted
accountin
g
p
ractice
,
GAAP and
g
aa
p
[16]
The
day before the hearing I sent a note to counsel for the parties
asking them to assist me by identifying
"the
consequences following on the withdrawal of SA GAAP in respect of
financial years commencing on or after 1 December 2012,
the voluntary
winding-up of the Accounting Practices Board, and the application
instead of IFRS".
I
had in mind the joint announcement by the Accounting Practices Board
(APB) and the Financial Reporting Statements Council (FRSC)
regarding
SA GAAP. In terms of that announcement the APB would be voluntary
wound-up, and SA GAAP would be withdrawn and will cease
to apply in
respect of financial years commencing on or after 1 December 2012.
[1]
[17]
Some
background is necessary.
[2]
The APB was formed in 1973 to consider what should be regarded as
generally accepted accounting practice, and in fact to issue
statements of SA GAAP. In time, the APB, having issued statements of
SA GAAP for some 30 years, decided to harmonise SA GAAP with
International Financial Reporting Standards
("IFRS").
[18]
Up to this point in time and for a while
thereafter, section 286 of the then Companies Act 61 of 1973 required
of the directors
of a company in respect of any financial year to
cause to be made out in one of the official languages, annual
financial statements,
and to lay them before the annual general
meeting. That section also prescribed the contents of the annual
financial statements
and then continued in subsection {3) as follows
(my emphasis):
"286.
DUTY TO MAKE OUT ANNUAL FINANCIAL STATEMENTS AND TO LAY THEM BEFORE
ANNUAL GENERAL MEETING.
(1)
..
.
(2)
.
.
.
(:3)
The
annual
fi
nancial
statements o
f
a
com
p
an
y
shall
,
in
con
fo
rmit
y
with
g
enerall
y
acce
p
ted
accountin
g
p
ractice
,
f
airl
y
p
resent
the state o
f
a
ff
airs
o
f
the
com
p
an
y
and
its business as at the end o
f
the
fi
nancial
y
ear
concerned and the
p
ro
fit
or
loss o
f
the
com
p
an
y
fo
r
that
fi
nancial
y
ear
and shall for that
purpose be in accordance with and include at least the matters
prescribed by Schedule 4, insofar as they are
applicable, and comply
with any other requirements of this Act."
[19]
It is to be noted that the words
"generally accepted accounting
practice"
in subsection 286(3)
appeared in lower case. Until the issuance by the APB of statements
of SA GAAP, there was no set of written
rules indicating precisely
what
"generally accepted
accounting practice"
as
envisaged in the statutory prescription was. Some general principles
had evolved in the course of time, and these were regarded
as guiding
members of the accountancy profession both in South Africa and in the
United Kingdom.
[20]
With the issuance of formal statements
of SA GAAP there developed practices, as explained by Meskin
i
n
Henochsberg on the Companies Act,
Volume 1, page 550, which were
colloquially referred to as
"gaap"
and
"GAAP''.
The latter referred to the
accounting practices that were described and prescribed in the formal
statements issued by the APB
.
The
former, often referred to by practitioners and commentators as
"little gaap",
were
those practices that were extensions of and additional to the formal
statements, and that had become generally accepted due
to their being
followed generally.
[21]
In
this context the 2nd edition of Generally Accepted Accounting
Practice - A South African Viewpoint, Everingham and Hopkins say:
[3]
"The
existing statements represent promulgated GAAP, but there has also
grown up a body of, as yet, unpromulgated GAAP
.
"
[22]
Meskin puts it this way (my emphasis):
"The
existence of
unpromulgated
qaap
as a
reporting framework may, however, have resulted in the adoption of
unsound accounting practices because a number of entities
were
applying such
practices. That was of course not a desirable state of affairs since
users are financial statements who rely on them
require an assurance
that financial statements do indeed fairly present the affairs of the
entity. In order to provide such assurance,
legal backing for the
South African accounting statements has long been regarded as
essential. The required legal recognition for
accounting statements
will now be achieved by the introduction of this section."
[23]
The author was referring to the new
section 285A by means of the Corporate Laws Amendment Act 24 of 2006
(14 December 2007).
[24]
Reverting then to the joint announcement
of the APB and the FRSC regarding SA GAAP: The APB since 2003 decided
to harmonise SA GAAP
with IFRS. Since then, the APB had issued IFRS
statements as SA GAAP without amendment. However, the chairpersons of
the APB and
the FRSC had decided, in order to reduce the burden of
issuing each IFRS standard as SA GAAP, formally to withdraw SA GAAP,
and
that was the rationale for the joint statement. After 1 December
2012 the FRSC would acquire, by regulation, the power to issue
financial reporting pronouncements to take account of local
circumstances.
[25]
The effect of the joint announcement was
that some companies were required to start preparing for their
conversion from SA GAAP
to IFRS, or depending on their size, to IFRS
for small and medium enterprises. Further, with effect from May 2011,
the APB ceased
approving individual IFRS statements as SA GAAP.
[26]
And reverting then to
"little
gaap",
Meskin draws attention
to the judgment of Colman, J mwho observed in
Novick
v Comair Holdings Ltd
1979 (2) SA
116
(W) (my emphasis):
"The
requirement that the fair presentation enjoined be in conformity with
'
generally
acce
p
ted
accountin
g
p
ractice'
,
is, in one
sense, a limiting requirement. But it carries with it a measure of
flexibility because there can be di
ff
erences
o
f
o
p
inion
about what
g
enerall
y
acce
p
ted
accountin
g
p
ractice is
in relation to certain matters; and there can be di
ff
erences
o
f
p
ro
f
essional
o
p
inion
as to the a
pp
lication
o
f
acce
p
ted
p
ractices
to s
p
ec
ifi
c
situations."
[27]
I revert to the request that I directed at counsel the day before the
hearing: It seemed to me that if
"little
gaap"
developed
as an adjunct to SA GAAP, and since SA GAAP had disappeared with
effect from 1 December 2012, there could well be a legitimate
debate
as to whether
"little
gaap"
existed
beyond that date. On the other hand, it might be said that in the
practice of accounting, members of that profession may
have continued
developing
"little
gaap";
or
they may instead have developed
"little
ifrs''.
[28]
Either way, it seemed to me necessary to
know what the position of the parties was on this score, given the
centrality which
"generally
accepted accounting practice"
assumes
in the plaintiffs' particulars of claim. I am grateful for the
written note provided by
·
the
respondents/plaintiffs in response to my request.
Discussion
[29]
That then brings me to a discussion of
the merits of the exception. It will be recalled that the exception
is not that no cause
of action
is
disclosed, but instead that the
particulars of claim are vague and embarrassing. Mr Brett SC who led
Mr Kaplan for the excipients,
took the court through the particulars
of claim but particularly stressed the role in which little gaap is
inspanned in the plaintiffs'
cause of fraudulent misrepresentation.
[30]
The fraudulent misrepresentation pleaded follows the following logic:
The 1
st
three
defendants, by dint of the common law and the position of the 1
st
and 2
nd
defendants
as directors, and the 3
rd
defendant by dint of being Executive: Operations, all owed fiduciary
duties to the plaintiff; and they were in addition each responsible
for the accurate and honest financial reporting in respect of both
plaintiffs. As regards the 1
st
plaintiff, this applied to its financial records, including
accounting entries and particularly the 1
st
plaintiff's operating profit, which operating profit would be used to
calculate the incentives payable to the executives.
[31]
The plaintiffs allege that the 1
st
three defendants, duty-bound in this way, knowingly participated in a
particular accounting treatment in the accounting records
of the
plaintiffs, of the recognition of an amount of R16 million in respect
of operating profit, an amount of R3,1 million in
respect of
operating profit, and an amount of R5,3 million as operating profit,
totalling R24,4 million.
[32]
The particulars of claim then proceed to
assert that to the knowledge of the 1
st
,
2
nd
and 3
rd
defendants
this particular accounting treatment was false, "...
and
the relevant accounting treatment did not comply with generally
accepted accounting practice".
It
is further asserted that the 1
st
,
2
nd
and 3
rd
defendants deliberately represented to the plaintiffs that the
particular accounting treatment did comply with generally accepted
accounting practice.
[33]
In paragraph 27 and following the
particulars of claim purport to explain why it was being asserted
that the relevant accounting
treatment did not comply with generally
accepted accounting practice, by listing four reasons of asserted
non-compliance; but,
importantly, without identifying the particular
feature or principle of generally accepted accounting practice that
was not being
complied with.
[34]
Mr Brett accordingly argued that absent
the particular feature or principle of gaap, the particulars of claim
were vague and embarrassing,
because the defendant was unable to work
out whether at all it had not complied with generally accepted
accounting practice. He
submitted in particular, as is specified in
paragraph 3.1.3 of the notice to remove cause of complaint, that the
particulars of
claim did not set out what operating profit meant and
how this was required to be calculated.
[35]
In short, the argument was that there
was a disconnect apparent from the particulars of claim between the
three essentials of the
plaintiffs' claim: what operating profit was
required to comprise; how the 1
st
,
2
nd
and 3
rd
defendants' treatment of operating profit failed to comply with
generally accepted accounting practice; and how this related to
the
asserted incentive bonuses.
[36]
Mr Gilbert, who appeared with Mr Van
Kerckhoven for the respondents/plaintiffs, argued however that the
pleading, properly construed,
used the words
"generally
accepted accounting practice"
not
as a term of art, but in the sense of requiring of the 1
st
,
2
nd
and 3
rd
defendants simply to act honestly and accurately in relation to the
accounting statements.
[37]
I do not believe that that is a fair
reading of the pleading. The words
"accurately
and honestly"
do appear, as one
sees in subparagraphs 23.1, 23.2 and 23.3. But when the notion of
"generally accepted accounting
practice"
is introduced in
paragraph 25, this is in conjunction with and not as subsuming the
requirement of accurate rendition of the accounting
records.
[38]
Further, having regard to the background
of the notion of
"generally
accepted accounting practice"
in
the Companies Act 61 of 1973, one can hardly blame a defendant who
reads the particulars of claim as referring to generally accepted
accounting practice in the way in which this concept was understood
in company law terms, as the many cases thrown up by an electronic
word search will show.
[39]
As I have indicated, to my mind, absent the identification of the
particular accounting practice which was being offended by
the
accounting treatment asserted in paragraph 24 of the particulars of
claim, the particulars of claim are rendered vague and
embarrassing.
And, as I have indicated, this relates not simply to one paragraph of
the particulars of claim; bear in mind the
lack of particularity of
the concept of
"operating profit"
as
well as the lack of particularity of the concept of
"incentive
bonus",
and it seems to me that one is
left with vagueness and embarrassment which goes to the whole cause
of action, as envisaged in
Jowell v
Bramwell-Jones and Others
1998 (1) SA 836
(W).
[40]
Trope v South
African Reserve Bank
1992
(3) SA 208
(T) is authority for the proposition that an exception
that a pleading is vague and embarrassing involves a twofold
consideration:
First, whether the pleading lacks particularly to the
extent that it is vague; and the second being whether the vagueness
causes
embarrassment to such an extent that the excipient is
prejudiced.
[41]
In my view the pleading here fails on
both scores. I have dealt with the vague and embarrassing aspect. The
excipient is prejudiced
because although it would be able to fashion
a plea in the form of a meaningless denial, it will not have been
able to address
the material merits of the fraud cause of action
which the plaintiffs are pressing against the 1
st
three defendants.
[42]
In these circumstances in my view the
exception is good, and I make the following order:
(a)
The 1
st
,
2
nd
and 3
rd
defendants' exception against the plaintiffs' particulars of claim is
upheld;
(b)
The plaintiffs' particulars of claim are
set aside;
(c)
The plaintiffs are afforded 20 days
within which to amend their particulars of claim;
(d)
The plaintiffs are directed to pay the
costs of the exception, including the costs occasioned by the
employment of two counsel,
one of whom is senior counsel.
_______________________
WHG
van der Linde
Judge,
High Court
Johannesburg
Date
argued: 15 May 2019
Date
judgment: 21 May 2019
For
the excipients (1
st
to 3
rd
defendants): Adv JJ
Brett, SC
With
him Adv J L Kaplan
Instructed
by: Ian Levitt Attorneys Excipients' Attorneys 9th Floor Sandton City
Office Towers Sandton City
Corner
Rivonia and 5th Street Sandton
Tel:
(011) 784 3310
Ref:
Michael Strauss/MAT/2375
For
the plaintiffs: Adv B M Gilbert
With
him: MC J van Kerkckhoven
Instructed
by: Brian Kahn Inc Attorneys Plaintiffs' Attorneys Umlilo House
2nd
Burnside Island 410 Jan Smuts Avenue Craighall Park Johannesburg
Tel:
(011) 577 5600
Ref:
B Khan/C da Costa/B1924
[1]
Some statutes have not kept up with the changes; compare Registrar
of Medical Schemes and Another v Genesis Medical Scheme 2016
(6) SA
472 (SCA).
[2]
Compare Commissioner, South African Revenue Service v Volkswagen
South Africa (Pty) Lt d, 2019 (2) SA 362 (SCA).
[3]
At p2.