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[1989] ZASCA 138
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International Shipping Company (Pty) Ltd. v Bentley (138/89) [1989] ZASCA 138; [1990] 1 All SA 498 (A) (10 October 1989)
IN THE SUPREME COURT OF SOUTH AFRICA
(
APPELLATE DIVISION)
In the matter between:
INTERNATIONAL SHIPPING
COMPANY
(PROPRIETARY) LIMITED
Appellant
and
CLIFFORD FREDERICK BENTLEY
Respondent
CORAM
: CORBETT, CJ, BOTHA, HEFER,
SMALBERGER, JJA,,et FRIEDMAN, AJA.
DATES OF HEARING:
25 and 26 September 1989.
DATE OF JUDGMENT
: 10 November 1989
JUDGMENT CORBETT, CJ
:
The appellant, International Shipping Company
(Proprietary) Limited ("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 countries. Early in 1976 International agreed to make
certain financial facilities available to
2
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 the importation
of goods and the funding of local purchases. International continued to provide
these facilities until the 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
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
3
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 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
gualified in any way, respondent stated that he had examined
the financial
statements in guestion and had complied with the reguirements of sec 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
reguired by the Companies Act.
In April 1982 International instituted an action
4
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, 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
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
5
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 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 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
6
based upon economic loss caused by a negligent 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
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) or, alternatively to (b), that in so reporting the respondent acted
unlawfully and negligently
vis
-a-
vis
International;
and
7
(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) , at 904 D-G, 911 B-C). In argument before us reference was
also made to sec 26(5) of the Public Accountants' and Auditors' Act
51 of 1951.
In its original form, this sub-section 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 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 sub-sec (5) was substituted by sec 1 of Act 42 of 1982.
This is far
8 more elaborate and,
inter alia
, prescribes positively
the
grounds of liability to third parties, but as the sub-section 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.
Financial statements materially false and misleading
Before considering International's complaints in regard to the financial
statements, I must say something a-bout the Deals Group,
its mode of trading and
its financial standing prior to and during the 1978 financial year.
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
9
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 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 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 circumstances that International was approached for
10
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 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'eguity was higher than was desirable
(sometimes referred to as "over-trading");
and it was agreed initially to
provide "a local facility" of 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 Deais
11
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 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 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.
12
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 Deals Group could not meet its commitments "in
the next week
or two" and described the January and February 1977 turnovers as
"disastrous". International did not, however, regard the situation
as being
sufficiently serious to warrant /the termination of the facilities accorded to
the Deals Group.
In October 1977 International received from Deals the first audited financial
statements covering the period when International commenced
to provide financial
facilities. Owing to the fact that the Deals Group had decided to change its
year-end from 31 August to 20 December
13
the statements covered the period 1 September 1975 to 20
December 1976. A financial analysis or investigation ("FI") of these accounts
prepared by a Mr Greg Miller, a financial analyst employed by International, and
laid before the credit committee, revealed,
inter alia
, that the
shareholders' equity had declined, that the debt-to-equity ratio had worsened
and that the trading results (after tax)
showed a loss of R4 595. This worsening
in the Group's financial position was attributed to its entry into the
television market.
The FI concluded that up to December 1976 the Group was not
viable and subsequently not in a good financial condition; the Group's
budget
for the six months ending June 1977, however, predicted a greatly improved
situation. According to Mr A J Walraven, financial
director of the Trade and
Industry Group, who gave evidence at the trial, the picture conveyed by the
report was "not a very healthy
one", but, taking account of the
14
fact that the economy had npt fully recovered from the Soweto
riots, the situation, though needing to be watched, did not call for
"desperate
action". He stated that his company's policy was to try, if possible, to assist
a client when times were bad rather than
to terminate the facility. At the time
there was no justification for closing the Deals account.
On 22 November 1977 a meeting took place between Cunningham and his
accountant ahd certain representatives of International, at which
Cunningham
proposed that Deals be granted additional facilities. This was refused, but
International accepted additional security
offered by Deals. The existing
facilities of R400 000 for block discounting and R100 000 for local purchasing
were to remain unchanged.
At the same time Deals undertook to furnish
International with the 1977 audited financial statements by not later than
February 1978.
15
In fact, these financial statements, audited by respondent,
were submitted to International only on 2 June 1978. These showed a
substantially
improved figure for shareholders' eguity, a slightly better
debt/equity ratio and a prof it after tax of R14 445. Nevertheless, the
overall
view was that the statements reflected, as Walraven put it, a "dismal financial
picture". An FI dated 23 June 1978 and prepared
by Miller speaks of the Group
being in "a shocking financial condition" and concludes with the following
paragraph under the heading
"VIABILITY":
"As can be seen the Company has not been viable over the last 2 years due to
numerous reasons but mainly to the bad management of
the Group which went into
different aspects of the furniture business i.e. T.V. rental and did not foresee
the consequences of writing
H P paper which has to be planned in great
detail."
But the credit
committee which considered these
16
financial statements also had before it figures for the first
four months of trading in the ensuing year, ie up to 20 April 1978.
These showed
a total income of R838 000, compared with R378 000 for the corresponding period
in the 1977 financial year, and this
persuaded International to continue to
grant the facility, which at that stage totalled R600 000. International did,
however, stipulate
that Deals's indebtedness should be reduced at the rate of
R10 000 per month until the facility had been reduced to R500 000.
A few days later Deals's banker, Barclays National Bank Limited, decided, on
the strength of the audited financial statements for
1977, to terminate the
overdraft facilities afforded by it to Deals. After negotiation, Deals was given
time to liquidate this overdraft.
International was informed of this. The action
taken by Barclays Bank put the Deals Group under further financial
17
pressure. Subsequently Cunningham persuaded International to
agree to continue the facility of R600 000, but to postpone the commencement
of
the monthly reduction of R10 000 to November 1978.
At the end of August 1978 Deals presented International with audited
financial statements for the six months ended 20 June 1978. These
showed an
increase in shareholders' equity from R438 680 to R597 145 and a profit after
tax (for the six-month period) of R95 311.
Neverthe-less, after an analysis of
the figures Miller reported (in an FI dated 29 September 1978) -
" . . . . that in actual f act there has been no improvement in the financial
condition of the Group and they are still grossly overtrading
and
illiquid."
He concluded (under
"VIABILITY") that the viability of the Group had improved "slightly".
18
In a monthly report on the Group's performance for the month
ended 20 December 1978 (dated 31 January 1979) Cunningham, however, struck
an
optimistic note, saying -
"The Group's 1978 audited results will undoubtedly reveal all-time record
profits... and current indications (despite an excep-tionally
poor start to
1979) indicate that this trend will continue through to
1980."
Despite this Cunningham
thereafter requested additional financial facilities from International,
which'were granted
to the tune of R80 000, upon certain conditions.
On about 20 March 1979 International received the
audited financial statements relating to the Deals Group for
the 1978
financial year. Miller subjected them to the
usual financial analysis. Among
the "highlights" of these
statements - as Walraven put it - are (i) an
increase in
shareholders' equity to R714 866 (1977: R438 680); (ii) an
19
increase in profit after tax to R201 329 (1977: R14 445) and
(iii) the
fact that total liabilities have remained constant at approximately Rl,2m.
Miller's summation on viability was:
"The group are now viable, a sharp
improvement on the previous year's results."
The same feeling of optimism is to be found in the chair-man's review
contained in the Group financial statements. Having referred
to various factors
which precluded a profit forecast, Cunningham added this quaint metaphoric
admixture:
"....other than to say that the winds of change brewing through your Group at
present paint an extremely rosy
picture."
Asked (in evidence-in-chief)
to comment on the difference in the position of the Group at the end of 1978, as
compared with that at
the end of 1977, as reflected in the financial statements
for those years, Walraven stated -
20
"The position as reflected at 20 December in
accordance with the audited accounts reflected, the statistics and figures and
ratios relating to a strongly capitalised, highly
viable company with good
liquidity ratios and all-in-all a company that would be
worthwhile backing for any financier, whereas conversely the position as
reflected in the 1977 financials, showed a slightly overgeared
company, weaker
liquidity ratios, a small liquidity surplus and effectively no viability. A
company that had to be watched if facilities
were to be continued in the hope
that matters would improve and therefore the belief in the company would be
justified."
Walraven's evidence
continued -
"
Mr Kuper
: Were you entitled as at March 1979.... what view did you take
concerning that as at March 1979?— My view and that of the Credit
Committee was that the company was well worthwhile supporting and we were happy
to approve the facilities of whatever was detailed
in the approval
form."
21
With this factual background I turn now to International's
complaint that the 1978 financial statements were false and misleading
in a
number of material respects. I shall deal in turn with each of these
complaints.
(a)
Doubtful debt reserves
This complaint is confined, at this stage
at any rate, to the provisions made for doubtful debts in the financial
statements of the
subsidiaries in the Group. It appears that identical amounts
were provided for in the case of each subsidiary in the 1977 and the
1978
financial statemehts. Furthermore, in each set of 1978 accounts there appeared a
note, under the heading "Doubtful debt reserve",
in the following terms:
"The accounting policy of the company is to provide a reserve equal to 60% of
the value of the total doubtful debt owing by those
customers who are more than
two instalments in arrears on their payments
on
22
instalment accounts; or who have not paid for
more than 120 days on open accounts."
It is common cause that the amounts provided for in the financial statements
did not accord with the policy stated in the note and
that, had this policy been
applied, the provisions would have been substantially larger. On the other hand,
it is conceded by International
that the provisions actually made were adequate.
The gravamen of International's complaint, therefore, is the discrepancy between
the amounts actually provided for and the policy
stated in the note. It no
longer contends that it was in
any way misled by this inconsistency, but
merely cites it as evidence of fraud or negligence on respondent's part.
(b)
Taking to income the proceeds of
merchandise sold but not delivered
It is not in dispute that the various companies constituting the Deals Group
did, in their respective
23
financial statements, reflect as part of income earned the
proceeds of merchandise sold to customers before the end of the financial
year,
but delivered only thereafter. This was done as a matter of policy. In fact, the
same practice had been observed in the 1977
financial statements. The gross
amount involved in 1978 was R103 822. It is accepted by the respondent that this
was an incorrect
accounting procedure and that the practice of so dealing with
incomplete sales should at least have been disclosed by a note to the
financial
statements.
The actual effect of this procedure on the 1978
financial statements was, however, not established. The
figure of R103 822 represents gross proceeds and does not
apparently take
account of correlative costs; and it is not
possible to make the necessary
adjustment in respect of
similar transactions included in the 1977 financial
statements which ought to have been reflected in the 1978
24
statements, because the figures were not proved.
Again International concedes that there is no question of it having been
misled in this regard. It had previously been told of this
practice. Accordingly
the complaint is also merely cited as evidence of fraud or negligence on the
part of the respondent.
(c)
Inter-company manipulation in regard to turnover and expenses
It is conceded by respondent that the 1978
financial statements reflect a manipulation of turnover as
between
companies in the Group in the sense that portion of
the turnover actually
earned by one company was arbitrarily
transferred to the credit of another company, thereby
diminishing on paper
the profits of the former company and
boosting those of the latter. In this way an amount of
R100 000 was
"transferred" from the turnover of Deals TV to
that of Deals Furnishers. Thls had the effect of
25
converting what would otherwise have been a net
loss in the income statement of Deals Furnishers into a net profit and of
correspondingly
reducing the net profit of Deals TV as shown in its income
statement. The object of this manipulation was to evade taxation.
It is also alleged by International that in similar fashion and for similar
reasons expenditure was "transferred" from Deals Furnishers
to various members
of the Group, thereby boosting the profits of the holding company and reducing
those of the subsidiaries concerned.
Respondent, on the other hand, contends
that it has not been shown thát these transfers, or "ailocations", of
expenditure
were not permissible and appropriate. The trial Judge appears to
have found against respondent on this issue. I do not find it necessary
to
decide this issue, but will assume in appellant's favour that the inter-company
transfers of expenditure were as unjustified as
the
26
manipulation of turnover.
A further issue raised by respondent was whether, even if these manipulations
were potentially misleading, International was in fact
misled in any material
sense. Respondent contended that it was not. In this regard respondent's counsel
made two points. The first
was that the Deals Group was managed and run as a
single business and International regarded it as such. The re-allocation of
turnover
and expenditure as between members of the Group did not affect the
financial results of the Group as a whole; and this was all that
interested
International. The second, and perhaps more telling, point is that
International, through certain of its executives, notably
Walraven, Rivkind,
Hagger and Jacobson (all members of the credit committee), knew all along that
Cunningham made a practice of manipulating
the Group's financial statements in
this way. In this connection counsel referred to an FI
27
(C526) dated 4 October 1977, which was seen by
all the
gentlemen mentioned. The FI refers to a telephonic communication from
Cunningham to Hagger in the course of which Cunningham told
him that "for our
edification only" the "true trading results" of various companies in the Group
for the 14 months to 31 December
1976 were as follows: (then followed against
the names of the companles certain figures representing profit or loss, as the
case
may be). Walraven, Rivkind, Hagger and Jacobson were all cross-examined on
C526 and none of them appears to have been able to explain
it satisfactorily on
an innocent basis. Counsel also pointed to the FI comprising Miller's assessment
of the 1978 financial statements
(C759), which contains the following
statement:
"Included in creditors is an amount of
R50 000 which was fictitious and was
done to hide profits".
28
The trial Judge appears to have found that International was
misled by these inter-company manipulations. At the same time the learned
Judge
indicated that he was not impressed with the evidence of Walraven, Rivkind,
Hagger and Jacobson. He found that they were clearly
biased in favour of
International's case and attempted, whenever possible, to interpret events and
opinions reflected in the documentary
evidence in a manner most favourable to
International's case. And, in fact, he declded to approach the evidence of these
and certain
of International's other witnesses with caution and to rely
thereon-
"....only where their evidence is supported by other acceptable evidence and,
in
particular, documents which have been
proved".
At this point it is also
pertinent to note that respondent closed his case without leading any
evidence.
29
Neither he nor Cunningham (nor any other person connected with
the Deals Group) gave evidence at the trial. There was, however, before
the
Court the record of portion of the evidence given by respondent at an enquiry
held in terms of sec 417 of the Companies Act 61
of 1973 during July 1981. This
record was held by the trial Judge to be admissible in terms of sub-sec 2(b) of
sec 417. That ruling
has not been challenged on appeal.
Bearing in mind the trial Judge's above-mentioned credibility findings, I
think that there is much to be said
for the view that International, through certain key
executives (all members of the credit committee), was aware
of the fact that the financial statements of the Deals Group
were subject
to inter-company manipulations of the nature
described above. On the other
hand, there is no suggestion
that International had any knowledge of the manner in which,
and extent to which, the 1978 financial statements had been
30
manipulated. Walraven stated that they were
always advised when Cunningham "changed the picture"; and, in the absence of any
such
advice, he would have assumed that the financial statements "showed the
correct picture". Rivkind gave evidence to the same effect.
It is also of some
significance that the only manipulation mentioned in Miller's FI on the 1978
financial statements was the inclusion
of a fictitious amount of R50 000 in the
"creditors" figure.
In regard to the question as to whether the individual trading results of
companies within the Group were of material interest to
International, Walraven
averred that they were; and I must say that common sense would seem to support
this averment. The different
companies in the Group were engaged in various
business activities and I would imagine that a creditor in the position of
International
would be interested in the relative
31
profitability, or otherwise, of these different
enterprises.
All in all I am not persuaded that the learned
trial
Judge erred in holding that the inter-company -
manipulations contained in
the financial statements were
materially misleading as far as International
was concerned.
(d)
The categorization of non-refundable
deposits
This seems to be a very minor and
unimportant
complaint. The lessee of a television
set leased by Deals
TV was obliged to pay at the inception of the lease a
"non-
refundable deposit", which entitled him to a three-month
rent-free period at the end of the lease. The total amount
of such deposits was reflected in the balance sheets of
Deals TV and of
the Group as part of shareholders equity,
whereas it should have been shown
as income or deferred
income and provision should have been made for expenditure
likely to be incurred at the end of each lease. Moreover,
32
the categorization of these deposits as part of
share-
holders' equity did not conform to a note which appeared in
the financial statements of the Group and Deals TV.
Again, however, it is conceded that International was not misled by this
treatment of the deposits in the financial statements concerned
and it was
referred to by appellant's counsel only in the context of proof of fraud
or
negligence.
(e)
The accrual to income of future television rental
In regard to this complaint the learned trial
Judge said the following:
"It is not in dispute that in the case both of discounted and pledged
agreements, the full amount of
future
rentals payable under such
agreements were brought to account in the 1978 financial statements as income.
Furthermore, no expenses
to match such
income
33
were brought to account.
On the undisputed evidence, the amount of future rental brought to account as
income was the sum of R400 333,33. Of that amount some
R72 000 represented
agreements discount-ed by the TV company with the plaintiff. The balance was
pledged paper.
The calculation of the amounts thus brought to account appears from a document
found in the defendant's working papers, Exhibit B192.
The defendant's counsel
did not dispute this interpretation of the document or that the defendant would
have realised the effect
thereof had he read it. I do not propose, therefore, to
attempt to describe the details appearing on Exhibit
B192."
The learned Judge then proceeded
to refer to the expert evidence given by the accountant witnesses:
"The expert evidence was equivocal as to
whether it would constitute proper accounting practice to bring to account as
income the proceeds of a genuine sale of
television
34
rental agreements. There can be no doubt that where, as in the present case, the
TV company remained liable to maintain the television
sets, there were matching
expenses which should have been set off against that income. There can also be
no doubt that the fact of
such a practice should, at least, have been referred
to in a note to the financial statements. I shall assume, however, in favour
of
the defendant, that the inclusion in income of the proceeds of the agreements
discounted was an acceptable accounting procedure.
That, however, accounts only
for some 70% of the amount in
question."
And he concluded:
"With regard to this issue, the defendant's counsel, quite correctly in my
opinion, did not seek to justify the taking to account
of the future rental in
respect of rental agreements pledged as security to the
plaintiff."
Before us
appellant's counsel supported the
35
findings of the trial court on this issue and
submitted that the evidence established that the amount of such future rental
brought
to account as income was R400 333, of which an amount of approximately
R72 000 represented the proceeds of agreements discounted
(ie "sold") by Deals
TV to International and the balance of R338 333 pledged paper.
Respondent's counsel, on the other hand, submitted (in oral argument) that
the evidence failed to establish any of these facts. In
elaborating this
argument, counsel criticized the use made by the trial Court (and
appellant's
counsel) of the exhibit B192 and pointed to various gaps in
the evidence. He further submitted that the inference that
a substantial amount from the proceeds of pledged paper was
wrongly taken
to income in the relevant financial statements
could be drawn only if it were established -
(1) that the amount of R400 333, which appêars
on
B192, was in fact included as revenue in the
36
financial statements concerned;
(2) that this amount was made up entirely of the
proceeds of television
rental agreements, ie did
not include the proceeds of television
hire-
purchase agreements; and
(3) that the proceeds of television rental agreements
discounted (or "sold")
amounted to R72 000.
And he argued that none of
these propositions had been established in evidence.
As regards (1) above, B192 is admittedly a cryptic and equivocal document.
The only witness who purported to be able to interpret
it properly was Jacobson,
when resuming his re-examination after an 8-month adjournment of the trial.
Jacobson was a particularly
unconvincing witness and I am sceptical of this
evidence. Nevertheless, the argument of respondent's counsel was somewhat
weakened
by the fact that in respondent's heads of argument it is stated
37
that it is common cause that,
inter alia
, the proceeds
of
the "sales" of television agreements -
".... amounted to R400 333 as calculated in
document B192".
Moreover, this
proposition does not appear to have been seriously disputed in the Court below.
Similarly, the question as to whether
this amount of R400 333 included the
proceeds of hire-purchase agreements does not appear to have been canvassed in
cross-examination
in the Court below.
To establish proposition (3), International relied
upon evidence given by Walraven to the effect that from
International's own internal records it appeared that the
total proceeds for the year in question, derived from
television rental
agreements discounted (ie "sold") by Deals
to International, amounted to R72
328. Walraven
also mentioned a figure of R146 000 which was given to
him
by Cunningham and which apparently included the proceeds of
38
paper discounted with other financial institutions. The
evidence is not very clear as to what this figure of R146 000 comprised. At
all
events, it was Walraven's contention that the balance (ie the difference between
R400 333 and either R146 000 or R72 328) represented
the proceeds of paper
pledged which had been wrongly taken to account as income.
Respondent's counsel criticized this evidence on various grounds. One was
that it failed to take account of the proceeds of hire-purchase
paper
discounted, the amount of which was unknown. Another criticism was that B192
contains the following notation:
"Future commitment 400,333,33 Not accr.
Future commitment 13 175,09
Accr.
To Sales 413 509,42
Reversal of F.C. to Income because contracts have been
sold."
39
(The abbreviation "accr" evidently stands for "accrued" and
"F.C." for "future commitment"".) This notation, for what it is worth,
appears
to suggest that the whole of the R400 333 represented the proceeds of contracts
"sold".
Generally, the evidence leaves me in substantial
doubt as to whether International did establish the three propositions upon
which its case on this aspect of the matter rests. Nevertheless,
I do not find
it necessary to decide this issue and I shall assume in International's favour
that it was shown that the relevant
financial statements reflected as income a
substantial amount (R250 000 to R300 000 was Walraven's estimate) representing
the proceeds
of rental paper pledged by Deals. Upon this assumption, the
financial statements would, to this extent, have been false and misleading.
There is no suggestion that International was in fact not misled in this
respect.
40
Fraud or Negligence
In his judgment the trial Judge considered very thoroughly the question as to
whether it had been shown that in reporting on the 1978
financial statements of
the Deals Group (with their various defects) respondent had acted fraudulently
or, alternatively, negligently.
The learned Judge came to the conclusion that
fraud had not been established, but that in regard to two of the complaints,
viz. the
inter-company manipulation of turnover and expenses and the taking to
income of future rentals accruing under pledged paper, the
respondent had acted
negligently and that had he carried out his duties with proper diligence these
complaints would probably not
have arisen - in the sense, presumably, that these
defects in the financial statements would have been detected and either
eliminated
or drawn to the attention of International by way of a qualification
to the statements.
41
Appellant's counsel and respondent's counsel
delivered lengthy arguments on these issues: the former in an attempt to show
that the
learned Judge should have found fraud and the latter in an attempt to
show that negligence ought not to have been found. I do not
propose to refer to
these arguments in any detail. I have carefully considered them all and remain
unpersuaded that the trial Judge
erred in making the finding which he did.
Unlawfulness
In order for respondent to be held liable to
International for his reporting as auditor on the 1978 financial statements of
the Deals
Group it is necessary for International to show not only that he acted
negligently in so reporting, but also that he acted unlawfully,
ie in breach of
a legal duty owed to International not to report incorrectly on the financial
statements. Goldstone J came to the
conclusion that the following facts and
42
considerations established such a legal duty:
"(a) The statutory duty upon the defendant to furnish his report on the
financial statements: s300 of the Act. More particularly,
his duty was to
satisfy himself as to the matters referred to in Section 301 of the Act and to
express an opinion as to whether the
financial statements fairly presented the
financial position of the company and its subsidiaries;
(b)
The nature and context of
the relationship between the parties created a direct link between the plaintiff
and the defendant;
(c)
The def endant was
aware that in monitoring and reviewing the facilities of the Deals Group, the
plaintiff would rely upon the financial
statements in a serious and business
context;
(d)
There are no considerations of
public policy which should induce the Court to deny liability in a case such as
the present."
43
I agree that these circumstances do create such a
duty and I did not understand respondent's counsel to dispute this.
I am also satisfied that, in view of the defects in the financial statements
referred to in the previous section on fraud or negligence,
viz the
inter-company manipulation and the accrual to income of future rentals in
respect of pledged paper, respondent acted in breach
of that duty in reporting
on the financial statements as he did. Clearly the statements did not, in these
respects, fairly represent
the financial position of the companies concerned and
it would also be incorrect to say that he (respondent) had properly complied
with all the requirements of sec 300 of the Companies Act. Unlawfulness was,
therefore, established.
44
Causation
International's case on the aspect of
causation,
as I apprehend it, may be summed up as
follows:
(1) In his auditor's report respondent negligently and unlawfully certified the
correctness of the financial statements.
(2) In fact the financial statements were
incorrect
and misleading in various material
respects, viz
those respects resulting from the inter-company
manipulations of turnover and expenses and those
resulting from the taking to income of future rentals accruing under pledged
paper.
(3) Acting on the information contained in these
statements and relying upon
respondent's report,
International decided in March 1979 to continue
to
provide the Deals Group with financial facilities.
(4) Had respondent not so acted negligently and
unlawfully the true financial
position of the
45 Deals Group would have been revealed to International.
(5) Had International known the true financial position of the Deals Group in
March 1979 it would have decided to discontinue the
provision of financial
facilities, and would have recovered from Deals the amount owing to it.
(6) In the circumstances it would not have suffered the loss which it ultimately
did.
(7) Consequently such loss is directly traceable to
respondent's negligent
report on the financial
statements.
Propositions (1) and (2) have already
been dealt with: they were established. As regards (3), it is not in dispute
that International
relied on the financial statements and respondent's report
thereon when it decided on or about 30 March 1979 to maintain and, in
part
increase,
46
the Deals facility. The total facility then
allowed was R700 000. Nor is it seriously disputed that had respondent not acted
negligently
the true financial position of the Deals Group would have been
revealed to International (see (4) above).
As to (5) above, the learned trial Judge referred to B3, which was a column
in a financial analysis constituting annexure "C" to International's
particulars
of claim, as amended (see also exhibit 13). In column B3 are shown the figures
reflected in the 1978 financial statements
for the Group, adjusted in order to
correct the false bringing to account as revenue of the future television
rentals. The trial
Judge compared certain of these adjusted figures in B3 with
the corresponding figures in the 1977 financial statements. This comparison
demonstrates that had International been provided with 1978 Group financial
statements drawn along the lines of B3 it would
47
have noted that (as compared with the previous
year) there was a substantial decline in total shareholders' equity, in net
profit
after tax and in the profit-sales percentage and a marked increase (from
2,39:1 to 3,84:1) in the debt/equity ratio (and here it
is to be observed that a
ratio of more than 2:1 would indicate an unsatisfactory, over-geared situation).
In addition, had there
not been a manipulation of turnover and expenses in the
audited 1978 financial statements, Deals Furnishers, the holding company,
would
have shown a substantial trading loss for the year.
After carefully reviewing the evidence the trial Judge concluded that it had
been demonstrated as a matter of "substantial probability"
that -
" if the 1978 audited accounts had shown
the figures reflected in Annexure B3 and in addition the loss in the holding
company (i e without the manipulation of turnover), the
facility of the Deals
Group would, indeed,
48
have been terminated by the Plaintiff. Apart from the poor financial condition
of the Group which would have been reflected, the
management figures provided by
Cunningham would have been shown to have been wholly and materially unreliable.
And, indeed, the dishonesty
of the management of the Deals Group would have been
apparent to the plaintiff."
Before us
respondent's counsel attacked this finding, the main argument being that since
International was prepared to continue the
facility after receiving the
1977 audited financial statements (the figures of which were
"broadly comparable" with those reflected in the 1978
financial statements adjusted along the lines of B3 - I
shall call these
"the B3 figures") it would probably have
continued the facility even if confronted in March 1979 with
the B3
figures. I cannot agree. As I have shown in my
review of the facts, the responsible officers of
International were very unimpressed by the 1977 audited
49
financial statements (received in June 1978), but were
persuaded to continue the facility largely because of the prospect of radical
improvement held out by the trading figures for the four months up to 20 April
1978. It seems to me to be unlikely that if this expected
improvement had been
shown by the 1978 financial statements (reflecting B3 figures) to have been
ill-founded and the true position
revealed as one of substantial decline in the
financial condition of the Group and if at the same time Cunningham's
large-scale deceptions
had thus been brought to light, International would have
continued the facility. I agree, with respect, with the finding of the trial
Judge on this issue.
It is not disputed that had International discontinued the facility in March
1979, or shortly thereafter, it would have recovered
in full the amount owing to
it by Deals.
50
I come now to consider propositions (6) and (7)
above. It is in this context that Goldstone J non-suited International, broadly
on
the ground that. in law the necessary causal connection between respondent's
unlawful and negligent act and International's ultimate
loss did not exist.
Before considering in more detail the trial Court's reasons for coming to this
conclusion and the arguments pro
and con addressed to us by counsel for the
parties, I must make brief reference to the course of events between March 1979
and April
1981, when the companies in the Deals Grcup were placed under
provisional liguidation.
During the remainder of 1979 not much information in regard to the financial
position of the Group appears to have been forthcoming.
Together with the 1978
financial statements, Deals submitted a budget for 1979 which optimistically
forecast a Group profit prior
to taxation of
51
R241 909. In November 1979 Walraven circulated an FI in
which he noted that no updated figures were available, as monthly figures had
not been prepared by their client. He also noted "inefficient
administration",
resulting in a number of cheques emanating from the Group being returned
R/D.
In December 1979 Cunningham approached Mr J R Kneen, an officer of
International, for a restructuring of the Deals Group's facilities.
Kneen wrote
an FI (dated 6 December 1979), which is highlý critical of Cunningham
and
the Group. It includes the following statements:
"He (referring to Cunningham) has not
provided us with any
concrete evidence of
where the total earnings of this group,
approximately
R600 000 have gone during the
past year's trading. There has been
no
substantial increase in debtors, no
substantial increase in stock and
no
substantial decrease in current liabilities.
52
One can only draw the f ollowing conclusion, that he is blowing a smoke screen
on the profitablility of the company or else he is
grossly overstocked with
stock that is not being written off and is therefore dead stock or,
alternatively, there are loss areas
which are not being disclosed.
The main points to bear in mind regarding this company are as follows:
1. We do not believe in Brian
Cunningham
2. We do not believe he is making the profits which he continues to say he
is.
3. We do not believe that he is able to meet our
commitments.
4. We do not believe in his
administrative
ability
5. As a result of 1. to 4. above we must do
our utmost to get out of this
account as
rapidly as possible in the current
financial climate which
appears amenable
to the sale of such a group."
Walraven stated in evidence that he disagreed with many of these comments,
but his evidence in this regard is not very convincing.
What does emerge from
this and other subsequent FI's is that the Deals Group seemed to be
53
perennially beset by illiquidity problems and that it was
becoming increasingly apparent that the Group was poorly administered.
In January 1980 Deals TV sold its television business to a company referred
to in the evidence as "Teljoy" and it was arranged that
part of the proceeds of
the sale would be paid to International in reduction of the indebtedness of
Deals to it.
In April 1980 there occurred a curious episode. According to an FI by Kneen
(dated 14 April 1980), a meeting of the credit. committee
was held on 12 April
1980 and at this meeting it was agreed that the Deals account would be
terminated "forthwith". The FI also records
that Kneen had consulted with
International's attorneys, who had provided the text of a letter of termination.
What is curious is
that this decision was never implemented and the letter of
termination was never sent to Deals. Moreover,
54 Walraven professed not to
know about the decision; Rivkind said that no such decision was intended - it
was merely "a strategic
move"; and Jacobson stated that he did not recall the
decision to terminate.
A telex dated 17 April 1980 from Cunningham to Kneen records the substance of
a telephone conversation between them during which Cunningham
gave reasons for
not being able to provide management accounts as at December 1979, but assured
Kneen that as at 20 December 1979
the capital employed was in excess of Rl 000
000 (1978:
R817 948) and would be "a lot higher" when the proceeds of
the Teljoy transaction were brought into account. The
evident lack of liquidity in the Deals Group and the failure
of Cunningham
to produce up-to-date figures and accounts
was obviously a source of concern
to International at that
stage, for in reply Kneen telexed that after discussion with
his
colleagues a decision had been arrived at which
55
entailed,
inter alia
, all future payments from Teljoy
being made to International, Deals providing International with various items of
information and
International's auditors, Messrs Alex Aiken and Carter, making a
current evaluation of, and preparing draft accounts for, the Group.
An FI of 8 May 1980 drafted by Kneen and giving a
rèsumè of the Deals account over the previous two
weeks
again stresses the illiquidity of the Group and contains the
cryptic
sentence -
"He requires R75 000 from Teljoy or else we must take an Order. If we don't,
somebody
else will."
(The "order" referred to
was apparently a judicial management order.)
A telex from Cunningham to International dated 11 June 1980 reveals that
Deals was again having liquidity problems and gives a number
of reasons why
International
56
should give further financial support to the Group. The
alternative possibility of a judicial management order is again alluded to.
In
brief, what Deals asks for is an immediate injection of R50 000, a further R50
000 on 21 June 1980 and a third R50 000 to be made
available "in case of need"
on 1 July 1980.
At about the same time (ie early in June) International received from Deals a
document (C685) headed "Conservative estimate of the
Assets and Liabilities of
the Deals Group as at 20th April 1980", which had been prepared by Cunningham.
It is essentially a balance
sheet of the Group, with the comparative figures
from the 1978 accounts. Generally, the picture presented is of a sound financial
position.
In May 1980 International's auditors, Messrs Alex Aiken and Carter, were
instructed by International to investigate and report cm
the quality and
quantity of the
57
security held by International in respect of the Deals Group's
indebtedness to it. They reported verbally on 17 June 1980 to the effect
that
the security was satisfactory and that it provided one-and-a-half times cover.
The total amount of the Deals indebtedness at
that stage was approximately R475
000 and the approved facility R600 000. It was conceded by both Walraven and
Jacobson that had
the Deals account been terminated at that stage no loss would
have been incurred.
Towards the end of June 1980 International decided
(through the medium of its credit committee) to embark upon
what has been described as a "support programme", or a
"salvage operation", with reference to the Deals Group.
This was in
response to Cunningham's telex of 11 June 1980,
requesting additional
facilities of (potentially) R150 000.
At that stage it must have been apparent to International that Deals was
suffering chronically from illiquidity
58 problems and that there was a
serious administrative breakdown within the Group. No audited financial
statements had been forthcoming
since the 1978 statements, received in March
1979. This was partly because Deals again changed its year-end, this time from
20 December
to 28 February. Consequently, the next set of audited financial
statements was not expected until about the end of April 1980, but
by the end of
June, despite frequent reports from Walraven, nothing had been produced. Indeed
no such statements were available at
any time prior to liquidation in April
1981. One of the reasons given by Deals for the inability to produce financial
statements
was a "bug" in the computer which prevented figures for debtors being
accurately determined. An undertaking, given by Cunningham
in writing in
February 1979, to provide monthly management accounts had never been properly
adhered to and as at June 1980 no up-to-date
financial information about the
Group,
59
save for C865 (which contained no trading figures), was
available to International. This failure to provide management accounts was
also
attributed to administrative problems.
In terms of the "support programme" decision, International agreed to pay
Deals salaries for the month of June (the Group evidently
did not have the ready
cash to do so) and to make available the additional financial facilities
requested. It was further arranged
that International would provide consultancy
and management services to Deals in order to assist the Group in rectifying its
administrative
and financial position, at a fee of R2 500 per month.
Respondent's appointment as auditor to the Group had in the meanwhile been
terminated and as part of the support programme International nominated the firm
of Willem du Toit and Partners in his place. The
firm was immediately
commissioned to write up the books of the Group,
60
to overcome the debtors problem and to produce the overdue
financial statements. Although both International and Willem du Toit and
Partners spent much time and effort on these appointed tasks, the administrative
and accounting mess (described by Walraven as "chaotic")
was never cleared up
and at the time of liquidation it had not been possible to produce a set of
financial statements. As a consequence
of this International was unable (after
March 1979) to undertake its usual annual review of the financial position of
the Deals Group
and generally was denied proper insight into the affairs of the
Group until it was too late.
After the commencement of the support programme, the general picture
presented by the evidence is one of an ever-mounting indebtedness
of the Deals
Group to International, of an inability to solve the administrative and
financial problems of the Group, of a general
defaulting by Deals in regard to
its obligations towards International
61
and an apparent indifference on the part of International to
such defaults. While on paper the approved credit facility of the Deals
Group
remained fixed at R600 000, the actual indebteness of the Group had risen by the
end of July 1980 to approximately R669 000;
and by the end of November 1980 it
stood at R890 000 and by the end of March 1981 at R976 000. In the result
International's security
cover dropped substantially below the desired 150%.
During this period no security analyses appear to have been done and credit
continued
to be granted in increasing amounts on extremely lenient terms.
Walraven likened it to a period of judicial management. International
appeared
to abandon its accepted practices in dealing with a client.
During the second half of 1980, and with encouragement from International,
Deals embarked upon what was referred to in the evidence
as the "Mr Space
Cupboard venture", essentially a new line of business. This
62
entailed a capital outlay of R200 000 and absorbed a major
portion of the Group's cash flow. By the time of liguidation this venture
had
not generated any significant amount of income: it had merely resulted in an
increase
pro tanto
in the indebtedness of the Group. Also during the
second half of 1980 Impact sold the African side of its business to Freedom
Stores
Limited, in which 40% of the shareholding was held by the manager of
Impact and 60% by Cunningham.
On the evidence the trial Judge concluded that the
decision taken in June 1980 to support the Deals Group was
not simply a
further implementation of the decision taken in
March 1979 (on the strength
of the 1978 audited financial
statements) to give further financial
assistance to the
Group. He stated:
"The statements by Walraven that reliance was still placed on the 1978
financial statements in the light of the
63
events which had taken place, appears to me to be highly suspect and
improbable. However, even if that is so, it does not assist the
plaintiff if the
decision of June 1980 to support the Deals Group was not a decision in the
implementation of the facility agreed
in March 1979. In particular, as Walraven
himself agreed, the June 1980 situation presented the Plaintiff with a choice:
either terminate
the facility and liquidate the Deals Group or proceed with the
support operation. The plaintiff chose the latter course and, in doing
so, was
not only more lenient with regard to the terms given to the Deals Group but,
(and this is of fundamental importance), knowingly
allowed its security to drop
significantly below the 150% level it had previously insisted upon. Generally,
as the defendant's counsel
put to the relevant witnesses, the manner in which
the Deals Group was supported after June 1980 was anything but in accordance
with
the plaintiff's usual policy.
In all the circumstances, I have come to the conclusion that the decision of
June
64
1980 was a new departure and not a direct consequence of the decision in March
1979 to continue the facility of the Deals Group.
It is at this point that the
plaintiff' s case must fail.
I would add, that even if this conclusion is incorrect, and if the plaintiff, in
June 1980 was acting in consequence of the March
1979 decision, I am of opinion
that such ultimate loss was too remote to be recovered by the
plaintiff."
This reasoning was attacked
by appellant's counsel and supported by respondent's counsel.
As has previously been pointed out by this Court, in the law of delict
causation involves two distinct enquiries. The first is a factual
one and
relates to the question as to whether the defendant's wrongful act was a cause
of the plaintiff's loss. This has been referred
to as "factual causation". The
enquiry as to factual causation is generally conducted by applying the
so-called
65
"but-for" test, which is designed to determine whether a
postulated cause can be identified as a
causa sine qua non
of the loss in
guestion. In order to apply this test one must make a hypothetical enquiry as to
what probably would have happened
but for the wrongful conduct of the defendant.
This enquiry may involve the mental elimination of the wrongful conduct and the
substitution
of a hypothetical course of lawful conduct and the posing of the
question as to whether upon such an hypothesis plaintiff's loss
would have
ensued or not. If it would in any event have ensued, then the wrongful conduct
was not a cause of the plaintiff's loss;
aliter
, if it would not so have
ensued. If the wrongful act is shown in this way not to be a
causa sine qua
non
of the loss suffered, then no legal liability can arise. On the other
hand, demonstration that the wrongful act was a
causa sine qua non
of the
loss does not necessarily result in legal liability. The second enquiry then
arises, viz
66
whether the wrongful act is linked sufficiently closely or
directly to the loss for legal liability to ensue or whether, as it is
said, the
loss is too remote. This is basically a juridical problem in the solution of
which considerations of policy may play a
part. This is sometimes called "legal
causation". (See generally
Minister of Police v Skosana
1977 (1) SA 31
(A), at 34 E -35 A, 43 E - 44 B;
Standard Bank of South Africa Ltd v
Coetsêe
1981 (1) SA 1131
(A), at 1138 H - 1139 C; S v
Daniëls
en 'n Ander
1983 (3) SA 275
(A), at 331 B - 332 A;
Siman & Co (Pty)
Ltd v Barclays National Bank Ltd
1984 (2) SA 888
(A), at 914 F - 915 H;
Mokgethi en Andere v Die Staat
, a recent and hitherto unreported judgment
of this Cour't, pp 18 - 24). Fleming,
The Law of Torts
, 7th ed at 173
sums up this second enquiry as follows:
"The second problem involves the question
whether, or to what extent, the defendant should have to answer for the
consequences
67
which his conduct has actually helped to produce. As a matter of practical
politics, some limitation must be placed upon legal responsibility,
because the
consequences of an act theoretically stretch into infinity. There must be a
reasonable connection between the harm threatened
and the harm done. This
inquiry, unlike the first, presents a much larger area of choice in which legal
policy and accepted value
judgments must be the final arbiter of what balance to
strike between the claim to full reparation for the loss suffered by an innocent
victim of another's culpable conduct and the excessive burden that would be
imposed on human activity if a wrongdoer were held to
answer for all the
consequences of his default."
In
Mokhethi
's case,
supra
, Van Heerden JA referred to the various
criteria stated in judicial decisions and legal literature for the determination
of legal
causation, such as the absence of a
novus actus interveniens
,
proximate cause, direct cause, foreseeability and sufficient causation
68
("adekwate veroorsaking"). He concluded, however, as
follows:
"Wat die onderskeie kriteria betref, kom dit my ook nie voor dat hulle veel meer
eksak is as 'n maatstaf (die soepele maatstaf) waarvolgens
aan die hand van
beleidsoorwegings beoordeel word of 'n genoegsame noue verband tussen handeling
en gevolg bestaan nie. Daarmee gee
ek nie te kenne nie dat een of selfs meer van
die kriteria nie by die toepassing van die soepele maatstaf op 'n bepaalde soort
feitekompleks
subsidiêr nuttig aangewend kan word nie; maar slegs dat geen
van die kriteria by alle soorte feitekomplekse, en vir die doeleindes
van die
koppeling van enige vorm van regsaanspreeklikheid, as 'n meer konkrete
afgrensingsmaatstaf gebruik kan word nie." It must
further be borne in mind that
the
delictual wrong of negligent misstatement is
relatively
novel in our law and that in the case which in effect
brought
it into the world,
Administrateur, Natal v Trust Bank
69
Bank van Afrika Bpk
1979 (3) SA 824
(A), Rumpff CJ
emphasized, with reference to the fear of the so-called "limitless
liability", that this new cause of action could be kept within
reasonable bounds
by giving proper attention to,
inter alia
the problem of causation (see p
833 B).
In the present case International's loss arose from its inability to recover
in full the amount owed to it by the Deals Group upon
the liquidation in April
1981 of the companies forming the group. Respondent's negligent report on the
1978 audited financial statements
unquestionably constituted a
causa sine qua
non
of such loss since, as I have indicated, a proper, ie non-negligent,
performance by respondent of his duties as auditor would have
revealed the true
financial state of the Deals Group to International in March 1979; and, had this
occurred, International would
then have discontinued providing the Group with
financial facilities and would have recovered from Deals the amount
70
owing to it, which was then about R620 900 (as against an
approved facility of R650 000). In that way the ultimate loss would have
been
obviated. In other words, but for respondent's negligent report and postulating
hypothetical lawful (ie non-negligent) conduct
on respondent's part,
International's loss would not have ensued.
There remains the final and much-debated question as to whether International
established legal causation. Here there are a number
of factors which tend to
separate cause and effect.
(1)
The time factor
.
About two years elapsed between the respondent's
negligent reporting on the financial statements and the loss sustained by
International. As Fleming (op.
cit
. p
198
)
remarks, "
liability does not reach into infinity in
time". Two years is, of course,
nowhere near infinity, but
71
in a situation such as the present one it does permit of other facts to
intervene and it does tend to dissipate the effect of the
original wrongful act.
By itself this is not a decisive factor, but it is one to be considered when
viewing the overall picture.
(2) '
The decision to provide a support programme
.
This decision in
June 1980, which was referred to in the evidence as a "watershed decision", does
appear to have played a crucial
role in International sustaining the loss which
it did. The picture at that stage was fairly bleak. ' The Deals Group was
chronically
illiquid, its administration was in a mess, proper figures,
particularly relating to debtors, were unobtainable, it was regularly
defaulting
on its obligations, there were threats of judicial management, and it now wanted
more financial support. As the learned
trial Judge correctly pointed out,
International had then to decide whether to terminate the
72
facility (which would undoubtedly have resulted in
liquidation) or proceed with a support programme. It chose the latter option.
Had
it chosen the former, there seems little doubt that even then it would have
recovered what Deals owed it in full.
(3)
Indebtedness allowed to escalate.
A conspicuous and decisive
feature of the support programme was the manner in which Deals's indebtedness to
International was allowed
by the latter to escalate over the period June 1980 -
April 1981 from under half-a-million rand
to nearlý a million rand;
and this in disregard of formally
authorized credit limits, of adequate
security cover and of financial defaults by Deals and in ignorance of the
Group's true financial
state. It was this uncontrolled (and unexplained)
escalation which was the real and immediate cause of International's loss, for
had Deals's indebtedness been kept within authorized limits little or no loss
would
73
have been incurred.
(4)
The changed relationship between the parties.
As a result of the implementation of the support
programme International and the Deals Group ceased to be
creditor and
debtor dealing at arm's length.
International, through its own employees and
through the
auditors nominated by it, became intimately involved in
the
administration of the Group. It gained greater insight
into the
administration - or lack thereof - and in effect,
as Walraven conceded,
credit terms granted were so lenient
that it became a kind of unofficial judicial
management.
(5)
Cunningham's fraud
.
Walraven conceded that with
hindsight he realised that Cunningham had been dishonest in his dealings with
International: that comparing
the picture which he (Cunningham) had painted of
the financial position of the Group in 1979 and 1980 - and even in 1981 - with
the
true
74
position as revealed on liquidation, it became
apparent that International had been deliberately lied to. To some extent the
executives
of International must have been aware of his dishonesty, as for
example his practice of manipulating inter-company accounts in order
to evade
taxation, but it is clear that they were deceived all along during the fateful
period from March 1979 to April 1981, by
Cunningham's reports as to the
financial position of the Group and his sanguine forecasts of future profits,
which he must have known
were ill-founded. His decision in 1980 to again
postpone the Group's year-end for accounting purposes smacks óf a
stratagem
to gain time and avoid having then to produce audited financial
statements. In addition, there were at least two instances of double
discounting, ie Deals discounting the same agreements twice over on different
dates. Cunningham's deceptions over this period obviously
played an important
part in causing the financial loss which
75
International ultimately incurred.
(6)
Non-reliance on 1978 financial statements
.
It was submitted on
appellant's behalf that International did not rely on the 1978 audited financial
statements solely in deciding
in March 1979 to maintain and increase the
financial facilities afforded to Deals but that International further relied
upon the
statements in its dealings with Deals in the 1980/81 period. Indeed
this was the main thrust of appellant's argument on the causation
issue. The
trial Judge found Walraven's evidence to this
effect "highly suspect and
improbable". I agree. It was
not pertinently pleaded that International placed such
reliance on the 1978 statements; obviously by June 1980
those statements
were. very much out of date; there were
some other sources of information available to
International, and, in any
event, the support programme, in
its execution, does not appear to have taken much account of
76
facts and figures.
(7)
The foreseeability of the support programme
.
I have described
the general features of the support programme - the uninhibited granting of
credit facilities, the involvement of
International in the running of the Group,
the dispensing with regular accounts or financial analyses or security analyses
and so
on, which contrasted starkly with International's
modus operandi
prior to June 1980. And as I have stated, it was this uninhibited lending
without adequate security that was the real cause of International's
loss. Such
a situation was, in my view, hardly foreseeable in March 1979.
Having regard to all these factors I am of the opinion that the ultimate loss
suffered by International was too remote - there was
not a sufficiently close
connection between respondent's negligence and the loss - for legal liability on
respondent's part to arise.
I, therefore,
77
agree with the conclusion reached by the Court a
quo
and
with the order made dismissing International's action with
costs.
The appeal is dismissed with costs, including the costs of two counsel.
M M CORBETT BOTHA JA) FRIEDMAN AJA)