Offshore Development Company v Deloitte and Touche (I 1111-2006) [2016] NAHCMD 191 (30 June 2016)

1

REPUBLIC OF NAMIBIA

REPORTABLE

HIGH COURT OF NAMIBIA, MAIN DIVISION, WINDHOEK

RULING ON APPLICATION FOR AMENDMENT

CASE NO. I 1111/2006

In the matter between:

OFFSHORE DEVELOPMENT COMPANY PLAINTIFF

and

DELOITTE & TOUCHE DEFENDANT

Neutral citation: Offshore Development Company v Deloitte and Touche (I 1111-2006) [2016] NAHCMD 191 (30 June 2016)

CORAM: MASUKU J.

Date heard: 9 June 2016

Date delivered: 30 June 2016

FLYNOTE: Rules of court- Amendments of pleadings - rule 52 (4) as read with 52 (5) of the rules of the Court- Exceptions rule 57 - Company Law- Liability of directors, auditors and company officials - Act 51 of 1951- CIVIL PROCEDURE-Award of costs in respect of amendments/exceptions.

SUMMARY:The defendant filed an application to amend his plea in terms of rule 52 (2) and rule 52 (5) of the rules of this court. Plaintiff opposed the amendment on the basis that it would render the defendant’s plea excipiable for the reason that the averments in the proposed plea are void in terms of s.247 of the Company’s Act 61 of 1973. Held -that amendment may be granted at any stage of a proceeding and court has a discretion in the matter, to be exercised judicially. Held further- that a court may permit an amendment, even if it would render the pleading excipiable if exceptional circumstances exist. Held further- that only if no possible evidence can be led on the pleadings can an exception that the pleading does not disclose a cause of action or defence be upheld. Held further- that s.248 gives the court a discretion, in appropriate circumstances, to excuse officers of a company including auditors from liability for negligence, default, breach of trust or duty, wholly or partly, if the court is convinced that they have acted honestly and reasonably in the circumstances.

Further held that the effects of s.248 can only be decided once evidence is led and not at exception stage, hence it would only be fair and just to allow the amendment and consequently dismiss the exception. Lastly, costs follow the event. As such the defendant is ordered to pay costs occasioned by the amendment including those of instructing and instructed counsel. Application for amendment allowed and exception dismissed.

ORDER

1. The application for amendment of the defendant’s plea is granted as prayed.

2. The amendment is to be effected within ten (10) days of the date of this order.

3. The plaintiff is ordered to file its replication, if any, within fifteen (15) days from the date of the filing of the amended plea.

4. The matter is postponed to 17 August 2016 at 15:15 for case management.

5. The defendant is ordered to pay the costs occasioned by the amendment and such costs are to include the costs of one instructing and one instructed Counsel.

RULING ON APPLICATION FOR AMENDMENT

Introduction

[1]Serving before court and submitted for determination is an opposed application for the amendment of a plea filed by the defendant. The application is brought in terms of the provision of rule 52 (4) as read with rule 52 (5) of this court’s rules.

The parties

[2]The plaintiff is a company, with limited liability, duly registered in terms of the company laws of this Republic, having its principal place of business situate at Brendon Simbwaye Square in Windhoek. The defendant, on the other hand, is a partnership of public accountants and auditors, having its place of business at Namdeb Centre. It offers services as accountants and auditors.

The claim and the defendant’s plea

[3]The plaintiff sued out a summons out of this court in which it claims N$ 65,000,000 from the defendant, together with interest thereon and costs of suit. The claim arises out of a partly written and partly oral agreement entered into by the parties in 2002. Shorn of all the frills, the agreement was for the defendant to provide auditing services to the plaintiff from 1999 and succeeding years.

[4]It was alleged that in performing those auditing services, it was expressly, alternatively impliedly or further alternatively tacitly agreed that the defendant would conduct such services within generally accepted accounting practice and that the defendant would perform those functions with due professional care and diligence as required by the provisions of the Public Accountants and Auditors Act.[footnoteRef:1] [1: Act No. 51 of 1951.]

[5]It is further averred that contrary to the above agreement, the defendant failed to conduct its audits in accordance with accepted standards and practice nor with due professional care and skill. It is averred that the defendant acted negligently and failed to verify certain investments in the amount of N$ 34,000.000 which were reflected as investments when in fact the said monies were fraudulently misappropriated or lost, induced by certain individuals mentioned in the particulars of claim. It is accordingly claimed that as result of the gross incompetence, negligence or recklessness of the said persons, the books of account did not reflect a fair status of the plaintiff’s financial position as at 28 February 2003.

[6]Because the defendant gave the plaintiff’s financial position a clean bill of health, including the investment of the amount of N$ 34, 000.000, it is further averred, the plaintiff, relying on the said financial position as confirmed by the defendant’s report, invested a further amount of N$65.000.000 which was also lost to the same persons referred to in the immediately preceding paragraph. It is averred that the said amount constitutes damages which the plaintiff claims is due to it from the defendant as a result of their failure to act in a professional manner and with the requisite duty of care and skill.

[7]The defendant, in its plea, denied liability for the amount claimed or at all, relying on a management letter dated 8 March 2002. The paragraphs relating to the allegations of negligence and failure to perform the professional services in line with the requisite duty of care were denied. In addition, the defendant filed a counterclaim for the payment of an amount of N$132 719 for auditing services allegedly rendered to the plaintiff and which it had, despite demand, failed to settle.

Notice of amendment

[8]By notice dated 2 December 2015, the defendant evinced an intention to amend its plea. I do not find it necessary to quote the said notice verbatim for the reason that opposition to the amendment is limited and is only in respect of a few paragraphs of the entire amendment sought. For that reason, I will only quote the parts of the amendment sought to be impugned as the balance thereof constitute no dispute at all. I will, for purposes of clarity, take a cue from the plaintiff’s Counsel and underline the ‘offensive’ portions of the proposed amendment in so far as the plaintiff is concerned. I do so presently.

[9]‘By inserting new paragraphs 2.5.4 and 2.5.5 to read:

“2.5.4 the defendant would, as part of the audit process, request from management written confirmation concerning representations made to the defendant in connection with the audit;

2.5.5 the defendant would not be liable to the plaintiff for loss suffered as a result of the defendant’s breach of the 1999 agreement, if the plaintiff was itself in breach of the 1999 agreement and its breach was the cause, alternatively, a material cause, of its loss.”

By inserting new paragraphs 3.1 to 3.6 to read:

“3.1 In accordance with the 2003 agreement, the plaintiff, represented by its Chief Executive Officer (Mr. Aboobakar) and its Financial Controller and Head of Administration (Mr. Ortman), on 3 June 2003 provided written confirmation of representations made by the plaintiff in the 2003 audit in a ‘LETTER OF REPRESENTATION’ annexed marked ‘P1.1’ (‘the letter of Representation’).

3.5 The plaintiff breached the 2003 agreement, read with the Letter of Representation, in that:’

3.6 The defendant pleads that:

3.6.1 the plaintiff is not entitled to rely on a breach of the 2003 agreement by the defendant where, in relation to the same subject matter and to reciprocal obligations, the plaintiff itself was in breach of the 2003 agreement;

3.6.2 the breach complained of by the plaintiff relates to information already known by the plaintiff and where the plaintiff did not rely on the defendant to inform it of facts already known to it;

3.6.3 the plaintiff was liable to protect its own interests based on facts known only to it, and based on relationships with persons known only to it and not to the defendant, and was not vulnerable to the risk of loss arising out of the defendant’s conduct.’

7.2 In amplification of the denial the defendant pleads that:

7.2.1 the cause, alternatively the material cause of the plaintiff’s loss was its own breach of the 2003 agreement, alternatively its careless conduct both in making and managing of the investment and the further investments claimed to comprise the plaintiff’s loss.’

[10]It will be seen from the above underlined portions that the opposition by the plaintiff appears in the main to be directed at new paragraphs by which the defendant seeks to deny liability for the claim based on the plaintiff’s own peculiar knowledge of facts which it allegedly did not disclose to the defendant and which if it did, would have allegedly placed the defendant on the qui vive as it were and would have assisted the latter in carrying out its duties to the plaintiff. In essence, and to put it in different language, the defendant claims that the plaintiff is in a sense in pari delicto and cannot, for that reason, claim damages from the plaintiff as it is, so to speak in equal guilt of contravening the provisions of the terms of the letter of engagement signed by both contractants.

[11]The opposition to the amendment is premised on the basis that the amendments sought by the defendant, if granted by the court, would render the amended defendant’s plea excipiable for the reason that the averments in the proposed plea are void in terms of the provision of s. 247 (1) of the Companies Act, (the ‘Act).[footnoteRef:2] For purposes of completeness, I propose to quote the said provision of the Act hereunder. It provides the following: [2: Act No. 61 of 1973]

‘Subject to the provisions of subsection (2), any provision, whether contained in the articles of a company or in any contract with the company, and whether expressed or implied, which purports to exempt any director or officer or the auditor of the company from any liability which by law would otherwise attach to him in respect of any negligence, default, breach of duty of trust of which he may be guilty of in relation to the company or to indemnify him against any such liability, shall be void.’

I shall revert to the import of the above provision and its implications, if any, to the present case in due course.

The court’s general policy towards amendments

[12]The court’s policy towards amendments, particularly with the advent of judicial case management, was stated with absolute clarity and completeness by a Full Bench of this court in I A Bell Equipment (Pty) Ltd v Roadstone Quarries CC.[footnoteRef:3] I shall, in this regard, refer to different portions of the judgment where the proper approach is set out. [3: (I 601/2013, I 4084/2013) [2014] NAHCMD 306 (17 October 2014).]

[13]At para [40], the court reasoned as follows:

‘The right to amend pleadings at any stage of the proceedings has not been removed by the rules of court, either before or in the new rules’.

And at para [49], the court said:

‘The unchanged position under the rules of court at the time the matter was argued and now is that an amendment may be granted at any stage of a proceedings and that the court has a discretion in the matter, to be exercised judicially. The common law position that a party may amend at any stage of the proceedings as long as prejudice does not operate to the prejudice of the opponent remains, save that, like every other procedural right, it is also subject to the objectives of the new judicial case management regime applicable in the High Court. That includes the imperative of speedy and inexpensive disposal of causes coming before the High Court.’

[14]Finally, at para [55], the court laid the following guiding principles, which I will quote selectively, with regard to facts of the present matter:

‘Regardless of the proceedings where it is brought, the following general principles must guide the amendment of pleadings: Although the court has a discretion to allow or refuse an amendment, the discretion must be exercised judicially. An amendment may be brought at any stage of a proceeding. The overriding consideration is that the parties, in an adversarial system of justice, must decide what their case is; and that includes changing a pleading previously filed to correct what it feels is a mistake made in the main pleadings. . . A litigant seeking the amendment is craving the indulgence of the court and therefore must offer some explanation for why the amendment is sought. The case for an explanation why the amendment is sought and the form it will take will also be determined by the nature of an amendment. The less significant the amendment, the less the formality for the explanation. . . The more substantial the amendment, the more compelling the case for an explanation under oath. . . The discretion to allow late amendments must not be exercised punitively, and each case, must be considered on its own facts, balancing the need to do justice between the parties by ensuring that the court allows them to ventilate the real issues between them, and the interests of the administration of justice. It has become common practice in our courts for parties to bring substantial amendments on the eve of trial, fully aware it is going to be opposed, and in that way, effectively secure a postponement. I cannot think of a practice more pernicious and subversive of the proper and orderly administration of justice than that’.

I will revert to some of these guiding principles at the appropriate juncture.

[15]To buttress the position, the Supreme Court stated the following in the unreported judgment of D B Thermal (Pty) Ltd v Quality Products[footnoteRef:4] regarding the approach to amendment of pleadings: [4: Case No. SA 33/2010 at para 38.]

‘The established principle that relates to amendments of pleadings is that they should be “allowed in order to obtain a proper ventilation of the dispute between the parties . . . so that justice may be done”, subject of course to the principle that the opposing party should not be prejudiced by the amendment if the prejudice cannot be cured by an appropriate costs order, and where necessary, a postponement.’

[16]Lastly, and directly in relation to an amendment sought where it is alleged that same is excipiable, the court reasoned thus in D B Thermal:[footnoteRef:5] [5: Ibid at para 39.]

‘A further principle governing amendments is that a pleading may not be amended if the result would be excipiable on the basis that the amended pleading would not disclose a cause of action. Again a court may permit an amendment, even if it would render the pleading excipiable, if exceptional circumstances exist. In order for a pleading to disclose a cause of action, it must set out every material fact, which would be necessary for the plaintiff to provide to support his or her right to the order sought.’

[17]These are some of the principles that the court may, depending on how the case pans out, call in aid as it deals with the amendment, subject of course to the further issue of the proper approach to such amendments where they are in the form of an exception, as dealt with in the succeeding paragraphs of this judgment.

[18]The defendant, in support of its application, filed an affidavit explaining why the amendments are sought. What is clear from the affidavit is that after the action was instituted some time back, the parties went into hibernation as it were and the action became dormant for some five or so years. When judicial case management became operative, the matter was rescuscitated back to life. At that point, the parties were called upon to make discovery and during which process certain documents discovered by the plaintiff brought certain facts to light and which have necessitated the amendment sought. In the main, the amendment sought is to allow the defendant in its plea, to raise the defence sought to be precluded by the provision of s. 247 of the Companies Act aforesaid. To this extent, I am of the view that the reason for the amendment sought is explained on oath as required by the I A Bell case.

[19]What remains for the court to consider, at this juncture, regard had to the nuggets of wisdom in the D B Thermal case quoted above, is whether the reasons proffered by the plaintiff as a basis for the opposition to the amendment sought do pass muster. In this regard, it must be examined whether the pleading in the proposed amended state would indeed be excipiable as alleged by the plaintiff, on the basis that it does not disclose a defence, regard had to the said section of the Companies Act. Alternatively, and in the event it is found that the said pleading is excipiable, the question may then turn to whether there are any exceptional circumstances that exist in the instant case that would justify the court, notwithstanding the excipiable nature of the proposed pleading, to allow same to be amended as stated in para [16] above.

[20]It is, however, prudent, before doing so, to briefly have regard to the approach to exceptions by the courts in so far as this may be necessary. I do so for the reason that where an amendment is opposed on the basis that same would be excipiable, it is prudent and may be necessary for the court to deal with the application for amendment as though it was an exception proper.

[21]The learned author Harms,[footnoteRef:6] states the following in this regard: [6: Civil Procedure in the Superior Courts, Butterworths, [Issue 51] p. B-189.]

‘If the grounds of objection are appropriate to an exception the application should be dealt with as if it is an exception. To allow the amendment in the sure knowledge that the defendant will immediately note an exception makes little sense. Applications for amendment should not deteriorate into mini-trials since amendment proceedings are not intended or designed to determine factual issues such as whether the claim has become prescribed. Likewise, an amendment will not be allowed if the particulars of claim do not disclose a cause of action; it would be an exercise in futility. An amendment may also not be allowed to place on record an issue for which there is no supporting evidence, where evidence is required’.

[22]The approach advocated by the learned author strikes me as eminently correct and sensible for the reason that if the court were to grant an amendment that appears excipiable because it is just to do so in the circumstances or because of exceptional circumstances that the court finds to exist, as stated in the D B Thermal case (supra), the party opposing the said amendment would then be entitled to file an exception and this would result in the court having to deal with the exception in addition to the amendment application just disposed of. This would inevitably result in two interlocutory proceedings on the same case and involving the same issue, a phenomenon our judicial case management system frowns upon. In this regard, the court may well have to make two rulings relating to the same issue, whereas dealing with the amendment as if it were an exception in one interlocutory proceeding would avoid a work of supererogation and would also conduce to the efficient use of court time and resources as much as it would save the parties costs for the hearings and preparation.

[23]Regarding the overriding objectives of judicial case management and interlocutory proceedings I have referred to above, the Supreme Court had this to say in the Van Straten case (infra):[footnoteRef:7] [7: At para [19].]

‘Those objectives include the facilitation of the real issues in dispute justly and speedily, efficiently and cost effectively as far as practicable by saving costs by, among others, limiting interlocutory proceedings to what is strictly necessary in order to achieve a fair and timely disposal of a cause or matter.’

For that reason, it will be clear that stripped to the bones, although the opposition is to an amendment, in essence, it is in fact one that raises an exception and which the court could be eminently capable of dealing with and disposing of in one swoop, by dealing with the issue on its true essence i.e. beyond the transient and intermediate issue of an amendment. I accordingly proceed to deal with the court’s approach to exceptions presently.

Courts’ approach to exceptions to pleadings

[24]The proper approach to exceptions has recently been restated by the Supreme Court in Alwyn Petrus Van Straten NO V Namibia Financial Institutions Supervisory Authority and Another.[footnoteRef:8] There, the court deals with the approach to exceptions to pleadings both on the bases that same disclose no cause of action and where it is alleged it is vague and embarrassing. I shall confine myself to the former as that appears to be the complaint in the instant case. [8: Case No. 19/2014 delivered on 8 June 2016.]

[25]At para 18, the Supreme Court stated the following:

‘Where an exception is taken on the grounds that no cause of action is disclosed or is unsustainable on the particulars of claim, two aspects are to be emphasized. Firstly, the facts alleged in the plaintiff’s pleadings are taken as correct. In the second place, it is incumbent upon every interpretation which the pleading can reasonably bear, no cause of action is disclosed. Stated otherwise, only if no possible evidence can be led on the pleadings can disclose a cause of action, will the particulars of claim be found to be excipiable’.

[26]I now proceed to deal with the basis of the complaint as raised by the plaintiff in the instant matter and properly understood, it would seem that the mainstay of the exception is that the defence sought to be raised by the defendant is void for contravening the provisions of s. 247 of the Companies Act. I deal with the import of that provision below.

The import of s. 247 of the Act – the plaintiff’s case

[27]In its heads of argument, the plaintiff referred the court to LAWSA,[footnoteRef:9] where the learned author states the following regarding the interpretation to be given to s. 247: [9: 1st Reissue Vol. 4 Part 2 para 157.]

‘The provision renders invalid, not only all provisions that purport to exempt the director from liability in the event of its being breach of a duty, but also all provisions that purport to exempt him from his duties. This is because this section of the Companies Act not merely renders void a provision which, but for this section, would exempt a director from liability of the kind specified (thus leaving it open for the articles to determine what constitutes a breach of duty). Rather, it renders void a provision that has its purpose the exemption of a director from such liability, which, but for that provision, would have attached to him for breach of duty. Hence it renders void both the provision that purports to exempt a director from liability arising from a breach of a duty and the provision that purports to release a director from duty; for in both cases the provision purports to relieve a director from liability . . . which would otherwise attach to him’.

[28]It must be mentioned that the said provision does not only deal with the exemption of a director. It also deals with the exemption of an auditor. This is plain from the excerpt of the provision quoted in para [11] above. For that reason, it would appear to me that the reference to the exemption of a director in this passage should refer to the exemption of an auditor as well. Put simply, the provision renders void any exemption in any provision in legislation or even in any contract that purports to grant immunity to a director or auditor for breach of a duty that would otherwise attach liability to him in respect of any negligence, default, breach of duty of trust or which seeks to indemnify the said director or auditor from liability.

[29]It is accordingly plain from a reading of the defendant’s proposed amendment, that the plea sought to be introduced by the defendant has the ominous and deleterious effect of seeking to exempt the auditor from liability, by claiming that the plaintiff was itself in breach of its duties to the defendant in terms of the agreement signed by the parties in 1999. In this regard, it is claimed and sought to be alleged in the amended plea that no liability should attach to the auditors because the matters in relation to which it is claimed the defendant was negligent, were matters which the plaintiff already knew. In other words, it is alleged that the plaintiff cannot sue the defendant on the basis of the fact (to be proved) that the plaintiff was itself in breach of the very agreement it seeks to rely on for its claim.

[30]There is no gainsaying that a plain reading of the proposed amended plea shows that what the defendant attempts to do in its plea, is to seek to protect the defendants from liability, an issue specifically proscribed by s. 247, which renders it void i.e. of no force and effect. It is for this very reason that the plaintiff claims the intended amendment would be rendered excipiable and this appears eminently correct regard being had to the nomenclature used by the law giver and what appears to have been the mischief sought to be prevented by the promulgation of the section under consideration.

[31]The plaintiff also contends that to allow the amended portions of the plea complained of would enable the defendant to escape its duties and obligations in terms of the provisions of s.300 and 301 of the Act, which have been incorporated in some sections of the Public Accountants and Auditors Act. [footnoteRef:10] It was accordingly argued that to allow the auditor to shirk its responsibility imposed by the Companies Act and the Public Accountants and Auditors Act would be tantamount to transferring the auditor’s statutory duties and obligations to the company or its management. In this regard, it was further argued that an auditor could safely contract out of its statutory duties, something that would be an unconscionable anathema and which the court should not allow to eventuate. The purpose of s. 247, as submitted, was to ensure that the auditor performs his or her statutory duties properly and with the requisite degree of professionalism, skill and care. [10: Supra footnote 1]

Section 248 of the Act – the defendant’s case

[32]The argument of the defendant is a horse of a different colour. I must mention that the defendant has, in its heads of argument analysed the impact of the intended amendment to a few intricate defences. These defences are interesting work of high legal art and finesse. In view of the nub of the plaintiff’s ground of opposition, particularly as articulated in the brief but concise and incisive oral argument by Mr. Frank, I am of the view that for purposes of this case, it is prudent to confine the judgment solely to the issue raised by the plaintiff in relation to the provisions of s.247. I will, in this regard, confine the argument to the provisions of s. 248 of the same Act and consider whether they in any way impact or should serve to ameliorate the harshness of the provisions of s. 247. I follow this trajectory also for the reason that this was the main prong of attack adopted by the defendant’s Counsel, Mr. Van der Nest in his insightful and captivating argument.

[33]S. 248 (1) reads as follows:

‘If in any proceedings for negligence, default, breach of duty or breach of trust against any director, officer or auditor of a company it appears to the Court that the person concerned is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, the Court may relieve him, either wholly or partly, from his liability on such terms as the Court may think fit.’

What is clear, is that the said section was promulgated in order to give the court, in appropriate cases, the discretion to excuse officers of a company, including auditors from liability for negligence, default, breach of trust or duty, whether in whole or in part, where the court is convinced that they have acted honestly and reasonably in all the circumstances connected with their appointment with the company.

[34]S. M. Blackman[footnoteRef:11] posits that the intention of the promulgation of the said provision is the following: [11: ‘Exemption of directors from liability and section 247 (1) of the Companies Act’, 1973 at p.(Vol 2) 8-362.]

‘These provisions are designed to protect honest directors, officers and auditors, and ought not to be construed in a narrow sense, and for this reason it has been held that the court may grant relief from liability for damages for breach of contract.’

I have, despite a diligent search been unable to find any cases locally or in the Republic of South Africa, for that matter, that deal with the application of the said subsection from the courts and how the section is to be applied and the examples of circumstances where it has been previously applied.

[35]The defendant’s legal team referred the court to the application of equivalents of this section in at least two jurisdictions and they importuned the court to adopt the same interpretation. Two cases, in this regard, were referred to and these were in England and Wales in Barings plc v Coopers & Lybrand[footnoteRef:12]and in Singapore in JSI Shipping (S) Pte Ltd v Teofoongwonglcoong (a firm)[footnoteRef:13]. [12: [2003] EWHC 1319 (Ch); [2003] Lloyd’s Rep IR 566, per Mr. Justice Evans-Lombe.] [13: [2007] 4 SLR 460; [2007] SGCA 40, per V.K. Rajah J.A. writing for the majority of the Court.]

[36]In England and Wales, the section in question is s. 727 of the Companies Act, of 1985. I can vouch that the wording of the said section is in pari materia with the section quoted above. In dealing with the interpretation of the said provision, the Court stated the following at para 1128 of the judgment:

‘As has been frequently remarked, there is an obvious paradox in the wording of section 727. It allows a defendant who has been found liable for negligence to be excused wholly or partially on the ground that he acted “honestly and reasonably” and, in the light of all the circumstances of the case, “ought to be excused”. A number of judges have had to consider how a negligent defendant can be found to have acted reasonably. As Hoffman L.J. remarked in Re D’ Jan of London [1993] BCC 646, at page 649:

“and compelling as also to demand a conclusion that a person had acted unreasonably for the purposes of the exculpatory section, nevertheless that section is to be taken to directing its attention to a much wider area of concern – both in point of scope and time frame. The examples relied upon by the defence as cited by Moffat J seem to me apt illustration of the issues involved.”’

[37]After considering some relevant authorities, the court concluded the treatise as follows at para 1133 and having reviewed the evidence:

‘I conclude from the above authorities that section 727 is available to me if D&T acted honestly and reasonably. They may have acted reasonably for the purposes of the section even though I have found them to have acted negligently, if they acted in good faith and their negligence was technical or minor in character, and not “pervasive and compelling”. Nor am I limited to consideration of the nature of D&T’s fault, but may take into account wider considerations, such as in D’ Jan the economic reality that the defendant and his wife owned the entire company. Similar considerations weighed with the court in Re Duomatic [1969] 2 Ch 365.’

[38]In the Singaporean case of JSI Shipping case, the court considered the provisions of 391 of the Companies Act, which I must once again note, are couched similarly with our s. 248 word for word. That court, in deciding the matter before them, also referred to the Barings case. At para 163, the court reasoned as follows:

‘In our view, we agree that the court should not hesitate, in a proper case, to relieve a person from the harsh and oppressive consequences arising from the strict application of the law, particularly in an instance where the person had acted honourably, fairly and in good faith as judged by the standards of a similar professional background.’

[39]At para 168, the court, in dealing with the element of reasonableness stated the following:

‘The determination of reasonableness for the purposes of this section is not to be limited by the specific breach, but can encompass wider considerations such as the nature of the audit and other relevant circumstances. In particular, we note the views of the authors of a leading treatise to the effect that the court is required to take into account all relevant circumstances in considering whether an auditor ought to be excused, an analysis which, in their own words, “ought surely to include the conduct of the directors”.

In particular, the court held that the auditor could be excused from liability if his conduct, though found to be negligent, is underpinned by three epithets captured in the relevant section, namely reasonableness, honesty and fairness.[footnoteRef:14] [14: Ibid at para 167.]

[40]It appears from the foregoing cases that the equivalent of s. 248 has been applied in other jurisdictions to exculpate company directors, officers and auditors in circumstances where they may have been negligent in the conduct of the company affairs. The degree of exculpation may be relative, it would seem, ranging from total or partial exculpation, depending on the circumstances of the case. In this regard, it would seem that the operative criteria for the court to exercise its discretion in favour of such officers, including auditors who may have been negligent, include the honesty, reasonableness and fairness in the conduct of their duties. In this regard, it must be further added, it would seem that the degree of negligence must not be egregious, outlandish, pervasive or compelling.

[41]It would appear to me in the instant case that the otherwise compelling case made by the plaintiff challenging the sustainability of the amendment proposed in the light of the provisions of s. 247 must be tampered by the provisions of s.248, which essentially allow the court, in exercise of its discretion, based on the attendant facts, to ameliorate the otherwise harsh and unbridled oppressive effects of s.247, which prevents company officials, including auditors, from claiming any defence where they are guilty of negligence.

[42]I am of the considered opinion that in the circumstances, it is only fair and just to allow the amendment prayed for in view of the fact that for the court to decide whether the effects of s.248 decisively and particularly whether the facts attendant to the matter do bring the matter within the purview of s. 248 will require the leading of evidence. This court is certainly ill-placed, on the allegations before it presently, to decide the matter with any degree of finality at this stage.

[43]It must be stressed in my view, that the decision as to whether this court should attach the same meaning and approach to s.248 can be done once the evidence is led. That process can hopefully usher the court into a position where it can carefully consider and assess the evidence led and neatly place the court in the vantage position to finally decide whether the actions of the defendant in this case fall within the rubric of the decisive epithets of reasonableness, honesty and fairness in all the circumstances of the case as encapsulated in s. 248.

[44]It would appear to me that the case in question, particularly on the interpretation to s.248 potentially raises a new approach to the liability of company directors, officers and auditors in this jurisdiction. Depending on how the court views the evidence at the end of the day, it would be presumptuous for this court, at this stage and without hearing, assessing the evidence that the defendant may lead, to close the door in final fashion on the defendant’s face, only on the basis of the provisions of what appears, from the plaintiff’s argument, to be the decisive and fatal effects of the provisions of s.247.

[45]The approach I advocate above, must be viewed particularly considering the duties of auditors as stated by Lopes LJ in In re Kingston Cotton Mill Company (No.2),[footnoteRef:15] where the following is stated: [15: [1868] Ch 279 at 290.]

‘The duties of auditors must not be rendered too onerous. Their work is responsible and laborious and the remuneration moderate. . . Auditors must not be made liable for not tracking out ingenuous and carefully laid schemes of fraud when there is nothing to arouse their suspicion, and when those frauds are perpetrated by tried servants of the company and are undetected for years by the directors. So to hold would make the position of an auditor intolerable.’

[46]In In re London and General Bank (No.2),[footnoteRef:16] Lindley LJ considered the auditor’s true functions in the following terms: [16: [1895] 2 Ch 673 (Re London).]

‘His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that. But then comes the question, How is he to ascertain that position? The answer is, By examining the books of the company. But he does not discharge his duty by doing is without enquiry and without taking any trouble to see that the books themselves shew the company’s true position. He must take reasonable care to ascertain that they do so. Unless he does this his audit would be an idle farce. . . An auditor, however, is not bound to do more than exercise reasonable care and skill in making inquiries and investigations. . . Such I take to be the duty of the auditor: he must be honest – i.e., he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true. What is reasonable care in any particular case must depend upon the circumstances of that case.’

[47]The above excerpts illustrate lucidly what the duties and responsibilities of an auditor are. Implicit in these are examples where the auditors may have done what is required of them and what goes wrong may be due to other factors not connected or not sufficiently connected to their lack of diligence or poor performance. These are issues which are sought to be raised by the defendant in the instant case and which must, in my view be ventilated in a trial and not be brought to a screeching halt by an exception at this stage.

[48]I am of the considered view that the court should be allowed to consider the evidence and on the facts, decide whether the actions of the defendants, together with that of the plaintiffs would fall within the ameliorating effects of s.248. It would, in my view be presumptuous to willy-nilly interpret s.247 as non-suiting the defendant without considering the effects and implications of s.248, after evidence has been led.

[49]In the Van Straten case,[footnoteRef:17] the Supreme Court expressed itself as follows: [17: Ibid at para 111.]

‘The balancing of the competing interests which arise in and evaluating whether public policy and the legal convictions of the community would result in a finding that the conduct complained of was wrongful and susceptible to an Aquilian remedy in damages are exercises best undertaken at the conclusion of the trial after the full matrix has emerged’.

[50]I am of the considered view that there are competing interests in this matter as well and these will emerge from what I have said before. In the premises, I am of the view that the full import of the competing positions that appear to be ushered by what appear to be the discordant provisions of ss. 247 and 248, would require the adduction of evidence. That evidence and full legal argument, after all the evidence is in, would place the trial court, rather than this court, dealing as it does with interlocutory matters in the absence of evidence, at the vantage point to fully investigate the effects of s.248 on the case, considering same in tandem with the evidence led. This, in my opinion, is the proper and fair approach to the matter and one that would apply if this matter was dealt with as an exception.

[51]I am of the view that in the light of what is persuasive authority cited above, it is high time that the defences availed to auditors amongst others, by the interpretation accorded to s.248, should be recognized and applied in appropriate cases in this jurisdiction. The reasoning of the courts in both England and Singapore, is in my view in line with logic, principle and the demands of justice and fairness. As a result, I do not find any meaningful reason not to adopt the approach of those courts for application in our jurisdiction.

[52]I am accordingly of the view that the defendant should be allowed to amend its plea as proposed in order to enable it to raise the defences it seeks to and the trial court can be properly placed to poignantly consider, in the light of the evidence, whether the import of s.248 has the effect contended for by the plaintiff in the first place. It would also, having regard to the evidence, decide whether or not a case for absolving the defendant from liability, whether partially or in full, is made out in terms of s. 248.

[53]Finally, in the Van Straten case, [footnoteRef:18]referred to Indac Electronics (Pty) Ltd v Volkskas Bank Ltd,[footnoteRef:19] where the following lapidary remarks were made: [18: Ibid at para 150.] [19: 1992 (1) SA 80B-D.]

‘. . . at the stage of deciding an exception a final evaluation and balancing of relevant policy considerations should . . . not be undertaken.’

I accordingly heed that admonition, considering the weighty issues that arise and the potentially decisive effect that this case, after trial may have on the duties and liability of auditors in the company law of this Republic. I would therefore grant the amendment sought and in effect dismiss the exception at this stage.

[54]Should I be found to have erred in my considerations and prima facie view of the applicability of the provisions of s.248 as dealt with in the cases referred to above and the effect it may possibly have on s. 247, and that the pleading sought to be amended is excipiable as alleged, I am nonetheless of the opinion that the sheer weight of the issues at stake, their novelty and the possible development of Company Law and the duties of directors, officers and auditors, that may be yielded by allowing the amendment in the circumstances, in my view constitute an exceptional circumstance within the meaning of the D B Thermal case as quoted in para [16] above. For that reason, I am of the considered view that this court should sanction the proposed amendment, as I hereby do.

Costs

[55]The question of costs presents some difficulty in this matter. This arises from the fact that the proceedings were brought as one type of interlocutory but were dealt with as a different type. In my view, the ruling on costs differs, depending on which interlocutory it is. In the instant case as it was essentially an amendment sought and the court has effectively granted it, the authorities suggest that an applicant for an amendment essentially seeks an indulgence from the court.

[56]In the instant case, I am of the view that the opposition to the amendment, as seen from the issues discussed in this ruling, were weighty and of great moment. The opposition was therefor not in any way frivolous or vexatious. This would for that reason point to an order for costs having to be granted to the plaintiff in the circumstances.

[57]On the other hand, as the matter was effectively dealt with as though it was an exception, the end result was to effectively not uphold the exception. As is apparent from the judgment, in the circumstances, it would mean that the ordinary rule that costs follow the event should be issued. On a mature consideration of all the facts however, and in exercise of the discretion reposed in the court in matters of costs, I am of the view that it would be unfair and unjust in the circumstances to mulct the plaintiff with costs as it was brought to court by the defendant, who found it fit to apply for an amendment, which has been effectively granted. The fact that the court dealt with the application as though it was an exception in my view does not, and should not detract from the fact that the matter was brought to court as an application for amendment and the costs that ordinarily follow in amendments applications should therefore apply.

[58]In the premises I grant the following order:

1. The application for amendment of the defendant’s plea is granted as prayed.

2. The amendment is to be effected within ten (10) days of the date of this order.

3. The plaintiff is ordered to file its replication, if any, within fifteen (15) days from the date of the filing of the amended plea.

4. The matter is postponed to 17 August 2016 at 15:15 for case management.

5. The defendant is ordered to pay the costs occasioned by the amendment and such costs are to include the costs of one instructing and one instructed Counsel.

____________

TS Masuku

Judge

APPEARANCES:

PLAINTIFF: M. Van der Nest SC, with him R. Heathcote and D Smit

Instructed by Theunissen, Louw & Partners

DEFENDANT:T. Frank SC, with him E. Schimming-Chase

Instructed by Engling, Stritter & Partners