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Supreme Court of Appeal of South Africa

MEDIA SUMMARY – JUDGMENT DELIVERED IN SUPREME COURT OF APPEAL

From:The Registrar, Supreme Court of Appeal

Date:1 June 2005

Status:Immediate

Please note that the media summary is intended for the benefit of the media and does not form part of the judgment of the Supreme Court of Appeal

On 1 June 2005the Supreme Court of Appeal handed down judgment inAxiam Holdings Limited v Deloitte & Touche. In an action in the Johannesburg High Court Axiam Holdings claimed damages in an amount of R241 069 222-43 from Deloitte and Touche, on the basis of an alleged negligent audit by the latter of the financial statements of the Business Bank Limited for the financial year ending 31 March 1999.

It was alleged by Axiam that the Business Bank’s financial statements misrepresented its nett worth ─reflecting a nett profit before tax of R29 266 176-00 whereas, in fact, it had suffered a nett loss of R77 899 201-00. The third party from whom Axiam obtained title to sue, in subsequently purchasing the Business Bank Limited, relied on an audit certificate by Deloitte and Touche in terms of which it certified that the financial statements fairly presented the Business Bank’s financial position. It was Axiam’s case that Deloitte knew or ought to have known that reliance was to be placed on the certification and that in the circumstances had a duty to warn the third party about the inaccuracies in the financial statements.

Deloitte and Touche excepted to Axiam’s particulars of claim on the basis that,on the facts presented,it did not owe the purchaser a legal duty to inform it of the errors in the financial statements of the Business Bank Limited and that the failure to warn the purchaser was insufficient in law to constitute a representation in terms of s20(9)(b)(ii) of the Public Accountants’ and Auditors’ Act 80 of 1991.

In the Johannesburg High Court Schwartzman J partially upheld the exception. He held that, insofar as it was alleged that Deloitte and Touche knew that its certification was incorrect and knew that the third party was going to rely on it in concluding an agreement to purchase the Business Bank Limited, that issue should proceed to trial. He held, however, that insofar, as it was alleged that Deloitte and Touche was negligent in that it ought to have known about its incorrect certification, the flaw in the reasoning was that when the audit was completed Deloitte and Touche did not owe the purchaser a legal duty and could therefore subsequently not have such a duty.

In this Court it was held (Cloete and Heher JJA dissenting) that the Johannesburg High Court had erred by deciding prematurely, at exception stage, without the benefit of all the facts thatmight emerge at trial that no such duty could be said to exist. It was held that on the face of the pleadings the claim was sustainable and that the matter should proceed to trial on that issue. The Johannesburg High Court’s judgment was substituted accordingly.

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