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Deloitte, directors in the dock for African bank’s failure

Nov 12 2017 06:00
Justin Brown

In seeking damages, the empowerment partners of the collapsed bank are making a case for personal liability.

Deloitte & Touche was in the spotlight this week, facing legal action for its alleged role in the collapse of African Bank and parent company African Bank Investments Limited (Abil).

Deloitte, the former auditor of African Bank and Abil, was joined in the Pretoria High Court by the legal representatives of 10 former African Bank and Abil directors.

Two separate yet related cases – against the auditing firm and the directors – have been brought by the shareholders of the Hlumisa and Eyomhlaba schemes, which were the two empowerment partners of African Bank.

The former directors filed three exceptions against the case brought by the plaintiffs – and in its response, Deloitte filed two exceptions against the plaintiffs’ case.

The exceptions are aimed at trying to block the summons served on them by the plaintiffs from getting a full court hearing – and are also aimed at delaying the case.

The shareholders of Hlumisa and Eyomhlaba are seeking to claim nearly R2.1 billion from Deloitte and the former directors of African Bank, which failed in August 2014.

Chris Loxton, the advocate representing the former African Bank and Abil directors, argued that a company suffers a loss and not its directors – and, as such, shareholders cannot sue directors, as the company is separate from its shareholders.

The former directors of Abil and African Bank who are being sued are former African Bank CEO Leon Kirkinis, along with Nithiananthan Nalliah, Mojankunyane Gumbi, Mutle Mogase, Nomalizo Langa-Royds, Nicholas Adams, Samuel Sithole, Antonio Fourie, Robert Symmonds and Morris Mthombeni.

Mthombeni is currently the director of African Phoenix Investments, which is the name adopted by Abil for its relaunch in April 2016.

Mike van der Nest, the advocate representing Deloitte, said there was no evidence to back up the allegations by the former African Bank empowerment partners to use section 218 of the Companies Act – which states that a director can be held civilly liable for damages – to sue for the losses they had sustained.

“The loss is the company’s loss, not your loss,” said Van der Nest.

“The loss caused to third parties is Abil’s loss.”

Van der Nest added that there was no case for the use of section 218 of the Companies Act by the former African Bank empowerment partners, adding that he would never have guessed that this would be the route that the plaintiffs would have taken.

Van der Nest said the claim by the former empowerment partners was a delictual claim for “pure economic loss”. Delict is a legal term for a civil wrong of intentional or negligent breach of duty of care that inflicts loss or harm – and triggers legal liability for the wrongdoer.

“The plaintiffs’ case is misconceived,” he added.

However, Jose Brett, the advocate for Hlumisa and Eyomhlaba, said the plaintiffs’ claim against the directors was not delictual in nature.

“The plaintiffs’ cause for action against the directors is squarely rooted in the remedy provided for by the provisions of section 218(2) of the Companies Act, which provides a new remedy which did not exist under common law,” Brett said.

“Section 218(2) of the Companies Act provides a general remedy to any person, and renders people who contravene any provision of the Companies Act liable for any loss or damage suffered as a result of the contravention.

“A third party can therefore hold a director personally liable in terms of the Companies Act.”

Loxton and Van der Nest cited the 2016 judgment in the case of Itzikowitz vs Absa Bank as backing their position regarding whether a shareholder of a failed company could sue a third party for losses over the collapse of the company.

Van der Nest said Deloitte was being sued by a “remote plaintiff”.

“The claim is unsustainable,” he added. “Our exceptions should be upheld.”

In March 2016, the Supreme Court of Appeal (SCA) handed down judgment in the Itzikowitz vs Absa Bank case about whether a shareholder could sue for the diminution in value of shares as the result of a wrong committed against a company.

Referring to this, Brett said the court had ruled in favour of a flexible approach, in terms of which there was no single criterion.

“The basic question is whether there is a close enough relationship between the wrongdoers’ conduct and its consequence for such consequence to be imputed to the wrongdoer in view of the policy considerations based on reasonable fairness and justice,” Brett said.

“The auditors, much like the directors, place much reliance on the SCA judgment. However, the Itzikowitz judgment said no more than that a shareholder must have been independently wronged in order for such a shareholder to claim damages against such a wrongdoer for a shareholder’s loss.”

Brett said all the exceptions brought by the former directors and Deloitte should be dismissed with costs.

Desmond Lockey, the chairperson of Hlumisa, said the court battle against the former African Bank directors was being fought on a “shoestring” budget.

Lockey said that, in addition to the funds remaining in the Hlumisa and Eyomhlaba schemes, he was contributing a “considerable amount” of his own money to the legal battle.

“We are committed to seeing this through to the end,” he added.

“If this case succeeds, you need to be very careful when you are a director of a company.”

On Thursday, Judge Lettie Malope reserved judgment in the matter after hearing arguments on Wednesday and Thursday.

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deloitte  |  african bank  |  financial services  |  abil

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