African Bank’s ex-BEE partners take R2.1bn claim to the Supreme Court of Appeal

African Bank Investments Limited’s (Abil’s) former empowerment partners are Hlumisa and Eyomhlaba, and together, they have 13,000 shareholders, which held almost 5% of Abil, which in turn owned the former African Bank.

They are suing 10 former Abil and African Bank directors as well as Abil and the bank’s former auditor, Deloitte.

On Monday, 9 March 2020, lawyers for Hlumisa and Eyomhlaba presented arguments at the Supreme Court of Appeal (SCA) to appeal against a North Gauteng High Court ruling dated 31 August 2018, that dismissed the claims.

The empowerment companies submitted their appeal against that ruling on 20 September 2018.

The lawyers for the empowerment companies, in a 24-page application for leave to appeal, argued that Judge Letty Molopa-Sethosa of the North Gauteng High Court had erred in her ruling. Business Maverick has a copy of the application.

The judge’s findings were in “stark contrast” to the principles established in five recent judgments, the empowerment partners stated.

In the North Gauteng High Court, on 7 and 8 November 2017, the lawyers for the 10 directors and Deloitte argued that the only entities that could sue them for losses were Abil and African Bank. Shareholders such as Hlumisa and Eyomhlaba couldn’t sue them, the directors and Deloitte said. Molopa-Sethosa, in her ruling, upheld this argument.

“Shareholders have no personal claim for damages in these circumstances; only the company suffering the loss has a claim against the third party,” Molopa said in her judgment.

“A shareholder of a company benefits from limited liability. Unless very exceptional circumstances are present, a shareholder is not liable for debts incurred by its company. The corollary of this limited liability is limited rights. Because a shareholder is normally not exposed to the liabilities of a company, it is also normally not the beneficiary of claims accruing to the company (such as a claim in delict against a wrongdoer causing loss to a company),” Molopa added.

In their leave to appeal application, the empowerment partners also argued that Section 218 (2) of the Companies Act provided a general remedy to any person, which could include the company, a shareholder or creditor to hold any person, who contravened any provision of the Companies Act liable for any loss or damage suffered as a result of an infringement.

“Third parties, Section 218 (2) of the Companies Act, therefore have a claim against the directors of the company for each breach of their statutory fiduciary duties to the company even though these duties are owed to the company and not them,” the appeal document said.

“The learned judge erred in finding that Section 218 (2) of the Companies Act did not apply to the auditors,” the appeal document reads.

Section 218 (2) reads as follows: “Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.” 

The matter was heard in court A of the SCA in Bloemfontein by five judges: Judge Mahomed Navsa, Judge Mahube Molemela, Judge Ashton Schippers, Judge Phineas Mojepelo and Judge Petrus Koen. 

The empowerment partners are suing the 10 directors for R721.4-million plus interest and costs, and they are suing Deloitte for R1.3-billion plus interest and costs.

The former directors of Abil and African Bank who are the subjects of the legal action are former chief executive Leon Kirkinis, Nithiananthan Nalliah, Mojankunyane Gumbi, Mutle Mogase, Nomalizo Langa-Royds, Nicholas Adams, Samuel Sithole, Antonio Fourie, Robert Symmonds and Morris Mthombeni.

The case casts a shadow over the directors and particularly Deloitte as the Independent Regulatory Board for Auditors (Irba), which regulates the local auditing profession, in May 2018 charged two partners at Deloitte with misconduct relating to the financial statements of African Bank and Abil, which they signed off before these entities were placed under curatorship.

The charges apply to Mgcinisihlalo Jordan, who is deputy CEO and partner at Deloitte Africa, and Danie Crowther, a Deloitte partner.

Jordan is a respondent in all 10 charges of misconduct, while Crowther is only a respondent in charge number 10.

The Irba held an inquiry into the charges, which started on 23 March 2018. The last day that matter was heard was on 6 December 2019. In May 2020, the parties to the case would present heads of argument, Irba CEO Bernard Agulhas said on 9 March 2020.

In addition to its involvement in the failure of African Bank, Deloitte has audited the financial statements of two significant companies accused of accounting fraud, Steinhoff International and Tongaat Hulett.

The Irba is probing the audits completed by Deloitte of Steinhoff’s financial statements for the years 2014, 2015 and 2016. Dutch group VEB, which represents Steinhoff shareholders, is suing Deloitte for damages and has accused the audit company of failures, according to the Financial Times.

The losses investors and other stakeholders suffered due to the failure of African Bank, as well as the alleged fraud at Steinhoff and Tongaat Hulett, runs into hundreds of billions of rands.

Deloitte was also the auditor of LeisureNet at the time of its failure and was sued for damages due to that collapse.

The whole local auditing sector is under scrutiny given significant lapses, including KPMG’s audit work at VBS Mutual Bank and Gupta-linked company, Linkway Trading.

“The auditing profession has… been tainted by a string of high-profile corruption, fraud, and corporate collapse cases that have cost the country, citizens and pensioners dearly,” Irba’s CEO Bernard Agulhas wrote in 2019. 

To deal with these concerns, Finance Minister Tito Mboweni announced in his Budget speech in February 2020 that he planned to put through legislation to strengthen Irba.

He is going to introduce a draft amendment bill to Parliament to amend sections of the Auditing Profession Act of 2005 to give Irba increased powers, particularly when undertaking investigations. 

“We will shortly appoint an independent panel of experts to review practices in the auditing profession,” Mboweni said during his Budget speech. BM