WK Construction (Pty) Ltd v Moores Rowland and Others (952 of 2020) [2022] ZASCA 44

The recent Supreme Court of Appeal “SCA” judgment passed in the above case is of particular relevance regarding extinctive prescription, breach of contract as well as professional negligence.

WK claimed damages against its auditors “Mazars”. This is following a tremendous R80 000 000.00 loss at the hands of one of its former directors. The director had authorised several fraudulent transactions resulting in funds being transferred for his own benefit. Of the R80 000 000.00 loss, WK was able to recover a sum of R26 000 000.00 from the director. WK subsequently sought to recover the balance from Mazars.

The summons issued by WK against Mazars were defended by way of special plea of prescription. The plea was upheld by the High Court on the basis that the three years period within which action should have been brought had long lapsed, thus the claim became unenforceable through prescription.

This brings about the question of when an alleged debt is deemed to have been due. Given the provisions of the NCA, are there any grey areas with regards to when debt is due, and what did the court in this instance deem as the appropriate time by which prescription began to run? We expand on this principle throughout the article.

Another prominent question pertains to what relevant knowledge comprises? Knowledge is defined as an awareness or understanding especially of an act, fact, or the truth. Relevant knowledge thus entails a warranty or other statement of any person that the fact or situation described therein is known by the person making the representation.

On February 2013, Irregular payments appearing on the general ledger were detected by the WK financial the manager. Following which investigations commenced and subsisted through April 2013. At this point, the director and CEO of WK had already been informed of these irregular payments.

The investigation revealed that these Irregular payments were in-fact fraudulent transactions around August 2013. Further conveyancers alleged to have assisted the then director in his transfers of properties were contacted, whilst the director's user certificate revoked.

A meeting with the board of WK and the director took place.

Section 12(1) of the Prescription Act 1969 provides that a debt shall not be deemed to be due until the creditor has knowledge of the identity of the debtor and of the facts from which the debt arises. It further states that a creditor shall be deemed to have such knowledge if he could have acquired it by exercising reasonable care.

The Court considered the aspect of ‘reasonable care' in making a finding on the first legal question. By August 2013, WK did not have knowledge as to the liability on part of Mazars. They contended that Mazars has to prove that the director was in fact unable to satisfy the claim for repayment before WK had requisite knowledge.

The SCA found that prescription will begin to run the moment the debtor has a reasonable suspicion of possible negligence on the part of the auditor.

It was further held that auditors are scrutineers with a critically enquiring mind who at all times maintain independence and carry out their duties with utmost skill and diligence. Similarly, anyone who contends otherwise would have to show that an auditor was careless in the execution of any aspect of their mandate. The threshold for this measure would be against the general standards prevailing in the profession at that given time as there is no requirement of evidence on specific duties of auditors.

The Court pointed out the fact that WK had a reasonable suspicion that the director has defrauded them of money since August 2013. The act of contacting an accounting firm for expert advice in August 2013 is indicative of the fact that they acted on their suspicion.

Debt is deemed due once a creditor acquires, or could reasonably have acquired, knowledge of facts from which debt arose.

The Court further held that the running of prescription is not postponed until the creditor becomes aware of the full extent of its rights. This led to the finding that the claim had indeed prescribed, thus Mazars could not be held liable for the outstanding amount sought by WK. The appeal was dismissed with costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.