Eight trusts and a partnership (the appellants/plaintiffs) were clients of a firm of chartered accountants, Katz Salber & Company. The firm provided comprehensive accounting services including administration of funds, collection of income, payment of disbursements, and investment of surplus funds. From 1988, Katz Salber pooled clients' surplus funds into a money market account in its own name at Investec Bank, earning commission of 6% on interest generated. Over approximately five years, one partner, Lombard, systematically misappropriated these pooled funds for his own speculative purposes while creating fictional monthly statements showing the funds were intact. The fraud was discovered in 1994 when a plaintiff requested R150,000 but the account contained only R9,000. Katz Salber could not make good the shortfall and was sequestrated. Lombard was convicted of theft. Katz Salber had professional indemnity insurance underwritten 80% by the first respondent and 20% by the second respondent, with a limit of indemnity of R1,500,000. The plaintiffs invoked section 156 of the Insolvency Act to claim directly against the insurers.
Appeal allowed with costs including costs of two counsel. Judgment granted against the first defendant (80%) and second defendant (20%) for the amounts claimed by each plaintiff (ranging from R4,514.59 to R213,530.29 after deductibles), with mora interest at the legal rate from 14 November 1994 to date of payment. Three witnesses declared necessary witnesses. Costs against both defendants jointly and severally.
Where accountants accept a mandate to administer and invest client funds as part of their professional accounting services, the relationship is one of mandate, not debtor-creditor. It is a naturalia of such mandate that the accountant perform duties honestly, diligently, and with care, and account to the principal. Breach of these duties through misappropriation by a partner and failure to detect such misappropriation constitutes 'breach of contract amounting to breach of duty in the practice of the profession' within a professional indemnity policy covering work undertaken 'in connection with' listed professional activities. The phrase 'in connection with' in defining the insured profession is construed broadly; it is not necessary that every aspect of work be separately listed if it is incidental to or connected with listed activities. Services rendered by accountants including acceptance of mandates to invest surplus funds with approved financial institutions, as part of comprehensive accounting services (bookkeeping, collection, disbursement, financial statements, tax returns), fall within the practice of the profession as accountants. Section 156 of the Insolvency Act 24 of 1936 entitles third parties to recover directly from insurers upon sequestration of the insured, up to the limit of indemnity, where the insured incurred liability to the third party and the insurer was obliged to indemnify the insured in respect of that liability.
The Court noted (without deciding definitively) that there may be merit in the argument that section 2 of the policy (covering liability arising from dishonest acts of partners) cannot be invoked without identifying the causa of the legal liability in a delictual sense, though this was unnecessary to determine given the finding under section 1.2. The Court observed that it would be inaccurate oversimplification to characterize Katz Salber's breach simply as failure to repay deposits; the breach consisted of deviation from the terms of mandate. The Court commented that if the bank had failed there would have been no breach of mandate, distinguishing the case from mere failure to refund deposits. The Court noted that cases such as Goddard & Smith v Frew, West Wake Price & Co v Ching, and Walton v National Employers' Mutual General Insurance Association Ltd may be relevant to consideration of policy clauses covering negligent acts/errors or unintentional failure to account (sections 1.1 and 1.6) but were of little guidance where the mandate terms differ and the policy contains a clause like section 1.2. Because of the finding under section 1.2, the Court found it unnecessary to consider the pertinence of sections 1.1 and 1.6 of the policy.
This case establishes important principles regarding the scope of professional indemnity insurance for accountants in South Africa. It clarifies that where accountants accept mandates to administer and invest client funds as part of a comprehensive suite of accounting services, breaches arising from dishonest misappropriation by partners fall within the coverage of professional indemnity policies, not merely fidelity policies. The judgment affirms that the relationship between accountants and clients in such circumstances is one of mandate, with attendant duties of honesty, care, and diligence implied by law. It also confirms the broad interpretation of 'breach of duty in the practice of the profession' to encompass breaches of mandate executed in the course of professional accounting services. The case demonstrates the application of section 156 of the Insolvency Act allowing third-party beneficiaries to claim directly against insurers upon the insured's sequestration. It also applies the 1997 amendments to the Prescribed Rate of Interest Act to allow mora interest on unliquidated damages claims from the date of written demand where equitable.