A panel of the Financial Services Tribunal (FST) is not required to include a person knowledgeable in accounting practices or the International Financial Reporting Standards (IFRS), the Supreme Court of Appeal (SCA) has ruled.
The ruling forms part of a judgment in an appeal application brought by Trustco Group Holdings Limited. Trustco has challenged, all the way to the appeal court, a JSE directive compelling the company to restate its financial statements.
The Namibia-based investment group is listed on the JSE and the Namibian Stock Exchange.
The SCA’s unanimous judgment, handed down on 19 June, addressed:
- the legal principles governing the appointment of Tribunal panels to hear applications for the reconsideration of the JSE’s decisions in terms of section 230 of the Financial Sector Regulation Act (FSRA); and
- the power of the JSE to direct listed entities to restate financial statements.
The decision also addressed new arguments advanced by Trustco in oral argument before the SCA.
Background to the appeal application
Between 2015 and 2018, Trustco’s chief executive and majority shareholder, Dr Quinton van Rooyen, advanced loans of about N$546 million to Huso Investments (Pty) Ltd and other subsidiaries.
In 2018, Trustco acquired all Huso’s issued shares. The loan was initially reflected in Huso’s financial statements as equity. By the time Trustco acquired Huso’s shares, the loan had been reclassified as a liability – that is, a debt owed to Van Rooyen.
The agreement in respect of Trustco’s purchase of Van Rooyen’s shares in Huso included an “earn-out” mechanism in terms of which he would be allocated shares in Trustco if it met certain profit thresholds. A few weeks after the conclusion of the agreement, Van Rooyen “forgave” the loans, resulting in a N$546m profit in Trustco and triggering the “earn-out” mechanism, which allowed Van Rooyen to acquire the Trustco shares.
In October 2018, Van Rooyen advanced a second loan of N$1 billion to Trustco, which he “forgave” during 2019. This amount was also reflected in Trustco’s financial statements as profit, again allowing Van Rooyen to acquire more shares in terms of the “earn-out” mechanism.
In its 2019 financial statements, Trustco reclassified properties in its Elisenheim development from “inventory” to “investment property”. Trustco said the reclassification was because a decline in demand meant it did not anticipate selling the properties in the foreseeable future. It thereafter revalued the properties and, as a result, reported a profit of N$693m.
In December 2019, the JSE advised Trustco that its financial statements had been selected for review under the exchange’s “proactive review process”, in terms of which listed companies’ financial statements are reviewed at least once every five years.
The JSE referred three issues to its Financial Reporting Investigation Panel (FRIP). Two issues related to entries in respect of the loans by Van Rooyen, and the other to entries reflecting the reclassification of the immovable properties.
On the FRIP’s advice, the JSE informed Trustco, in October 2020, that the entries did not comply with the IFRS. Trustco objected to the decision.
In November 2020, the JSE dismissed the objection and directed Trustco to restate its financial statements for the year to the end of March 2019, to reflect the correct nature of the transactions. The JSE also directed Trustco to reverse the profits declared in pursuance of those transactions.
Trustco lodged an application with the FST to have the JSE’s directive reconsidered. The Tribunal dismissed the application in November 2021.
Read: Tribunal upholds JSE directive that Trustco must restate its financial results
Trustco approached the High Court in Pretoria to review and set aside the FST’s decision.
The grounds for the review were, inter alia, that the JSE lacked the power to direct listed companies to restate their financial statements and that the Tribunal’s panel had not been properly constituted in terms of section 224 of the FSRA.
The High Court dismissed the application, with costs, in November 2022.
In February 2023, Trustco agreed to restate its financial statements and undertook to:
- arrange for the shares issued to Van Rooyen to be returned to Trustco;
- reinstate the loans he waived; and
- reverse the profits declared pursuant to the waiver of the loans.
It was common cause that Trustco did this without prejudice to its rights and solely to lift the suspension of the trading of its shares on the JSE.
Composition of Tribunal panels
In its written arguments before the SCA, Trustco contended that:
- The FSRA requires that in cases involving only accounting issues, the Tribunal panel must include persons with financial expertise and experience.
- The JSE Listings Requirements do not empower the exchange to issue directives for listed companies to restate their financial statements.
Regarding the first argument, the judgment referred, inter alia, to section 220 of the FSRA, which stipulates that Tribunal members must include:
- at least two persons who are retired judges, or are persons with suitable expertise and experience in law; and
- at least two other persons with experience or expert knowledge of financial products, financial services, financial instruments, market infrastructures, or the financial system.
The SCA held that the sections of the FSRA dealing with the composition of Tribunal panels do not contain any express or implied requirement for a panel constituted under section 220 to include a person with knowledge of accounting practices or the IFRS.
“The interpretation contended for by Trustco simply does not find any support in the express and unequivocal language of these provisions,” Acting Judge of Appeal John Smith wrote on behalf of the court.
Regarding the JSE’s powers to direct listed entities to restate financial statements, the SCA held that paragraph 8.65 of the Listings Requirements grants wide powers to the JSE to instruct listed entities, in its sole discretion, to publish or re-issue any information it deems appropriate.
These powers are underpinned by sections 10(2)(m) and 11(1)(g)(v) of the Financial Markets Act, which, respectively, empower the JSE to do “all other things that are necessary for, or incidental, or conducive to the proper operation of an exchange and that are not inconsistent with this Act” and to impose any penalty that is “appropriate in the circumstances”.
Trustco’s oral arguments
Smith AJJA said Trustco, in its oral arguments before the court, “all but abandoned” its written arguments. Instead, it raised a new argument, namely, that the Tribunal’s chairperson, Judge Louis Harms, failed to exercise the discretion vested in him in terms of section 224 of the FSRA when he appointed the panel.
Trustco cited statements made by Judge Harms to support its argument that the judge, on his own admission, was unaware of the nature and complexity of the issues that the Tribunal would be required to consider before appointing the panel. He was consequently oblivious of the need to appoint someone with the requisite financial expertise and experience.
The SCA found Trustco’s argument problematic for several reasons, including that this review ground was not raised in the High Court or in Trustco’s written argument on appeal to the SCA. When Judge Harms wrote the statements, he had been unaware of the allegation that he did not exercise a discretion and consequently did not address the issue at all.
Furthermore, the statements cited by Trustco were quoted selectively and out of context, Smith AJJA said.
Trustco also “resuscitated” its High Court argument that the Tribunal accorded undue deference to the views of the JSE and its expert witness.
The SCA found the latter argument unsustainable and unfounded. It was belied by the Tribunal’s extensive analysis of the opinion submitted by Trustco’s expert and the reason it provided for preferring the opinion of the JSE’s expert.
Punitive costs
The SCA dismissed Trustco’s appeal and ordered it to pay costs on a punitive scale.
The JSE had been put out of pocket because it was compelled to incur unnecessary costs to defend litigation that had no reasonable prospects of succeeding, Smith AJJA said.
