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Duties of Auditors and Compliance Officers are owed to Intermediary not Third Party Insurers

23 February 2024 Donald Dinnie, Norton Rose Fulbright
Donald Dinnie

Donald Dinnie

Hollard Insurance Company Ltd and Others v Insure Group Management Ltd (in liquidation) and Others (21/43014) [2023] ZAGPJHC 371 (25 April 2023)

A number of insurers issued summons against an intermediary (the first defendant), its auditor (the second defendant) and its compliance officer (the third defendant) in relation to premiums collected by the intermediary and not paid over to the insurers.

The court held that the auditor and compliance officer owed their statutory duties to the intermediary who appointed them and not to the third party insurers.  There was therefore no wrongfulness on which the insurers could rely as a basis for a claim in delict against them for the losses.

The intermediary collected premiums on behalf of the insurers. The insurers allege that the intermediary unlawfully appropriated the value of approximately two months’ worth of premiums and invested those premiums in illiquid assets. The intermediary also failed to maintain its required guarantees and failed to pay the amounts due to the plaintiffs in terms of its mandates. The intermediary then collapsed and went into liquidation.

The issue in this case related to the second and third defendants only (the auditor and the compliance officer). The main argument was that there was no cause of action against either of them because their duties were to the company itself (the intermediary) and at times to the regulators. They argued that they owed no legal duty to creditors and clients of the intermediary, either to protect their interests or for the benefit of their commercial decisions.

The insurers alleged that the breach of the auditor and compliance officer’s statutory duties was prima facie proof of wrongfulness. The court did not agree, and upheld the second and third defendant’s exceptions: to hold auditors and compliance officers liable in cases such as these would open them up to numerous plaintiffs and indeterminate liability.

First published by: Financial Institutions Legal Snapshot

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