The financial statements of a company are essential information tools that enable investors, regulators and other stakeholders to assess its performance, as they provide insights into the entity. For listed companies, whose dealings generally have a large impact on the markets, the need for accurate financial statements cannot be overemphasised.
To this end, the Johannesburg Stock Exchange (“JSE”) and the Financial Services Tribunal (“Tribunal”) are among various authorities empowered with regulatory oversight. In the recent judgment of Trustco Group Holdings Limited v Financial Services Tribunal and Another1, the Supreme Court of Appeal (“SCA”) reaffirmed the JSE's authority to direct a listed company to restate its annual financial statements that were non-compliant with internationally accepted reporting standards.
Trustco Group Holdings Limited (“Trustco”) approached the SCA to challenge the High Court's ruling that the JSE has the power to order a company to restate its financial statements. Central to the dispute was the reclassification of immovable properties from inventory to investment property, and the inconsistent treatment of two loans in Trustco's financial statements.
Trustco is a Namibian public company listed on the JSE. Between 2015 and 2018, Trustco's majority shareholder, Dr Quinton van Rooyen (“Van Rooyen”) was also the sole shareholder of Huso Investments (Pty) Limited (“Huso”). Van Rooyen advanced loans amounting to N$546 million to Huso. This amount was initially treated as an investment by Van Rooyen, and reported as equity in Huso's financial statements.
By 2018, when Trustco acquired all the shares in Huso, the same amount had been reclassified as a loan (a liability) in Huso's financial statements. After Trustco's acquisition of Huso, Van Rooyen ‘forgave' the loans, resulting in a ‘profit' of N$546 million for Trustco. In 2018, Van Rooyen advanced and later ‘forgave' another loan of N$1 billion to Trustco, removing the obligation for Huso to repay the loans. This, too, was treated as a profit in Trustco's financial statements.
Trustco also reclassified some of its immovable properties from inventory to investment property. This reclassification resulted in a ‘profit' of N$693 million for Trustco.
The JSE, exercising its oversight powers, conducted a review of Trustco's 2019 financial statements and took issue with the treatment of the loans and the reclassification of the inventory. Following an investigation, the JSE notified Trustco that these entries in its financial statements were non-compliant with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board.
Trustco objected to this decision, and the JSE dismissed the objection, ordering Trustco to restate its financial statements, and reverse the profits reported as a consequence of the loan and inventory reclassifications. Trustco applied to the Tribunal for reconsideration of the order. The Tribunal dismissed the application, and Trustco launched a review application in the High Court to set aside the Tribunal's ruling.
Of the three grounds raised by Trustco, the most relevant for present purposes is Trustco's argument that the JSE has no power to order a company to restate its financial statements.
Both courts relied on the JSE Listings Requirements (“Listings Requirements”) and the Financial Markets Act 19 of 2012 (the “Act”), which set out the powers of the JSE in respect of an issuer that has not complied with the required accounting standards.
Paragraph 8.65(b) of the Listings Requirements enables the JSE to, in its sole discretion:
‘instruct such issuer to publish or re-issue any information the JSE deems appropriate'.
Trustco argued that paragraph 8.65 only empowers the JSE to order a reissuing of financial statements, rather than restatement. The difference between the two is not insignificant. A reissue is a without-prejudice correction of an error in the financial statements or an announcement. A restatement, on the other hand, indicates that the JSE has identified irregularities that the company needs to remedy.
Both the High Court and SCA rejected this argument. They agreed with the JSE's submission that the Listings Requirements empower the JSE to order a restatement of financial statements. The High Court relied on the judgment of Huge Group Ltd v Executive Officer: Financial Services Board2, where it was held that the JSE's power to order a company to ‘publish or reissue' does not exclude an instruction to restate annual financial statements. It ruled that a purposeful and contextual interpretation of paragraph 8.65 includes the power to direct listed companies to restate their financial statements. It further emphasised that without that power, the JSE would be rendered toothless in its mandate to protect the public by ensuring that financial statements set out the full picture.
Similarly, the SCA confirmed the wide powers of the JSE and referred to sections 10(2)(m) and 11(1)(g)(v) of the Act, which 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.'
The SCA pointed out the importance of ensuring that investors can rely on accurate financial statements that comply with international accounting standards. To achieve this, it is the JSE's statutory obligation, in terms of the Listings Requirements issued under the Act, to hold listed entities to this imperative. Accordingly, where financial statements do not accurately reflect the nature of financial transactions in accordance with international accounting standards, the JSE must be entitled to order the restatement of financial statements – or any ‘other thing' necessary – in a manner that gives investors full context.
This case should serve as a caution to listed companies to ensure that financial statements are always prepared in compliance with IFRS, and that shareholders are always timeously informed of any reclassification. A failure to do so may result in a restatement order from the JSE. An equally important takeaway from the judgment is the reaffirmation of the JSE's oversight powers (as a self-regulatory authority) to ensure that accurate information is provided to investors and the markets at large.
This article was prepared by partner Pierre Swart, associate Siyabonga Nyezi and candidate attorney Ferdinand Pike.
Footnotes
[1]. (471/2023) ZASCA 100 (19 June 2024).
[2]. (15380/2015) GLD (21 July 2017).
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