Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others (1423/2018) [2020] ZASCA 83; [2020] 3 All SA 650 (SCA); 2020 (5) SA 419 (SCA) (3 July 2020)

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[2020] ZASCA 83
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Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others (1423/2018) [2020] ZASCA 83; [2020] 3 All SA 650 (SCA); 2020 (5) SA 419 (SCA) (3 July 2020)

THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
no: 1423/2018
In
the matter between:
HLUMISA
INVESTMENT HOLDINGS (RF) LTD

First Appellant
EYOMHLABA
INVESTMENT HOLDINGS (RF) LTD

Second Appellant
and
LEONIDAS
KIRKINIS

First

Respondent
NITHIANANTHAN
NALLIAH

Second Respondent
MOJANKUNYANE
FLORENCE GUMBI

Third Respondent
MORRIS
MTHOMBENI

Fourth Respondent
MUTLE
CONSTANTINE MOGASE

Fifth Respondent
NOMALISO
LANGA-ROYDS

Sixth Respondent
NICHOLOAS
ADAMS

Seventh Respondent
SAMUEL
SITHOLE

Eighth Respondent
ANTONIO
FOURIE

Ninth Respondent
ROBERT
JOHN SYMMONDS

Tenth Respondent
DELOITTE
& TOUCHE

Eleventh Respondent
Neutral
citation:
Hlumisa
Investment Holdings (RF) Ltd and Another v Kirkinis and Others
(Case
no 1423/2018)
[2020]
ZASCA 83
(03 July 2020)
Coram:
NAVSA,
MAKGOKA and SCHIPPERS JJA and MOJAPELO and KOEN AJJA
Heard:
9 March
2020
Delivered:
This
judgment was handed down electronically via e-mail to the parties’
legal representatives on 03 July 2020. It has been
published on the
Supreme Court of Appeal website.
Summary:
Company
Law –
s 218(2)
of the
Companies Act 71 of 2008
– claim by
shareholders of company against directors and auditors for damages
related to diminution in value of shares –
directors alleged to
have acted in bad faith, for ulterior purposes and without the
requisite degree of care, skill and diligence,
in breach of
provisions of the Act – company, rather than shareholders,
proper plaintiff in respect of  claim
against directors –
essentially a claim for reflective loss – claim against
auditors based on alleged negligence in
the manner in which they
conducted an audit of the company, in breach of their legal duty –
proper plaintiff the company
– claim for pure economic loss –
wrongfulness requirement not met – exceptions rightly upheld by
court below
– appeal dismissed.
ORDER
On
appeal from:
Gauteng
Division of the High Court, Pretoria (Molopa-Sethosa J sitting as
court of first instance): judgment reported
sub
nom Hlumisa Investment Holdings RF Limited and Another v Kirkinis and
Others
[2018] ZAGPPHC 676;
2019 (4) SA 569
(GP).
The
appeal is dismissed with costs, including the costs of two counsel.
JUDGMENT
Navsa
JA and Schippers JA (Makgoka JA and Mojapelo and Koen A
JJA
concurring):
[1]
This
appeal, with the leave of the Gauteng Division of the High Court,
Pretoria (Molopa-Sethosa J, sitting as court of first instance),

concerns principally the question whether s 218(2) of the Companies
Act 71 of 2008 (the
Companies Act) enables
a claim by a shareholder
in relation to the diminution in the value of shares due to
misconduct by directors. The appeal also concerns
the viability of a
shareholder’s claim based on a diminution in share value
related to alleged misconduct by auditors in
auditing the company’s
financial statements. It follows on the upholding of exceptions to
the appellants’ particulars
of claim in an action for damages,
brought against the respondents in the court below.
[2]
The first
appellant, Hlumisa Investment Holdings (RF) Ltd (the first plaintiff
in the court below), and the second appellant, Eyomhlaba
Investment
Holdings (the second plaintiff in the court below), are shareholders
in African Bank Investments Limited (ABIL), which
is listed on the
Johannesburg Securities Exchange. The first appellant owns 1.73%, and
the second appellant 3.24%, of the issued
share capital of ABIL.
African Bank Limited (African Bank or ‘the Bank’), which
carries on the business of a bank under
the Banks Act 94 of 1990, is
a wholly-owned subsidiary of ABIL. The first to tenth respondents are
all either former or current
directors of ABIL and African Bank (the
directors). At all material times they were all directors of both.
The eleventh respondent,
Deloitte & Touche (Deloitte), was the
auditor of both ABIL and African Bank.
[3]
In the
action instituted by the appellants in the court below in 2015, they
sued the directors and Deloitte, jointly and severally,
for damages
allegedly suffered as a result of the diminution in the value of
their shares in ABIL, on account of the directors’
alleged
misconduct in relation to the affairs of both African Bank and ABIL
and on account of Deloitte failing to conduct audits
in accordance
with generally recognised auditing standards.
[4]
In their
claim against the directors (Claim A), the appellants alleged that
between 2012 and 2014, and in breach of
s 76(3)
of the
Companies Act,
the
directors had failed to exercise their powers in good faith and
in the best interests of ABIL and African Bank, which ‘resulted

in the business of ABIL and African Bank being carried out recklessly
or with gross negligence in contravention of the provisions
of
section 22(1)
of the Act’. This caused the Bank and ABIL to
suffer significant losses, which, in turn, caused the ABIL share
price to drop
from R28.15 per share as at April 2013 to R0.31 per
share as at August 2014, a total diminution in the price per share of
R27.84.
The appellants’ damages, according to the pleadings,
arose from this diminution in value of the ABIL shares, multiplied by

the number of shares that they held, which resulted in the first
appellant allegedly suffering a loss of R721 384 512,
and
the second appellant, a loss of R1 341 224 294.
[5]
The particulars of claim set out numerous instances of the directors’
alleged misconduct. They include the publication
of false financial
statements in respect of both entities; the authorisation of the
publication, in relation to a rights issue,
of a prospectus
containing false financial statements and other financial information
that was misleading; the authorisation of
a loan, at meetings or in
terms of
s 74
of the
Companies Act, in
contravention of
s 45
in
circumstances where it could be foreseen that the loan would not be
repaid; the appointment of an executive director who did
not possess
the necessary skills and expertise; failing to make provision for
losses sustained as a result of bad business decisions;
utilising
flawed credit provisioning models; pursuing aggressive and reckless
accounting practices; and pursuing a rights offer
on behalf of ABIL
on false premises. In para 24 of the particulars of claim the
appellants locate the statutory basis for their
claim against the
directors:
‘
In
the circumstances, and by reason of section 218(2) of the Act, the
directors are liable to compensate the first and second plaintiffs

for the damages they have suffered. . . .
’
[6]
The directors excepted to the particulars of claim on three bases,
the relevant parts of which are reproduced hereunder:
‘
EXCEPTION
1
The
plaintiffs’ claim is premised on the defendants, in their
capacities as directors of ABIL and African Bank, having conducted

themselves in a particular manner . . . .
The
directors’ conduct is alleged to have resulted in losses on the
part of African Bank and ABIL “which in turn caused
the share
price of the ABIL shares . . .  to drop. . .”.
The
loss which the plaintiffs claim is the reduction in the value of the
shares in ABIL.
On
the basis advanced by the plaintiffs the entities which suffered loss
as a result of the directors’ conduct were African
Bank and
ABIL . . . .
The
loss in respect of which the plaintiffs claim is a loss which is
reflected in the share price of ABIL, as a result of the loss

sustained by ABIL and African Bank in consequence of the directors’
conduct.
The
plaintiffs have not set out facts, or alleged any basis, entitling
them to recover the losses suffered by them in consequence
of the
diminution in the share price of ABIL.
In
the result the plaintiffs’ claim against the defendants lack
averments necessary to sustain a cause of action.
EXCEPTION
2
The
plaintiffs rely on
section 218(2)
of the
Companies Act
. . .
Section
218(2)
of the
Companies Act provides
:
“
Any
person who contravenes any provision of this Act is liable to any
other person for any loss or damage suffered by that person
as
a result of that contravention
.”
The
only provisions of the
Companies Act identified
by the plaintiffs are
section 76(3)
and
section 22(1)
. . . and
sections 74
and
45
.
The
plaintiffs have not alleged that the damages which they claim were
suffered “
as a result
of
” the contravention
of
sections 45
,
74
,
76
(3) or
section 22(1)
of the
Companies Act.
Instead
the plaintiffs allege that the damages which they suffered
are the consequence of a diminution in the value of the ABIL shares,

which diminution resulted from losses sustained by African Bank and
ABIL.
In
the result the amended particulars of claim do not contain
allegations entitling the plaintiffs to rely on
section 218(2)
of the
Companies Act and
the particulars of claim are accordingly
excipiable.
EXCEPTION
3
In
the amended particulars of claim the plaintiffs allege that the
defendants authorised the publication of a prospectus containing

false or misleading information . . . .
In
the amended particulars of claim the plaintiffs set out certain
details in respect of the false and misleading information in
the
prospectus . . . .
The
authorisation of the prospectus is alleged to be a misrepresentation
. . . .
The
plaintiffs do not allege that they relied on the representation
allegedly made by the defendants, or that they acted on the
strength
of the representation . . . or that they have suffered damages as a
result of the representation . . . .
In
the result the plaintiffs’ particulars of claim do not contain
sufficient averments to sustain a cause of action based
on the
representations . . . and the particulars of claim are accordingly
excipiable.’
[7]
In respect of the claim against Deloitte (claim B), the appellants
alleged that during the period between December 2012 and
December
2014, Deloitte was tasked by ABIL to audit and report on the
financial standing of ABIL and African Bank. The appellants
alleged
that Deloitte had, in respect of African Bank’s annual
financial statements for the years ending December 2012 and
December
2013, reported that the financial statements fairly presented the
Bank’s financial position. The reports were ‘false’,

so the appellants said, in that the financial statements did not
reveal the true state of affairs at the Bank. The falsity arose,
so
it was alleged
,
as
a result of:
‘
[T]he
deliberate,
alternatively
,
negligent failure on the part of the auditors to take sufficient
steps to rectify and disclose to the investors and shareholders
of
African Bank and ABIL, including the plaintiffs (the plaintiffs
constituting third parties as contemplated in
section 46(3)
of the
[Auditing Profession Act 26 of 2005]) the true state of affairs at
African Bank in the financial statements.’
The
appellants went on to state that Deloitte deliberately failed to
qualify the financial statements.
[8]
The appellants alleged that Deloitte knew, or could reasonably have
been expected to know that the audit reports would induce
them to act
or refrain from acting in some way, as contemplated in s 46(3) of the
Auditing Profession Act 26 of 2005 (the APA).
[1]
Had Deloitte performed proper audits, the appellants would have
convened a meeting of the shareholders of ABIL and caused the removal

of the errant directors. That would have put an end to their
mismanagement of African Bank and prevented further losses. As a
result of Deloitte’s audit reports, so it was asserted, the
appellants did not take these preventive measures, the directors

continued to mismanage the Bank and it continued to suffer loss. The
ongoing losses suffered by the Bank caused ABIL to suffer
loss in
that its shares in the Bank diminished in value; and in turn, the
plaintiffs suffered losses in the amounts set out at
the end of para
4 above.
[9]
Deloitte, like the directors, excepted to the particulars of claim.
Its exceptions read as follows:
‘
FIRST
EXCEPTION: THE ALLEGED WRONG WAS COMMITTED AGAINST AFRICAN BANK, NOT
AGAINST THE PLAINTIFFS
The
plaintiffs are shareholders of ABIL, the holding company of African
Bank.
According
to the plaintiffs, ABIL “
tasked
”
Deloitte to audit and report on the financial standing of ABIL and
African Bank . . . .
ABIL’S
shareholders have no claim over any assets of ABIL and/or African
Bank and merely have a personal right to participate
in ABIL on the
terms of its memorandum of incorporation.
Consequently,
any culpable failure by Deloitte to discharge its duties pursuant to
its appointment as African Bank’s statutory
auditor:
Constitutes
a breach of its duties to ABIL and/or African Bank, not to individual
shareholders of ABIL in their capacity as such;
and
May
have caused a loss for African Bank – not for ABIL or for
ABIL’S shareholders, in their capacity as such.
Shareholders
of ABIL have no claim in law against a third party which caused any
loss which African Bank may have suffered. The
diminution of the
value of the shares held by ABIL in African Bank and by the
plaintiffs in ABIL is merely a reflection of the
loss suffered by
African Bank.
In
the premises, [the claim against Deloitte] lacks allegations
necessary to sustain a cause of action.
SECOND
EXCEPTION: DELOITTE OWED NO LEGAL DUTY TO THE PLAINTIFFS AS
INDIVIDUAL ABIL SHAREHOLDERS
The
plaintiffs’ claim against Deloitte is a delictual claim for
pure economic loss.
The
plaintiffs’ claim is based upon negligent misstatements
allegedly made by Deloitte in expressing audit opinions in respect
of
the financial statements of African Bank.
At
common law, a statutory auditor of a company owes its legal duties to
the company itself and to the shareholders in general meeting;
it
owes no legal duty to individual shareholders in their capacity as
such.
Further,
the purpose of statutory audit of financial statements is to enable
shareholders acting as a collective to oversee management;
not to
enable individual shareholders from acting or refraining to act in
any way, whether in connection to their oversight over
management or
otherwise.
The
plaintiffs rely on section 46(3) of [the APA] to found a legal duty
to them, based on the alleged knowledge of Deloitte that
the
directors would use the [annual financial statements] to induce them
to refrain from exercising their rights as shareholders
in a specific
way.
Section
46 – the heading of which is “
limitation of liability
”
– does not change the common-law position and provides in
subsection (4) that:
“
Nothing
in subsections (2) or (3) confers upon any person a right of action
against a registered auditor which, but for the provisions
of those
subsections, the person would not have had.”
In
the premises, [the claim against Deloitte] lacks allegations
necessary to sustain a cause of action.’
[10]
In short, the directors and Deloitte adopted the position that the
claims by the appellants – which, if proven, enured
only to the
company – were unsustainable at common law, at the instance of
shareholders in their capacity as such, and could
also not be brought
in terms of
s 218(2)
of the
Companies Act. Deloitte
was adamant that
it owed a legal duty to the company but not to the appellants in
their capacities as individual shareholders in
the company.
[11]
The court below, in adjudicating the exceptions in relation to Claim
A, had regard to
s 218(2)
of the
Companies Act which
, although
appearing in the exceptions set out above, we restate for
convenience:
‘
Any
person who contravenes any provisions of this Act is liable to any
other person for any loss or damage suffered by that person
as a
result of that contravention.’
Alongside
this provision, Molopa-Sethosa J considered s 76(3) of the Act, which
the appellants contended the directors had contravened
in conducting
the affairs of the company as alleged. Section 76, which concerns the
standards of conduct expected from company
directors . . . is, in
essence, a codification of the common law on fiduciary duties.
Section 76(3) essentially provides that directors
must exercise their
powers and perform their functions in good faith and for a proper
purpose; in the best interests of the company;
and with the degree of
skill, care and diligence reasonably expected of directors. Section
76(3) reads as follows in relevant part:
‘
(3)
Subject to subsections (4) and (5), a director of a company, when
acting in that capacity, must exercise the powers and perform
the
functions of a director—
(a)
in
good faith and for a proper purpose;
(b)
in the best interests of
the company; and
(c)
with
the degree of care, skill and diligence that may reasonably be
expected of a person—
(i)
carrying out the same functions in relation to the company as those
carried out by that director; and
(ii)
having the general knowledge, skill and experience of that director.’
[12]
At para 26 of the judgment, the following appears concerning
s 218(2)
of the
Companies Act:
‘
Section
218(2) is worded widely in respect of individuals who fall within its
ambit; however, it is restricted in its application and applies
only
to “damage
suffered
by that person
as
a result of that contravention”. This restriction requires a
particular person to have suffered damage as a result of a
particular
contravention. What this means is that the particular person who has
suffered damage must be a person who is able to
invoke a claim for
damages as a result of a particular contravention of the
Companies
Act. In
para 21 of the amended particulars of claim, the plaintiffs’
recourse to
s 218(2)
is articulated as follows:
“
21
The directors’ conduct as aforesaid:
21.1
constituted a breach of the provisions of
section 76(3)
of the
Companies Act and
resulted in the business of ABIL and African Bank
being carried out recklessly or with gross negligence, in
contravention of the
provisions of section 22(1) of the Act . . . .’
Noting
that s 76(3) sets the standard of conduct expected of a director, the
court below stated that the subsection does not, however,
‘deal
with the liability of a director’. That subject, said the court
below, is dealt with in
s 77
of the
Companies Act, which
reads as
follows:
’
77
Liability of directors and prescribed officers—
.
. .
(2)
A director of a company may be held liable—
(a)
in accordance with
the principles of the common law relating to breach of a fiduciary
duty, for any loss, damages or costs sustained
by the company as a
consequence of any breach by the director of a duty contemplated in
section 75
,
[2]
76(2) or 76(3)
(a)
or
(b)
.
. . .’
[13]
Molopa-Sethosa J reached the following conclusion:
‘
Therefore,
a claim that alleges that directors are liable for damages as a
result of a breach of
s 76(3)
must be brought in terms of
s 77(2)
,
which specifically creates the liability for a breach of
s
76(3).
’
[3]
The
court went on to state the following:
‘
Where
a statute expressly and specifically creates liability for the breach
of a section, then a general section in the same statute
cannot be
invoked to establish a co-ordinate liability; see
Gentiruco
AG V Firestone SA (Pty) Ltd
1972 (1) SA 589
(A) at 603. This is the result of the
generalia
specialibus non derogant
maxim
in terms of which general provisions do not derogate from special
provisions.’
[4]
[14]
The court below stated that if
s 218(2)
had the breadth ascribed to
it by the appellants, it ‘would be a drastic departure from a
core principle of company law’.
[5]
Molopa-Sethosa J then embarked on an extensive examination of case
law, dealing with the well-established principle of statutory

interpretation that a statute should not be taken to alter the common
law unless it is clear that that is what was intended; and
even then,
no more than what is necessary. She dealt with the qualification that
statutes must be interpreted in the context of
constitutional values
and that the common law must be developed to promote the spirit,
purport and objects of the Bill of Rights
and referred to
Constitutional Court authority in that regard. The court below
proceeded to hold as follows:
‘
It
cannot be said that there is anything in
s 218(2)
to indicate that
the legislature intended to alter the common law and allow
reflective-loss claims to be brought under that section.’
[6]
It
was emphasised that
s 77(2)
required claims for a breach of
s 76(3)
to be brought ‘in accordance with the principles of the common
law’.
[7]
Molopa-Sethosa J
concluded on this score by holding that ‘a reflective-loss
claim cannot be brought under
s 77(2)
, because the common law does
not permit such a claim. What the plaintiffs’ argument involves
is a finding that the
Companies Act allows
a reflective-loss claim
which the common law prohibits if the claim is brought under
s
76(3)
’.
[8]
[15]
In respect of the appellants’ reliance on
s 22
of the
Companies
Act the
court below referred to the provisions of
s 77(3)
(b)
,
[9]
which deal explicitly with losses suffered by a company as a
consequence of a director having acquiesced in the carrying on of
the
company’s business, despite knowing that it was being conducted
in a manner prohibited by
s 22.
Thus, it held, as in the case of
their reliance on
s 76
, the appellants’ reliance on
s 22
was
misconceived.
[16]
Dealing with the contention on behalf of the appellants that the
words ‘as a result of’ in
s 218(2)
do not import a legal
causative requirement, the court below held as follows:
‘
Basically,
what the plaintiffs suggest in their interpretation of
s 218(2)
is
that all the requirements of the common law relating to fault,
foreseeability, causation and the proper plaintiff should be

discarded, and this cannot be so.’
[10]
In
arriving at that conclusion, the court below rejected the appellants’
reliance on the decision of the Constitutional Court
in
Department
of Land Affairs and Others v Goedgelegen Tropical Fruits (Pty) Ltd
[2007] ZACC 12
;
2007 (6) SA 199
(CC). The Constitutional Court was
there dealing with causation in relation to the application of the
Restitution of Land Rights Act 22 of 1994
and the meaning of the
phrase ‘as a result of’ in
s 2(1)
of that Act. It gave
that expression an extended meaning because it was considering a
remedial measure to redress past imbalances
and the effects of
historical dispossession of rights in land.
[11]
The court below held that the comparison with
s 218(2)
of the
Companies Act was
untenable.
[12]
[17]
Late in its judgment,
[13]
the
court below considered the judgment of this court in
Itzikowitz
v Absa Bank Ltd
[2016] ZASCA 43
;
2016 (4) SA 432
(SCA) where there is a discussion of
the principle against reflective loss in relation to companies and
their shareholders.
[14]
The
underlying principles that find application are, first, that a
company has a distinct legal personality. Secondly, holding
shares in
a company merely gives shareholders the right to participate in the
company on the terms of the memorandum of incorporation,
which right
remains unaffected by a wrong done to the company and, in the light
thereof, a personal claim by a shareholder against
a wrongdoer who
caused loss to the company is misconceived.
[15]
Thus, the court below was fortified in its view that the appellants
could not rely on
s 218(2)
of the
Companies Act for
their
reflective-loss claim.
[18]
The court below went on to consider the appellants’ claim
against Deloitte and the related exceptions. It considered
the
appellants’ ‘pivotal’ allegation to be the
following: ‘In consequence of ABIL being the sole shareholder

of African Bank, any
acts
or omissions by third parties causing patrimonial loss to African
Bank
would
consequently
result
in ABIL suffering patrimonial loss’.
[16]
It held as follows:
‘
It
is clear that the plaintiffs sue for a loss caused by a third party
(Deloitte) to African Bank which allegedly resulted in an
equivalent
loss to ABIL. By parity of this reasoning, ABIL’s minority
shareholders would then also have suffered patrimonial
loss due to
ABIL’s loss.
This
analysis is not correct. African Bank suffered the loss and it is the
proper plaintiff. In circumstances where African Bank
has a claim
against the third party, the shareholders of African Bank (or of its
shareholder) have no claim in their own name.’
[17]
[19]
Consequently, the court below upheld the exceptions by the directors
and Deloitte in respect of both Claims A and B with costs,
and
granted the plaintiffs an opportunity to amend their particulars of
claim, if so advised. It is against the order based on
the
conclusions set out above, that the present appeal is directed.
[20]
Deloitte was given leave to cross-appeal conditionally, ostensibly on
the basis that if this court found that liability attached
to the
directors in terms of
s 218(2)
, it did not follow that there was
liability on the part of Deloitte, located either statutorily or
otherwise. It must be borne
in mind that in their claim against
Deloitte, the appellants did not rely expressly on
s 218(2).
[21]
In considering whether the essential conclusions of the court below
are correct it is necessary, at the outset to deal with
the
contention by the appellants, near the commencement of their heads of
argument, that the directors’ reliance on the legally

recognised bar against a reflective loss claim is nowhere to be found
in their exceptions and, consequently, the court below erred
in
having regard to submissions in that regard. This was all the more
so, it was contended, if regard is had to rule 23(3) of the
Uniform
Rules of Court, which provides that the grounds upon which an
exception is founded ‘shall be clearly and concisely
stated’.
That contention can be disposed of briefly. The rule against claims
for reflective loss will be examined in some
detail later in this
judgment. For present purposes it suffices to state its essentials:
Where a wrong is done to a company, only
the company may sue for
damage caused to it. This does not mean that the shareholders of a
company do not consequently suffer any
loss, for any negative impact
the wrongdoing may have on the company is likely also to affect its
net asset value and thus the
value of its shares. The shareholders,
however, do not have a direct cause of action against the wrongdoer.
The company alone has
a right of action. In their exceptions, the
directors contended that ABIL and/or African Bank ought to have
brought an action,
if one was sustainable, and not the appellants as
shareholders in ABIL. The exceptions accordingly encompassed the no
reflective
loss principle. There is thus no merit in this point.
[22]
In
deciding an exception a court must take the facts alleged in the
pleading as being correct. It is for the excipient to satisfy
the
court that the conclusion of law set out in the particulars of claim
is unsustainable. The court may uphold the exception only
if it is
satisfied that the cause of action or conclusion of law cannot be
sustained on every interpretation that can be put on
those facts.
[18]
As Harms JA noted in
Telematrix
,
exceptions are a useful tool to ‘weed out’ bad claims at
an early stage and an unnecessarily technical approach is
to be
avoided.
[19]
The facts are
what must be accepted as correct; not the conclusions of law.
[23]
In the present case one must therefore accept that there was a
diminution in value of the shares held by the appellants; that
losses
were caused to both ABIL and African Bank; and that these losses were
due to the alleged misconduct on the part of the directors.
What is
in issue, is whether
s 218(2)
of the
Companies Act provides
a basis
for a claim by the appellants, in their capacity as individual
shareholders in ABIL, against the directors based on contraventions

by the directors of
ss 22(1)
,
45
and
74
and breaches of
s 76(3)
of
the
Companies Act. In
respect of the auditors the issue is whether,
in the circumstances pleaded, they owed the appellants, as individual
shareholders
in ABIL, legal duties not to have made
misrepresentations in African Bank’s financial statements and
to have qualified the
audit; and whether, in that regard, reliance
could be placed on
s 46(3)
of the APA and
s 218(2)
of the
Companies
Act to
sustain a cause of action. To that end one must accept that
there were misrepresentations by Deloitte relating to African Bank’s

financial statements, as well as a failure to qualify the financial
statements, and that this commission and omission caused loss
to
African Bank and consequently a diminution in value of the
appellants’ shares.
[24]
A good starting point in considering whether the exceptions were
correctly upheld, is a revisiting of the rule against claims
by
shareholders for reflective loss.  In
Itzikowitz
[20]
this court restated, with reference to the prevailing authorities,
the following established principle:
‘
The
notion of a company as a distinct legal personality is no mere
technicality – a company is an entity separate and distinct

from its members and property vested in a company is not and cannot
be regarded as vested in all or any of its members. . . . A

shareholder’s general right of participation in the assets of
the company is deferred until winding-up, and then only subject
to
the claims of creditors.’
[25]
Ponnan JA then went on to consider the following statement in
Lawsa
[21]
concerning our law on the rights of shareholders to sue personally
when a wrong is perpetrated against a company:
‘
Since
the shareholder’s shares are merely the right to participate in
the company on the terms of the memorandum of incorporation,
which
right remains unaffected by a wrong done to the company, a personal
claim by a shareholder against the wrongdoer to recover
a sum equal
to the diminution in the market value of his or her shares, or equal
to the likely diminution in dividend, is misconceived.’
[26]
Ponnan JA recognised that for that proposition in
Lawsa
reliance was placed on
Prudential
Assurance Co Ltd v Newman Industries Ltd
(No
2)
,
[22]
where the following was stated at 222-223:
‘
[W]hat
[a shareholder] cannot do is to recover damages merely because the
company in which he is interested has suffered damage.
He cannot
recover a sum equal to the diminution in the market value of his
shares, or equal to the likely diminution in dividend,
because such a
“loss” is merely a reflection of the loss suffered by the
company. The shareholder does not suffer any
personal loss. His only
“loss” is through the company, in the diminution in the
value of the net assets of the company,
in which he has . . .
shareholding.’
[27]
Itzikowtiz
also referred to the more recent judgment of the
House of Lords in
Johnson v Gore Wood & Co (a firm)
[2000]
UKHL 65
;
[2001] 1 All ER 481
;
[2002] 2 AC 1
(HL), where Lord Bingham
observed:
‘
(1)
Where a company suffers loss caused by a breach of duty owed to it,
only the company may sue in respect of that loss. No action
lies at
the suit of a shareholder suing in that capacity and no other to make
good a diminution in the value of the shareholder’s

shareholding where that merely reflects the loss suffered by the
company. A claim will not lie by a shareholder to make good a
loss
which would be made good if the company’s assets were
replenished through action against the party responsible for the

loss, even if the company, acting through its constitutional organs,
has declined or failed to make good that loss. . . . (2) Where
a
company suffers loss but has no cause of action to sue to recover
that loss, the shareholder in the company may sue in respect
of it
(if the shareholder has a cause of action to do so), even though the
loss is a diminution in the value of the shareholding.
. . . (3)
Where a company suffers loss caused by a breach of duty to it, and a
shareholder suffers a loss separate and distinct
from that suffered
by the company caused by breach of a duty independently owed to the
shareholder, each may sue to recover the
loss caused to it by breach
of the duty owed to it but neither may recover loss caused to the
other by breach of the duty owed
to that other.’
[23]
[28]
Dealing with the first principle, Lord Millett stated that the
rationale for the rule was to avoid double recovery:
‘
The
position is, however, different where the company suffers loss caused
by the breach of a duty owed both to the company and to
the
shareholder. In such a case the shareholder’s loss, in so far
as this is measured by the diminution in value of his shareholding
or
the loss of dividends, merely reflects the loss suffered by the
company in respect of which the company has its own cause of
action.
If the shareholder is allowed to recover in respect of such loss,
then either there will be double recovery at the expense
of the
defendant or the shareholder will recover at the expense of the
company and its creditors and other shareholders. Neither
course can
be permitted. This is a matter of principle; there is no discretion
involved. Justice to the defendant requires the
exclusion of one
claim or the other; protection of the interests of the company’s
creditors requires that it is the company
which is allowed to recover
to the exclusion of the shareholder.’
[24]
He
went on to say the following:
‘
It
is of course correct that the diminution in the value of the
plaintiffs’ shares was by definition a personal loss and not

the company’s loss, but that is not the point. The point is
that it merely reflected the diminution of the company’s

assets. The test is not whether the company could have made a claim
in respect of the loss in question; the question is whether,
treating
the company and the shareholder as one for this purpose, the
shareholder’s loss is franked by that of the company.
If so,
such reflected loss is recoverable by the company and not by the
shareholders.’
[25]
[29]
More recently, in
Novatrust
Limited v Kea Investments Limited and Others
[2014]
EWHC 4061
(Ch), with reference to
Johnson
v Gore Wood & Co
,
[26]
Day v
Cook
[2003]
BCC 256
para 39 and
Gardner
v Parker
[2004] EWCA Civ 781
;
[2004] 2 BCLC 554
para 49, the rule against a
claim by a shareholder that was purely reflective of a loss suffered
by the company was reaffirmed
in paras 54 and 55.
[30]
In 2018 the Court of Appeal considered the scope of the rule against
reflective loss in
Garcia v Marex Financial Ltd
[2018] EWCA
Civ 1468
;
[2018] 3 WLR 1412
;
[2019] QB 173.
Flaux LJ observed that
the justification for the rule is fourfold:
‘
The
four aspects or considerations justifying the rule which emerge from
the authorities, in particular Lord Millett’s speech
in
Johnson
v Gore Wood & Co
[2002]
2 AC 1
, are: (i) the need to avoid double recovery by the claimant
and the company from the defendant …; (ii) causation, in

the sense that if the company chooses not to claim against the
wrongdoer, the loss to the claimant is caused by the company’s

decision not by the defendant’s wrongdoing …; (iii)
the public policy of avoiding conflicts of interest particularly
that
if the claimant had a separate right to claim it would discourage the
company from making settlements …; and (iv) the
need to
preserve company autonomy and avoid prejudice to minority
shareholders and other creditors.’
[27]
[31]
Blackman,
Jooste and Everingham provide a slightly different rationale for the
rule against reflective loss in their
Commentary
on the
Companies Act
,
[28]
which is perhaps more convincing. On the ‘double recovery’
justification for the rule, and the view that allowing a
personal
action would subvert the rule in
Foss
v Harbottle
,
[29]
the authors say the following:
‘
This
explanation is misleading. When the value of shares is depreciated or
destroyed as a consequence of harm done to the company,
the
shareholders suffer harm, albeit that the harm is “indirect”.
A person who suffers indirect harm, suffers harm.
And there is no
principle of law that denies a person a claim for damages, merely
because the harm he suffered was “indirect
harm”,
although of course the question of remoteness of damage may arise.
The
principle is that where harm is wrongfully caused directly to A (eg
the company)
and
indirectly to B (eg the company’s
shareholders), the law gives the right of action to claim
compensation to A. It does so
because if, instead, the right were
given to B, A and A’s creditors would be prejudiced. What is
more, B’s action would
involve a determination of A’s
loss. In the case of a company, each shareholder would have an
action, and consequently there
would be a multiplicity of actions,
many of which would be for very small sums. If, instead, the cause of
action is given to A,
the law will not only ensure that A suffers no
loss: it will also ensure that B suffers no loss. This is not because
B will, then,
merely suffer “indirect” or “incidental”
harm. It is because B suffers no harm at all. A’s right of

action is an asset which, itself, compensates A for his loss. If A
(eg the company) is able to obtain full compensation from the

wrongdoer, A’s financial position is unaffected. And therefore
B’s financial position (eg the value of the company’s

shareholders’ shares) is also unaffected.’
And,
in a later paragraph:
‘
It is usually said that
if
both
the
company
and
the
shareholder were given the right to recover, the wrongdoer would
suffer “double jeopardy” and the shareholder
might
receive “double compensation”. If the shareholder sued
first, the wrongdoer would be placed in double jeopardy
because,
after paying the shareholder, he would still be liable to the
company; and if, then, the company obtained recovery, the
shareholder
would receive double compensation. However, despite the
frequency with which this argument has been advanced,
it is mistaken.
If the company has the right of action, the wrong done to it causes
its shareholders no harm. Hence the shareholder
can have no action.
The problem of “double jeopardy” and “double
compensation” simply does not arise. Thus,
it is not merely the
company's existence as a separate legal person that deprives the
shareholder of an action against the wrongdoer.
What deprives the
shareholder of a right of action is the fact that
the
company has a right to recover damages for the loss it has suffered
.’
There
can however be no doubt that there are sound policy and
jurisprudential reasons for the rule.
[32]
We pause to note that
Novatrust
also
dealt with derivative claims. In a situation where wrongdoers
themselves control the company, so that they can prevent the
taking
of the necessary steps, any one or more of its members may bring what
is known as a derivative action, that is, an action
by an individual
shareholder, in own name, against the wrongdoers for relief to be
granted to the company, the action being one
on the company’s
behalf.
[30]
In England and
Wales derivative actions are comprehensively regulated by
Part 11
of
Chapter 1 of the Companies Act 2006. In South Africa it is regulated
by s 165 of the Companies Act. In both statutes there are

requirements that must be met before such a claim may be brought.
Derivative claims are not in issue in this appeal.
[33]
In
Giles v Rhind
[2002] 4 All ER 977
;
[2002] EWCA Civ 1428
,
the Court of Appeal gave effect to the third policy consideration set
out by Lord Bingham in
Johnson
, referred to in para 27 above.
It held that the rule against claims for reflective loss did not
operate to exclude a shareholder’s
personal action for
reflective loss against a wrongdoer who had deprived the company of
funds and who successfully obtained security
for costs against the
company, essentially stifling the company’s claim so that its
directors discontinued the company’s
action against him. The
shareholder then moved to litigate in the company’s stead. In
those circumstances the Court of Appeal
permitted a shareholder’s
personal claim, notwithstanding the shareholder’s loss being,
in part, a reflection of the
loss suffered by the company. Waller LJ
(paras 33-35) justified the exception as follows:
‘
In
Johnson
v Gore Wood & Co
there was no difficulty about the company having a cause of action
and being able to recover on the cause of action. I also think
that
in the light of Lord Bingham's observation that it is important for
the “court to be astute to ensure that the party
who has in
fact suffered loss is not arbitrarily denied compensation”, it
is clear that he had the particular facts in
Johnson
v Gore Wood & Co
in mind, ie that there had been nothing to stop the company
continuing with its action if it had so chosen.
One
situation which is not addressed is the situation in which the
wrongdoer by the breach of duty owed to the shareholder has actually

disabled the company from pursuing such cause of action as the
company had. It seems hardly right that the wrongdoer who is in

breach of contract to a shareholder can answer the shareholder by
saying “the company had a cause of action which it is true
I
prevented it from bringing, but that fact alone means that I the
wrongdoer do not have to pay anybody”.
In
my view there are two aspects of the case which [Giles] seeks to
bring which point to [him] being entitled to pursue his claim
for the
loss of his investment. First, as it seems to me, part of that loss
is not reflective at all. It is a personal loss which
would have been
suffered at least in some measure even if the company had pursued its
claim for damages. Secondly, even in relation
to that part of the
claim for diminution which could be said to be reflective of the
company's loss, since, if the company had
no cause of action to
recover that loss the shareholder could bring a claim, the same
should be true of a situation in which the
wrongdoer has disabled the
company from pursuing that cause of action. I accept that on the
language of Lord Millett's speech there
are difficulties with this
second proposition, but I am doubtful whether he intended to go so
far as his literal words would take
him. Furthermore it seems to me
that on Lord Bingham's speech supported by the others, it would not
be right to conclude that the
second proposition is unarguable.’
[34]
The approach taken in
Giles
v Rhind
was,
of course, to mitigate the inflexible proper plaintiff rule set out
more than 175 years ago in
Foss
v Harbottle
.
[31]
Prudential
Assurance
set that case, which is the genesis of the rule against claims for
reflective loss by shareholders, in historic perspective and
in
relation to derivative claims. In
Prudential
Assurance
(at
210-212), the Court of Appeal stated the following:
‘
A
derivative action is an exception to the elementary principle that A
cannot, as a general rule, bring an action against B for
to recover
damages or secure other relief on behalf of C for an injury done by B
to C. C is the proper plaintiff because C is the
party injured, and,
therefore, the person in whom the cause of action is vested. This is
sometimes referred to as the rule in
Foss
v Harbottle
[1843] EngR 478
;
(1843) 2 Hare
461
when applied to corporations, but it has a wider scope and is
fundamental to any rational system of jurisprudence. The rule in
Foss
v Harbottle
also embraces a
related principle, that an individual shareholder cannot bring an
action in the courts to complain of an irregularity
(as distinct from
an illegality) in the conduct of the company’s internal affairs
if the irregularity is one which can be
cured by a vote of a company
in general meeting.
The
classic definition of the rule in
Foss
v Harbottle
is stated in
the judgment of Jenkins LJ in
Edwards
v Halliwell
[1950] 2 All ER
1064
at 1066-7 as follows. (1) The proper plaintiff in an action in
respect of a wrong alleged to be done to a corporation is, prima

facie, the corporation. (2) Where the alleged wrong is a transaction
which might be made binding on the corporation and on all
its members
by a simple majority of the members, no individual member of the
corporation is allowed to maintain an action in respect
of that
matter because, if the majority confirms the transaction,
cadit
quaestio
; or, if the
majority challenges the transaction, there is no valid reason why the
company should not sue. (3) There is no room
for the operation of the
rule if the alleged wrong is
ultra
vires
the corporation,
because the majority of members cannot confirm the transaction. (4)
There is also no room for the operation of
the rule if the
transaction complained of could be validly done or sanctioned only by
a special resolution or the like, because
a simple majority cannot
confirm a transaction which requires the concurrence of the greater
majority. (5) There is an exception
to the rule where what has been
done amounts to fraud and the wrongdoers are themselves in control of
the company. In this case
the rule is relaxed in favour of the
aggrieved minority, who are allowed to bring a minority shareholders’
action on behalf
of themselves and all others. The reason for this is
that, if they were denied that right, their grievance could never
reach the
court because the wrongdoers themselves, being in control,
would not allow the company to sue.’
[35]
As indicated above, there has been statutory and judicial
intervention to address concerns against injustices resulting from

the rule against claims for reflective loss being applied inflexibly.
Commentators, whilst also voicing concerns that an inflexible

application of the rule might lead to injustice, have not suggested
that it be abolished. In P Koh’s contribution on ‘The

Shareholder’s Personal Claim: Allowing Recovery for Reflective
Losses’
[32]
she
concludes as follows at 888-889:
Undoubtedly,
the no reflective loss principle, as laid down in
Prudential
Assurance
and as clarified in
Johnson
, is driven by sound
policy reasons. However, these policy reasons are not always
applicable nor are they in themselves unassailable.
As the task of
any court should be to achieve justice and fairness on the particular
facts before it, there is much to be said
for retaining discretion
over whether to allow a personal suit or not. Justice is necessarily
context-driven. To apply a rigid
rule regardless of context,
therefore, raises the real risk of denying the wronged party
appropriate remedy. …
However,
to ensure that the cause brought by a shareholder is indeed
genuine
,
the asserted claim must, in the first place, be one that can properly
be classified as a personal one, taking account of the source
and
nature of the right asserted. Only then should the court entertain
the shareholder’s claim and proceed to consider whether
the
policy concerns that support the rule may be adequately dealt with in
the particular case.’
[33]
[36]
In New Zealand, the legislature has provided for shareholders to
bring an action in instances where there is a duty owed to
them
.
It also set out, though not exhaustively, duties of directors that
are owed to shareholders and not to the company, and conversely,

those owed to the company and not to shareholders (which include the
instances relied on by the appellants in the present case).
It was
emphatic that an action may not be brought to recover any loss in the
form of a diminution in the value of shares in the
company by reason
of loss suffered by the company. Thus, s 169 of the Companies Act
1993 (New Zealand) provides:
‘
169
Personal actions by shareholders against directors
(1)
A shareholder or former shareholder may bring an action against a
director for breach of a duty owed to him or her as a shareholder.
(2)
An action may not be brought under subsection (1) to recover any loss
in the form of a reduction in the value of shares in the
company or a
failure of the shares to increase in value by reason only of a loss
suffered, or a gain forgone, by the company.
(3)
Without limiting subsection (1), the duties of directors set out in
—
(a)
section 90 (which relates to the duty
to supervise the share register); and
(b)
section 140 (which relates to the duty
to disclose interests); and
(c)
section 148 (which relates to the duty
to disclose share dealings)
—
are
duties owed to shareholders, while the duties of directors set out
in
—
(d)
section 131 (which relates to the duty
of directors to act in good faith and in the best interests of the
company); and
(e)
section 133 (which relates to the duty
to exercise powers for a proper purpose); and
(f)
section 135 (which relates to reckless
trading); and
(g)
section 136 (which relates to the duty
not to agree to a company incurring certain obligations); and
(h)
section 137 (which relates to a
director’s duty of care); and
(i)
section 145 (which relates to the use
of company information)
—
are
duties owed to the company and not to shareholders.’
[37]
There can be no doubt that when the Companies Act became operative on
1 May 2011, and thereafter, our law recognised the rule
against
claims for reflective loss, more particularly, in respect of claims
by shareholders for compensation for a diminution in
the value of
their shares due to loss occasioned to the company by a wrongdoer.
That much is clear from what is set out in paras
24 to 27 above. Our
courts applied the law as applied by English courts over time. See,
in addition to the South African judgments
already referred to,
Gihwala
and Others v Grancy Property Ltd and Others
[2016]
ZASCA 35
; (SCA) 2017 (2) 337 (SCA) paras 107-112 and
Off-Beat
Holiday Club and Another v Sanbonani Holiday Spa Shareblock Ltd and
Others
[2016] ZASCA 62
;
2016 (6) SA 181
(SCA) para 41 and the cases there
cited.
[38]
The appellants’ claims against the directors are
quintessentially reflective loss claims. The essentials of the
particulars
of claim are that:
(a)
The plaintiffs are shareholders of ABIL.
(b)
The directors were at all material times directors of ABIL.
(c)
African Bank was a wholly owned subsidiary of ABIL.
(d)
African Bank carried out the business of a bank.
(e)
The directors in their capacity as directors of ABIL conducted the
business of ABIL and African Bank recklessly and in contravention
of
ss 22(1), 74 and 45 of the Companies Act and in breach of s 76(3) of
that Act.
(f)
The breach of the aforesaid provisions resulted in significant losses
on the part of African Bank and consequently ABIL.
(g)
As a result of the loss suffered by ABIL, the appellants suffered a
diminution in the value of their ABIL shares. The losses
‘in
turn caused the share price… to drop from R28.15 ... to ... 31
cents ... being a total diminution of R27.84 per
share’.
Simply
put, the wrong done to the company (ABIL) is the basis of the
appellants’ claim and the diminution in share value is
directly
correlated to the losses suffered by ABIL. The belated attempt in a
submission before us, namely, that the diminution
in value of the
appellant’s shares, although arising from a chain of events
which includes the losses suffered by African
Bank and ABIL, is a
loss distinct from the losses suffered by African Bank and ABIL, is
fallacious. Linked to that submission is
one concerning the manner in
which listed shares are valued, that is, the price a willing buyer is
prepared to pay to a willing
seller. That ignores the very basis of
the rule referred to in the first principle stated by Lord Bingham in
Johnson
and captured in the passage from
Lawsa
,
cited in para 25 above. In any event, that is not how the loss and
its cause were pleaded by the appellants. There can be no doubt,
on
the appellants’ version of events, that ABIL would have a claim
against the directors and that at common law, the existence
and
viability of that claim precluded a personal claim by the
shareholders. In the present case there is no hint by the appellants

of a derivative claim and no assertion of oppression by the majority
of shareholders, or that ABIL was in some way, hindered or
obstructed
in pursuing a claim against the directors.
[39]
There is no independent cause of action as submitted on behalf of the
appellants and no justification of any kind as to why
the appellants’
claim fell within any of the recognised exceptions, or why it would
be unjust to deny the claim or why allowing
it would not do violence
to the sound policy reasons for the retention of the rule, including
a multiplicity of claims by aggrieved
shareholders.
[40]
There is simply no basis in fact for the contention on the part of
the appellants that the claim against the directors falls
with the
second or third principles set out by Lord Bingham in
Johnson
,
cited in para 27 above. We repeat them here for convenience:
‘
(2)
Where a company suffers loss but has no cause of action to sue to
recover that loss, the shareholder in the company may sue
in respect
of it (if the shareholder has a cause of action to do so), even
though the loss is a diminution in the value of the
shareholding. . .
. (3) Where a company suffers loss caused by a breach of duty to it,
and a shareholder suffers a loss separate
and distinct from that
suffered by the company caused by breach of a duty independently owed
to the shareholder, each may sue to
recover the loss caused to it by
breach of the duty owed to it but neither may recover loss caused to
the other by breach of the
duty owed to that other.’
[34]
The
appellants’ claim against the directors do not even begin to
approximate the claims envisaged in (2) and (3).
[41]
Does s 218(2) save the day for the appellants in relation to the
claim against the directors? The short answer is no. The reasons
are
set out hereafter. It is necessary first to have regard to the
purposes of the Companies Act within which s 218(2) is
located.
The Act came into effect on 1 May 2011.The purposes of the Act are,
inter alia, to promote compliance with the Constitution;
to provide
for the creation and use of companies in a manner that enhances the
economic welfare of South Africa as a partner within
the global
economy; to promote the development of the South African economy by
encouraging transparency and high standards of corporate
governance;
and to re-affirm the concept of the company as a means of achieving
economic and social benefits. It was also enacted
to balance the
rights and obligations of shareholders and directors within
companies. The full list of the purposes of the Act
are set out in s
7. Whilst the Act was structured to deal with South African
conditions, the legislature was conscious of the global
economy. In
the interpretation of the Act regard is also to be had to foreign
law, to the extent that this would be appropriate.
In this regard see
s 5(2) of the Act.
[42]
A company is defined in s 1 of the Act as a distinct juristic person.
This distinct personality is no mere technicality.
[35]
It is foundational to company law. As observed in
Itzikowitz,
referred to in para 24 above, property vesting in the company does
not vest in any or all of its members. It is the basis of the
rule
against the claim for reflective loss, as referred to in
Prudential
,
Johnson
,
Itzikowitz
and captured in the statement in
Lawsa
,
referred to in para 25 above.
[43]
Importantly, the legislature must have been aware of the need to
retain those principles of the common law that had been applied
under
preceding legislation that were consonant with our constitutional
values and in line with international company law. The
following
statement in a policy paper published by the Department of Trade and
Industry, entitled ‘South African Company
Law for the 21
st
Century – Guidelines for Corporate Law Reform’,
[36]
which is quoted in the Companies Bill,
[37]
is elucidating:
‘
It
is not the aim of the [Department of Trade and Industry] simply to
write a new Act by unreasonably jettisoning the body of jurisprudence

built up over more than a century. The objective of the review is to
ensure that the new legislation is appropriate to the legal,
economic
and social context of South Africa as a constitutional democracy and
an open economy. Where the current law meets these
objectives, it
should remain as part of company law.’
[44]
A further factor to bear in mind is the presumption that statutory
provisions are not intended to alter or exclude the common
law unless
they do so expressly or by necessary implication.
[38]
Where possible, statutes must be read in conformity with the common
law.
[39]
This enhances legal
certainty and recognises the value of the common law, which has
developed systematically over time.
[40]
[45]
It is in that context that s 218(2) falls to be considered. Section
218(2) reads as follows:
‘
Any
person who contravenes any provision of this Act is liable to any
other person for any loss or damage suffered by that person
as a
result of that contravention.’
When
a wrongdoer ‘contravenes’ the Act and causes loss to a
person, the wrongdoer is liable to that person
.
The ordinary
meaning of ‘contravene’ is ‘to go counter to; to
transgress, infringe (a law, provision, etc); to
act in defiance or
disregard of’.
[41]
The
decriminalisation of company law sanctions was one of the principles
of the policy underlying the Act.
[42]
This indicates that the contravention envisaged in s 218(2) need
not be a criminal offence.
[43]
It suffices to say that the word ‘contravenes’ in
s 218(2) includes a breach or an infringement of any provision

of the Act, ‘which is by nature prescriptive or which in some
way regulates conduct’.
[44]
Sections 22(1), 74, 45 and 76(3), which in the present case the
appellants contend trigger the operation of s 218(2), clearly fall

into this category.
[46]
Section 22(1)
(a)
provides that ‘[a] company must not carry on its business
recklessly, with gross negligence, with intent to defraud any person

or for any fraudulent purpose.’ Section 76(3) provides
:
‘
Subject
to subsections (4) and (5), a director of a company, when acting in
that capacity, must exercise the powers and perform
the functions of
a director
—
(a)
in good faith and for
proper purpose;
(b)
in the best interests of
the company; and
(c)
with the degree of care,
skill and diligence that may reasonably be expected of a person
—
(i)
carrying out the same functions in relation to the company as those
carried out by that director; and
(ii)
having the general knowledge, skill and experience of that director.’
Section
45 is another section of the Companies Act on which the appellants
relied. That section regulates loans or other financial
assistance to
directors or prescribed officers of the company or of a related or
inter-related company, or to a related or inter-related
company or
corporation, or to a member of a related or inter-related
corporation, or to a person related to any such company, corporation,

director, prescribed officer or member. In the appellants’
particulars of claim it was alleged that the directors failed
to vote
against the granting of loans to certain corporations and that these
loans were in contravention of section 45. In not
resisting the
granting of the loans the directors were said to have acted in
contravention of s 22(1) of the Act and, consequently,
the appellants
were entitled to bring a claim against them in terms of s 218(2) of
the Act.
[47]
Henochsberg
,
[45]
in the commentary on s 76(3) of the Companies Act, states the
following:
‘
The
common law position is that a director has to act
bona
fide
and in the best
interests of the company. This is the fundamental duty which
qualifies the exercise of any powers which the directors
in fact have
. . . . The duties to act
bona
fide
and in the best
interests of the company are now entrenched in the Act . . . . With
regard to the duty to act in the best interests
of the company and
who the beneficiary of a director’s duty is, the common law
position is as follows: At common law
directors
owe fiduciary duties to the company
.
. . . Such duties are owed even by non-executive directors . . . .
Where, therefore, a director acts in breach of a fiduciary
duty he
may, depending on the circumstances, also act in breach of his duty
of care, skill and diligence . . . .
.
. .
The
duty of good faith and the duty to act for the benefit/interests of
the company are two separate duties . . . . The “interests”,

in this context, are only those of the company itself as a corporate
entity and those of its members as such as a body (
Alexander v
Automatic Telephone Co
[1900] 2 Ch 56
(CA) at 67, 72;
Coronation
Syndicate Ltd v Lilienfeld
1903 TS 489
at 497;
Parke v Daily
News Ltd
[1962] Ch 927
at 963;
[1962] 2 All ER 929
at 948 . . . .
.
. .
The
“proper purpose” duty entails in the first instance that
the director must not exceed the limitations of his own
authority and
must not exceed the limitations of the company . . . .
In
the second instance a director must exercise the duties only for the
purpose for which they were conferred and not for an “improper”

purpose . . . .
Directors
as such owe no fiduciary duty to the members/shareholders
individually
(
Percival
v Wright
[1902] 2 Ch 421
;
Pergamon Press Ltd v Maxwell
[1970] 2 All ER 809
(Ch) at 814), not even to a member who is the
majority shareholder (
Bell v
Lever Brothers Ltd
[1931] UKHL 2
;
[1932]
AC 161
(HL) at 228); their fundamental duty is to act only in the
bona fide
interests of the company and its shareholders
as
a body
(
SA
Fabrics Ltd v Millman NO
1972 (4) SA 592
(A);
Minister
of Water Affairs and Forestry v Stilfontein Gold Mining Co Ltd
2006 (5) SA 333
(W) para 16 . . .’  (Emphasis added and
some authorities omitted.)
[48]
Returning to the provisions of s 218(2) of the Companies Act, the
duties owed by directors in terms of s 76(3) are owed to
the company,
not to individual shareholders. The company, in the event of a wrong
done to it in terms of any of the provisions
of that subsection, can
sue to recover damages. The company would be the proper plaintiff. It
is no coincidence, then, that s 77(2)
(a)
provides that a
director of a company may be held liable for breaches of fiduciary
duties resulting in any loss or damage sustained
by the company.
Similarly, in respect of the particular wrongdoer and claimant, s
77(2)
(b)
of the Act provides that:
‘
A
director of a company may be held liable­­
—
.
. .
(b)
in accordance with the principles of
the common law relating to delict for any loss, damages or costs
sustained by the company as
a consequence of any breach by the
director­­­ of
—
(i)
a duty contemplated in section 76(3)
(c)
;
(ii)
any provision of this Act not otherwise mentioned in this section; or
(iii)
any provision of the company’s Memorandum of Incorporation.’
[49]
Even more significant are the provisions of s 77(3)
(b)
, which
read as follows:
‘
A
director of a company is liable for any loss, damages or costs
sustained by the company as a direct or indirect consequence of
the
director having­
—
.
. .
(b)
acquiesced in the
carrying on of the company’s business despite knowing that it
was being conducted in a manner prohibited
by section 22(1) . . .’
[50]
These provisions of the Companies Act make it clear that the
legislature decided where liability should lie for conduct by

directors in contravention of certain sections of the Act and who
could recover the resultant loss. It is also clear that the
legislature was astute to preserve certain common law principles. It
makes for a harmonious blend.
[51]
There is no need to give the words ‘as a result of that
contravention’ in s 218(2) an extended meaning, as submitted
on
behalf of the appellants, so as to ignore the conventional meaning of
a consequence flowing from the misconduct. The provisions
referred to
in the preceding paragraphs abound with recovery of loss resulting
from misconduct on the part of directors. There
is no indication in
the scheme of the Companies Act or any of its relevant provisions
that the words quoted at the beginning of
this paragraph should carry
a different meaning. On the contrary, all indications lead to the
ineluctable conclusion that it was
meant to have the conventional
meaning and that the person who can sue to recover loss is the one to
whom harm was caused. Simply
put, there must be a link between the
contravention and the loss allegedly suffered. In the present case,
loss was occasioned to
the company and the company is the entity with
the right of action.
[52]
From what is set out above it is clear that the rule against claims
for reflective loss has not expressly been abolished by
s 218(2), nor
does it follow by necessary implication. Section 218(3) does not
assist the appellants. It reads as follows:
‘
The
provisions of this section do not affect the right to any remedy that
a person may otherwise have.’
The
provision thus provides a statutory remedy to ‘any person’
who can bring themselves within its ambit. Subsection
(3) does not
detract from any existing rights to sue but is, rather, an
affirmation of those rights. The remedy is available to
avoid
injustice where that would otherwise ensue. It is not necessary in
this case to make any findings in relation to the precise
contours of
this remedy and we deliberately eschew doing so.
However,
we must accept that allowing individual shareholders in their
capacities as such to bring claims against miscreant company

directors for a diminution in the value of their shareholding may
very likely prejudice companies (and/or its creditors and/or
other
shareholders). Furthermore, we are constrained to accept that a
company has an established right to claim damages from its
directors
for any losses sustained as a result of those directors’ breach
of a duty owed to the company. It follows that
s 218(3) entrenches
also the company’s right. If one were to accede to the
appellants’ claim based on a diminution
in the value of their
shares, it would impinge on the company’s right preserved by s
218(3). This proves the fallacy of the
appellants’ claim.
[53]
Finally, in relation to the directors’ third exception, it will
be recalled that the appellants alleged that the directors
had
authorised the publication of a prospectus containing false or
misleading information. In the exception the directors pointed
out
that the appellants did not allege that they had acted on or relied
on the misrepresentations or the falsehoods and that they
suffered
loss in consequence of such reliance. One cannot tell from the
particulars of claim whether the appellants were already
shareholders
at the time that the prospectus was published. It is no answer to
contend, as the appellants do, that the misrepresentation
was pleaded
in support of their assertion that the directors had breached s 76(3)
of the Companies Act. The appellants’ claim
based on the breach
of s 76(3) has, in any event, been demonstrated to be unsustainable.
[54]
It follows that the essential findings of the court below in relation
to the exceptions by the directors cannot be faulted.
They were
correctly upheld. It is to the claim against Deloitte and the related
exceptions that we now turn.
[55]
It is necessary to revisit the basis of the appellants’ claim
against Deloitte. As already recorded, the appellants were

shareholders in ABIL, which was African Bank’s sole
shareholder. The directors, so the appellants said, mismanaged the
affairs
of the Bank which caused it to sustain significant losses.
Deloitte was the Bank’s auditor and was obliged to perform its

function with reasonable care and skill. Deloitte, in its
presentation of the Bank’s 2012 and 2013 annual financial
statements,
reported that they fairly represented the Bank’s
financial position. The audit reports were false in that the
financial statements
did not reveal the losses the bank had sustained
as a result of the directors’ mismanagement. The false reports
were due
to the failure to perform the audit with the requisite
reasonable care and skill. The appellants stated that Deloitte’s
negligent
audit caused the appellants to suffer loss as follows:
(a)
If Deloitte had performed proper audits, it would have withheld or
qualified the audit reports.
(b)
Had Deloitte withheld or qualified the reports, the appellants would
have convened a meeting of ABIL’s shareholders, and
caused ABIL
to remove the Bank’s directors from office, which would have
put an end to the mismanagement of the Bank and
would have prevented
further losses.
(c)
Because of Deloitte’s false audit reports, the preventative
measures were not taken, the mismanagement of the Bank continued
and
it continued to suffer loss,
(d)
The ongoing losses suffered by the Bank caused ABIL to suffer loss in
that its shares in the Bank diminished in value, which
then led to
ABIL’s own share price diminishing in the amounts stated above
and the appellants suffering a total loss as calculated
above.
[56]
The basis of the appellants’ claim reveals that the Bank
suffered the primary loss. Against that, one must accept that

Deloitte wrongfully and negligently or deliberately caused the loss.
In the ordinary course, the Bank would have had statutory
and
contractual claims against the directors and Deloitte for the
recovery of the loss. As pleaded, ABIL suffered loss in the second

degree. Its loss is a reflection of the Bank’s loss. ABIL did
not suffer any loss of its own. The appellants, as shareholders
of
ABIL, thus suffered loss in the third degree. They suffered loss only
because of ABIL’s loss.
[57]
As pointed out by Deloitte’s counsel, this ‘cascade’
of reflective losses on which the claim is based does
not end with
the appellants. They were minority shareholders of ABIL, holding
1.73% and 3.24% of ABIL’s shares, respectively.
The reflective
losses sustained by the appellants would have been suffered by
everyone else who held shares in ABIL. There must
have been thousands
of shareholders, if not more, who suffered the same third-degree
losses as the appellants. And these reflective
losses would be
reversed if the Bank enforced its claim against the directors and was
thereby compensated for its loss.
[58]
As was discussed earlier, in relation to claims against directors, a
claim for reflective loss by a shareholder is generally
untenable.
Furthermore, what has to be borne in mind is that the claim against
Deloitte is one for pure economic loss. As a general
rule our law
does not allow for the recovery of pure economic loss. In
Country
Cloud Trading CC v MEC, Department of Infrastructure Development
,
[46]
the
Constitutional Court said the following:
‘
Wrongfulness
is generally uncontentious in cases of positive conduct that harms
the person or property of another. Conduct of this
kind is prima
facie wrongful. However, in cases of pure economic loss – that
is to say, where financial loss is sustained
by a plaintiff with no
accompanying physical harm to her person or property – the
criterion of wrongfulness assumes special
importance. In contrast to
cases of physical harm, conduct causing pure economic loss is not
prima facie wrongful. Our law of delict
protects rights and, in cases
of non-physical invasion, the infringement of rights may not be as
clearly apparent as in direct
physical infringement. There is no
general right not to be caused pure economic loss.
So
our law is generally reluctant to recognise pure economic loss
claims, especially where it would constitute an extension of the
law
of delict. . . .
In
addition, if claims for pure economic loss are too freely recognised,
there is the risk of “liability in an indeterminate
amount for
an indeterminate time to an indeterminate class”.’
[59]
In
Home Talk Developments (Pty) Ltd and Others v Ekurhuleni
Metropolitan Municipality
[2017] ZASCA 77
;
2018 (1) SA 391
(SCA)
para 1, the following appears:
‘
The
first principle of the law of delict, as Harms JA pointed out in
Telematrix
,
is that everyone has to bear the loss that he or she suffers. And, in
contrast to instances of physical harm, conduct causing
pure economic
loss is not prima facie wrongful. Accordingly, a plaintiff suing for
the recovery of pure economic loss, is in no
position to rely on an
inference of wrongfulness flowing from an allegation of physical
damage to property (or injury to person),
because “the
negligent causation of pure economic loss is prima facie not wrongful
in the delictual sense and does not give
rise to liability for
damages
unless
policy considerations require
that
the plaintiff should be recompensed by the defendant for the loss
suffered”.’ (Emphasis added and citations omitted.)
[60]
Some categories of liability for pure economic loss have, as pointed
out on behalf of Deloitte, crystallised. However, the
categories do
not in general terms include the liability of auditors. In
Axiam
Holdings Ltd v Deloitte & Touche
[2005] ZASCA 61
;
2006 (1) SA
237
(SCA) para 18, the following appears:
‘
It
is universally accepted in common-law countries that auditors ought
not to bear liability simply because it might be foreseen
in general
terms that audit reports and financial statements are frequently used
in commercial transactions involving the party
for whom the audit was
conducted (and audit reports completed) and third parties. In
general, auditors have no duty to third parties
with whom there is no
relationship or where the factors set out in the
Standard
Chartered Bank
case are absent.’
[47]
[61]
In
Standard
Chartered Bank of Canada v Nedperm Bank Ltd
[1994] ZASCA 146
;
1994 (4) SA 747
(A) this Court had regard to the context in which the
alleged negligent misstatement in that case was made, the purpose for
which
it was sought and made, the reliance placed on it by the third
party, the relationship between the parties and, finally, and
significantly
for present purposes, public policy and fairness. It is
true that in
Axiam
,
having regard to those factors, it was held that the question of
wrongfulness could not be decided at exception stage. The minority
in
Axiam
held that the exception ought to have been upheld. As in
Standard
Chartered Bank
,
this Court in
Axiam
did not find any policy factors that militated against a finding at
that stage against the auditors being held liable. The facts
in
Standard
Chartered
and
Axiam
are
far removed from the facts in this case. In
Axiam
the question was whether the auditors of one company owed legal
duties to other companies, who were in the process of negotiating

agreements for share purchases and business financing and for this
purpose relied on the audit statements and opinion which allegedly

misrepresented the company’s financial position. In both cases
there was no claim by shareholders based on a diminution in
share
value.
[62]
Wrongfulness is an element of delictual liability. The test for
wrongfulness was set out in
Le Roux and Others v Dey
, as
follows:
‘
[I]n
the context of the law of delict:
(a)
the criterion of wrongfulness ultimately depends on a judicial
determination of whether – assuming all the other elements
of
delictual liability to be present – it would be reasonable to
impose liability on a defendant for the damages flowing
from specific
conduct; and
(b)
that the judicial determination of that reasonableness would in turn
depend on considerations of public and legal policy in accordance

with constitutional norms.’
[48]
[63]
The test for wrongfulness should not be confused with the fault
requirement. The test assumes that the defendant acted negligently
or
wilfully and asks whether, in the light thereof, liability should
follow.
[49]
[64]
The appellants submitted that it would not be appropriate to decide
wrongfulness on exception. In this case, as in all cases
in which a
plaintiff claims damages for pure economic loss, it is incumbent that
the facts upon which such a plaintiff relies for
its contention that
the loss was wrongfully caused be pleaded. The pleadings are thus the
high-water mark of its case on wrongfulness.
In
Telematrix
(Pty) Ltd t/a Matrix Vehicle Trading v Advertising Standards
Authority
[2005]
ZASCA 73
;
2006 (1) SA 461
(SCA) para 2 this court noted that it has
often determined wrongfulness on exception.
[50]
[65]
In
Telematrix
, para 3, Harms JA said that ‘[s]ome public
policy considerations can be decided without a detailed factual
matrix, which
by contrast is essential for deciding negligence and
causation’. In
AB Ventures Ltd v Siemens Ltd
[2011]
ZASCA 58
;
2011 (4) SA 614
(SCA) para 5, Nugent JA noted that in a
case such as this, the issue of wrongfulness is ‘quintessentially
a matter that is
capable of being decided on exception’. In the
present case all the policy factors upon which a decision would rest
are known.
[66]
The question to be addressed on the issue of wrongfulness is whether
public and legal policy considerations dictate that the
auditors of
African Bank be held liable to the shareholders of ABIL for the
reflective losses they sustained as a result of the
underlying losses
suffered by the Bank. As the extensive discussion on the rule against
claims for reflective losses above reveals,
the appellants’
claims are barred by the rule. Moreover, as noted in para 60 above,
in general, auditors have no duty to
third parties with whom there is
no relationship. In 4(3)
Lawsa
2 ed para 4 the following
appears:
‘
If
the auditors perform their work negligently, it is the company, and
not its members, that is the proper plaintiff to sue for
any loss
caused to it by that negligence.’
[67]
Auditors are accountable to shareholders collectively, as a body, ie
as the company. Put differently, when auditors make negligent

misstatements concerning the company’s financial statements,
individual shareholders do not have claims against the auditors,

because financial statements are not prepared for the benefit of
shareholders’ individual investment decisions. Instead,
the
primary purpose of auditing accounts is to report on the stewardship
of the directors to the shareholders as a body, in order
‘to
provide shareholders with reliable intelligence for the purpose of
enabling them to scrutinise the conduct of the company’s

affairs and to exercise their collective powers to reward or control
or remove those to whom that conduct has been confided’
(
Caparo
Industries plc v Dickman
[1990] UKHL 2
;
[1990] 2 AC 605
at 630). The purpose of audit reports is neither to
protect the interests of investors nor individual shareholders.
[68]
Imposing a legal duty on auditors in a case such as this raises the
spectre of indeterminate liability. Policy considerations
require
that liability in delict be confined to reasonably predictable limits
(15
Lawsa
3 ed para 87). Limitation of liability is therefore a key policy
consideration in deciding whether pure economic loss should be

actionable. This court, citing Gaudron J in
Perre
v Apand (Pty) Ltd
[1999] HCA 36
;
(1999)
198 CLR 180
(HC of A) para 32, in
Fourway
Haulage
,
[51]
said that ‘[t]he first policy consideration is the law’s
concern to avoid the imposition of liability in an indeterminate

amount for an indeterminate time to an indeterminate class’;
and that liability would be more readily imposed for ‘a
single
loss of a single identifiable plaintiff occurring but once and which
is unlikely to bring in its train a multiplicity of
actions’.
[69]
If the appellants’ claims were to be recognised despite the
fact that their loss is merely a reflection of the underlying
loss
suffered by the Bank and ABIL, there is no reason to prevent all
others who suffered reflective losses from pursuing similar
claims.
They would include all other shareholders of both the Bank and ABIL
(of whom there are likely to be many) and, in the case
of corporate
shareholders like the plaintiffs, their shareholders up the corporate
chain who ultimately include natural persons.
This would expose the
auditors to ‘liability in an indeterminate amount for an
indeterminate time to an indeterminate class’.
The courts have
frequently held that this risk disqualifies the recognition of a new
category of claim.
[52]
().
And, if an action were granted to shareholders to claim compensation
directly from the wrongdoers, the Bank’s creditors
would demand
the same facility, particularly if it is insolvent.
[70]
In the latter circumstances, if only the Bank is allowed to claim
from the wrongdoers for the loss sustained the amount recovered
is,
in the ordinary course, distributed amongst its creditors pro rata to
their claims. ABIL and its shareholders do not share
in the recovery
unless there is a residue after all the bank’s creditors have
been paid in full. However, if ABIL and its
shareholders are also
allowed to sue the wrongdoers, the ranking of claims gets distorted.
Questions of undue preferences might
arise. This consideration is
part of the policy reasons for the retention of the rule against
claims for reflective losses as set
out in
Johnson
at
14C-D. Under insolvency law, any damages recovered from the
wrongdoers should in the first place go to creditors before there
is
any distribution to shareholders. But what if ABIL or its
shareholders have already recovered the full amount of the loss: does

it mean that they circumvented the order of distribution to the
prejudice of other creditors? To allow the claim would have a result

that cannot be countenanced.
[71]
In addition to the aforesaid factors, it is so that the plaintiffs
are not vulnerable to the risk of harm, and have another
remedy. In
Cape
Empowerment Trust
,
[53]
this Court held that the extent to which a plaintiff was vulnerable
to the risk of harm was an important indicator in determining
whether
liability should be imposed on the defendant; and considered the
extent to which a plaintiff, which pursued a delictual
claim against
auditors, was able to recover its loss by means of a contractual
claim. In the present matter the plaintiffs could
protect themselves
against the risk of harm by way of a derivative action under s 165 of
the Companies Act. If Deloitte is indeed
guilty of professional
misconduct, it might be subject to sanction by the relevant
regulatory body. But that is not what this appeal
is about.
[72]
We turn, now, to deal with the appellants’ reliance on s 46(3)
of the APA. In para 28 of their particulars of claim,
they cite the
following parts of that subsection:
‘
(3)
Despite subsection (2),
a
registered auditor incurs liability to third parties who have relied
on an opinion, report or statement of that registered auditor
for
financial loss suffered as a result of having relied thereon
,
only if it is proved
that the opinion was expressed, or the report or statement was made,
pursuant to a negligent performance of the registered auditor’s

duties and the registered auditor—
(a)
knew,
or could in the particular circumstances reasonably have been
expected to know, at the time when the negligence occurred in
the
performance of the duties pursuant to which the opinion was expressed
or the report or statement was made
—
(i)
that the opinion, report or statement would be used by a client to
induce the third party to act or refrain from acting in some
way or
to enter into the specific transaction into which the third party
entered, or any other transaction of a similar nature,
with the
client or any other person; or
.
. .
(b)
in
any way represented, at any time after the opinion was expressed or
the report or statement was made, to the third party that
the
opinion, report or statement was correct, while at that time the
registered auditor knew or could in the particular circumstances

reasonably have been expected to know that the third party
would rely on that representation for the purpose of acting
or
refraining from acting in some way or of entering into the specific
transaction into which the third party entered, or any other

transaction of a similar nature, with the client or any other
person.’(Emphasis added.)
Nothing
further is said by the appellants about the significance of these
provisions, with the appellants going on to state that
the omission
to qualify the Bank’s financial statements was deliberate and
that Deloitte negligently misrepresented the Bank’s
financial
position and ‘had a duty’ not to make the statements,
thus incurring liability towards the appellants. A
third party might
be able to rely on this subsection in circumstances such as those in
Standard
Chartered
or in
Axiam
.
The third party would have to state facts that would bring it within
the subsection’s field of operation. The appellants
did not
say
how or why their claims fell within the ambit of the subsection.
s 46(4) of the APA is of significance. It reads as follows:
‘
Nothing
in subsections (2) or (3) confers upon any person a right of action
against a registered auditor which, but for the provisions
of those
subsections, the person would not have had.’
This
means that ss 46(2) and 46(3) do not found a claim where none existed
before. The discussion above shows why, in the circumstances
of this
case, a claim should not be held to exist. For the aforesaid reasons,
the appellants have not established wrongfulness.
The high court thus
correctly upheld Deloitte’s exception to the appellants’
particulars of claim.
[73]
In their pleaded case against Deloitte, the appellants did not rely
on the provisions of s 218(2) of the Companies Act. Before
us,
however, they contended that they were entitled to rely on that
subsection if such reliance could be inferred. For this proposition

they referred to s 30(2)
(a)
of the
Act, which provides that the annual financial statements of companies
like ABIL and African Bank must be audited and, if
read with the
definition of ‘audit’ in s 1 of the Act, it must mean in
accordance with prescribed or applicable auditing
standards. It was
contended on behalf of the appellants that the auditors contravened s
30(2)
(a).
Thus,
so they argued, they were entitled to rely on s 218(2). This is
fallacious. The duty to have its annual financial statements
audited
rests on the company. In relation to liability on the part of
Deloitte for contraventions of the Act, the discussion earlier
in
this judgment applies. The duty of the auditors is owed primarily to
the company. For all the stated reasons, liability by Deloitte
to
shareholders in the circumstances of this case is untenable.
[74]
For all the aforesaid reasons, the following order is made:
The
appeal is dismissed with costs, including the costs of two counsel.
___________________
M
S Navsa
Judge
of Appeal
___________________
A
Schippers
Judge
of Appeal
Appearances
For
Appellants A Subel SC with D Mahon
Instructed
by Faber, Goertz, Austen Inc
Johannesburg
McIntyre
& Van der Post, Bloemfontein
For
First to Tenth Respondents C D A Loxton SC, I P Green SC and N K
Nxumalo
Instructed
by Clyde and Company, Johannesburg
Webber
Attorneys, Bloemfontein
For
Eleventh Respondent W Trengove SC, M du P van der Nest SC, D J Smit
and L Zikalala
Instructed
by Webber Wentzel, Johannesburg
Honey
Attorneys Bloemfontein
[1]
Section 46(3)
of the
Auditing
Profession Act provides
:
‘
Despite
subsection (2),
a
registered auditor incurs liability to third parties who have relied
on an opinion, report or statement of that registered auditor
for
financial loss suffered as a result of having relied thereon, only
if it is proved that the opinion was expressed, or the
report or
statement was made, pursuant to a negligent performance of the
registered auditor’s duties and the registered
auditor—
(a)
knew,
or could in the particular circumstances reasonably have been
expected to know, at the time when the negligence occurred
in the
performance of the duties pursuant to which the opinion was
expressed or the report or statement was made-
(i)
that the opinion, report or statement would be used by a client to
induce the third party to act or refrain from acting in
some way or
to enter into the specific transaction into which the third party
entered, or any other transaction of a similar
nature, with the
client or any other person; or
(ii)
that the third party would rely on the opinion, report or statement
for the purpose of acting or refraining from acting in
some way or
of entering into the specific transaction into which the third party
entered, or any other transaction of a similar
nature, with the
client or any other person; or
(b)
in any
way represented, at any time after the opinion was expressed or the
report or statement was made, to the third party that
the opinion,
report or statement was correct, while at that time the registered
auditor knew or could in the particular circumstances

reasonably have been expected to know that the third party
would rely on that representation for the purpose of acting
or
refraining from acting in some way or of entering into the specific
transaction into which the third party entered, or any
other
transaction of a similar nature, with the client or any other
person.’
[2]
Section 75
deals with the personal
financial interests of directors and is of no relevance in relation
to the present dispute.
[3]
Hlumisa Investment Holdings RF
Limited and Another v Kirkinis and Others
[2018]
ZAGPPHC 676;
2019 (4) SA 569
(GP) para 29.
[4]
Ibid para 30.
[5]
Ibid para 31.
[6]
Ibid
para
39.
[7]
Ibid
para
40.
[8]
Ibid para 41.
[9]
Section 77(3)
(b)
reads as follows: ‘A director of a company is liable for any
loss, damages or costs sustained by the company as a direct
or
indirect consequence of the director having—
.
. .
(b)
acquiesced in the carrying on of the
company’s business despite knowing that it was being conducted
in a manner prohibited
by
section 22(1)
. . .’
[10]
Hlumisa
Investment Holdings
above
fn 3
para 44.
[11]
Department of
Land Affairs and Others v Goedgelegen Tropical Fruits (Pty) Ltd
[2007] ZACC 12
;
2007 (6) SA 199
(CC)
para
47.
[12]
Hlumisa Investment Holdings
above
fn 3 paras 47-48.
[13]
Ibid para 50.
[14]
See especially paras 9-20 of Ponnan
JA’s judgment in
Itzikowitz
v Absa Bank Ltd
[2016]
ZASCA 43
;
2016 (4) SA 432
(SCA).
[15]
Ibid paras 9-12.
[16]
Hlumisa Investment Holdings
above
fn 3 para 68. (Emphasis original.)
[17]
Ibid paras 69-70.
[18]
Children’s Resource Centre
Trust and Others v Pioneer Food (Pty) Ltd and Others
[2012]
ZASCA 182
;
2013 (2) SA 213
(SCA) para 36, cited with approval in
H
v Fetal Assessment Centre
[2014]
ZACC 34
;
2015 (2) SA 193
(CC) para 10.
[19]
Telematrix
(Pty) Ltd t/a Matrix Vehicle Tracking v Advertising Standards
Authority SA
[2005]
ZASCA 73
;
2006 (1) SA 461
(SCA) para 3, obtaining the Constitutional
Court’s imprimatur in
Pretorius
and Another v Transport Pension Fund and Others
[2018] ZACC 10
;
2019 (2) SA 37
(CC) para 15.
[20]
Itzikowitz
above
fn 14 para 9. (Citations omitted.)
[21]
4(1)
Lawsa
2 ed (2012) para 67. (Citations omitted.)
[22]
Prudential
Assurance Co Ltd v Newman Industries Ltd
(No
2)
[1982] 1 Ch 204
;
[1982] 1 All ER 354
(HL).
[23]
Johnson v Gore Wood & Co (a
firm)
[2000] UKHL 65
;
[2001] 1 All ER 481
;
[2002] 2 AC 1
(HL) at 35E-36B.
[24]
Ibid at 62D-G.
[25]
Ibid at 66B-D.
[26]
Ibid.
[27]
Garcia v Marex
Financial Ltd
[2018] EWCA Civ 1468
;
[2018] 3 WLR 1412
;
[2019] QB 173
at 188-189.
[28]
‘
Remedies of
Members’ in
MS
Blackman, RD Jooste & GK Everingham
Commentary
on the Companies Act
(RS 9
2012) at 9-67 – 9-68-1. (Citations omitted; emphasis original)
[29]
Foss v
Harbottle
(1843) 67
ER 189; (1843) 2 Hare 461.
[30]
See ‘Derivative actions’
in PA Delport (ed)
Henochsberg
on the Companies Act 71 of 2008
(SI
21 2019) 587-593 for a useful discussion on the proper plaintiff
rule in
Foss v Harbottle
(above fn 29) and the
progression to derivative actions.
Foss
v Harbottle
was the
genesis of the rule against claims for reflective loss and is
referred to in subsequent cases, such as
Prudential
Assurance
(above fn 22),
in terms of which the principle was refined, exceptions were
developed and the rule was also relaxed as against
the development
of the law in general.
[31]
Above fn 29.
[32]
P Koh ‘
The
Shareholder’s Personal Claim: Allowing Recovery for Reflective
Losses’ (2011) 23
Singapore
Academy of Law Journal
863-889.
[33]
Emphasis original.
See also the views of R
Samuel in ‘Reflective loss reconsidered (Pt 1)’ (2019)
NLJ
17-18,
and ‘Reflective loss reconsidered (Pt 2)’ (2019)
NLJ
17-18.
[34]
Johnson
above
fn 23 at 35G-36B.
[35]
Itzikowitz
above
fn 14 para 9.
[36]
See GN 1183 in
GG
26493
of 23-06-2004.
[37]
See the Companies Bill B 61-2008, an
explanatory summary of which was published in
GG
31104 of 30-05-2008.
[38]
Casserley v
Stubbs
1916
TPD 310
at 312;
Dhanabakium
v Subramanium
1943 AD 160
at 167;
Attorney-General,
Transvaal v Botha
[1993] ZASCA 159
;
1994 (1) SA 306
(A) at 330I-J.
[39]
Ngqukumba v
Minister of Safety and Security and Others
[2014] ZACC 14
;
2014 (5) SA 112
(CC) para 16
[40]
25(1)
Lawsa
2
ed
para 340.
[41]
Oxford English Dictionary
(2008).
[42]
See para 4.7 of the policy paper,
South African Company Law
for the 21st Century – Guidelines for Corporate Law Reform
,
at 44.
[43]
Henochsberg
op
cit fn 28 at 642.
[44]
R Stevens and P De Beer
The
Duty of Care and Skill, and Reckless Trading: Remedies in Flux?
(2016) 28
SA Merc
LJ
250 at 274.
[45]
‘
In good faith, in the
best interests of the company for a proper purpose’ in
Henochsberg
op
cit fn 28 at 298-9 – 298-11, 298-15 – 298-16, and
298-17.
[46]
Country Cloud
Trading CC v MEC, Department of Infrastructure Development
[2014] ZACC 28
;
2015 (1) SA 1
(CC) paras 22-24. (Citations omitted.)
[47]
(Citations
omitted.) See also
Cape
Empowerment Trust Ltd v Fisher Hoffman Sithole
[2013] ZASCA 16
;
2013 (5) SA 183
(SCA) para 21.
[48]
Le Roux and
Others v Dey
[2011]
ZACC 4
;
2011 (3) SA 274
(CC) para 122. (Citations omitted.)
[49]
See
Trustees,
Two Oceans Aquarium Trust v Kantey & Templer (Pty) Ltd
[2005] ZASCA 109
;
2006 (3) SA 138
(SCA) para 12.
[50]
See
Lillicrap,
Wassenaar and Partners v Pilkington Brothers (SA) (Pty) Ltd
1985 (1) SA 475
(A);
Indac
Electronics (Pty) Ltd v Volkskas Bank Ltd
[1991] ZASCA 190
;
1992 (1) SA 783
(A); and
Minister
of Law and Order v Kadir
[1994] ZASCA 138
;
1995 (1) SA 303
(A). See also
Fourway
Haulage SA v National Roads Agency
[2008] ZASCA 134; 2009 (2) SA 150 (SCA).
[51]
Ibid
paras 23-24.
[52]
Delphisure
Group Insurance Brokers Cape (Pty) Ltd v Dippenaar and Others
[2010] ZASCA 85
;
2010 (5) SA 499
(SCA) para 25;
Country
Cloud
above fn 46 para 24;
Fourway
Haulage
above fn 50 paras 23-24;
South
African Hang and Paragliding Association and Another v Bewick
[2015] ZASCA 34
;
2015 (3) SA 449
(SCA) para 32.
[53]
Cape
Empowerment Trust
above
fn 47 paras 28 and 30.