Itzikowitz v Absa Bank Ltd

• Jurisdiction: South Africa
• Judge: Ponnan JA, Cachalia JA, Willis JA, Saldulker JA and Fourie AJA
• Judgment Date: 31 March 2016
• Citation: 2016 (4) SA 432 (SCA)
• Docket Number: 20729/2014 [2016] ZASCA 43
• Hearing Date: 15 March 2016
• Counsel: M Dendy for the appellant. D Turner for the respondent. Heads of argument prepared by D Turner and J Mitchell.
• Court: Supreme Court of Appeal

Ponnan JA (Cachalia JA, Willis JA, Saldulker JA and Fourie AJA):

F [1] This appeal and cross-appeal arise from exceptions taken by the respondent, Absa Bank Ltd (Absa), to two counterclaims by the appellant, Mr Gary Itzikowitz. The appellant is the sole shareholder of Compass Projects (Pty) Ltd (Compass). Compass, in turn, holds 17,29% of the shares in a public company, Quantum Properties Group Limited (QPG). G QPG held 100% of the shares in A Million UP (Pty) Ltd (AMU), a property-development company. Compass has a loan account in AMU from which it is owed R5 292 442. Absa was the banker to AMU and QPG and had extended loan facilities to AMU. After June 2010 Absa increased the loan facilities to AMU from R390 million to over R500 million. According to Absa, as at 31 August 2011 it was owed a total of H R569 318 000 by AMU.

[2] On 4 June 2012 the board of directors of AMU resolved that it voluntarily commence business rescue. On 18 June 2012, and at the instance of Absa, the Western Cape High Court, Cape Town (the WCHC), I issued an order setting aside the resolution of the board of AMU. On 29 June 2012 Absa applied to the WCHC for an order that AMU be placed under provisional winding-up. It alleged that AMU was hopelessly insolvent and unable to pay its debts. The provisional order was confirmed and made final by the WCHC on 14 August 2012.

[3] On 30 August 2012 Absa caused a summons to be issued out of the J South Gauteng High Court, Johannesburg (the SGHC), against the

Ponnan JA (Cachalia JA, Willis JA, Saldulker JA and Fourie AJA)

appellant for payment of the sum of R20 million, together with interest A and costs on the attorney and own client scale. Absa relied for its cause of action on a suretyship signed by the appellant on 9 January 2008 in terms of which he bound himself 'as a surety and co-principal debtor jointly and severally together with' AMU in favour of Absa. The suretyship was —

'(l)imited to a maximum of R20 million together with such further B amounts in respect of interest and costs as have already accrued or which will accrue until date of payment of the amount'.

In response the appellant filed a plea and two counterclaims — the subject C of this appeal.

[4] In support of his counterclaims the appellant alleged that AMU's demise was a result of intentional, reckless or negligent conduct by Absa in: (a) advancing funds to AMU when there was no reasonable prospect of the moneys being repaid; (b) colluding with directors of QPG and AMU, D and the auditors of AMU, to ensure that they advanced Absa's wishes to the detriment of AMU; (c) colluding with AMU's joint-venture partner, Protea Hotels, in order to secure benefits for it at the expense of AMU; (d) ignoring the appellant's written request in September 2011 to cease advancing funds to AMU; and (e) setting aside the attempted business E rescue and then applying for AMU's winding-up. As a result of AMU being wound up, so the allegation goes: (a) the value of QPG's shareholding in AMU had reduced to nil; (b) trading in QPG shares was suspended by the Johannesburg Stock Exchange; (c) the value of Compass' shareholding in QPG was reduced to nil; and (d) Compass' loan amount in AMU of R5 292 442 was rendered irrecoverable. By way of his counterclaims the F appellant seeks to recover from Absa the amount of the reduction in value of his shareholding in Compass, alleged to be R50 002 338.

[5] The appellant's counterclaim A is founded in delict. The key allegations on which he relies are that: (a) Absa knew that he was a G surety who had a financial interest as an indirect shareholder in QPG and AMU; and (b) Absa knew (or more accurately foresaw) that a winding-up of AMU would materially impact upon the value of the QPG shares in AMU, the value of Compass shares in QPG and, correspondingly, the value of his shares in Compass. The 'legal duty' for his asserted delictual claim is H framed thus:

'In the premises the plaintiff [Absa] owed the defendant [Mr Itzikowitz] a legal duty to conduct itself towards AMU as a reasonable banker and not to take any decisions or to engage in any business conduct which could adversely affect the value of shares in AMU or the value of any loan I account in AMU in material respects. The said legal duty arose directly as a result of the banker – customer relationship between the plaintiff and QPG and between the plaintiff and AMU.'

[6] In counterclaim B, which was pleaded in the alternative, the appellant relies on the same allegations of misconduct by Absa as in J

Ponnan JA (Cachalia JA, Willis JA, Saldulker JA and Fourie AJA)

A counterclaim A. However, here he relies on the provisions of s 218(2) [1] read with s 22(1) [2] of the Companies Act 71 of 2008. He alleges that the devaluation of his shares in Compass qualifies as 'any loss or damage' contemplated by s 218(2) and that Absa's conduct constitutes a breach of s 22(1). This, so the allegation goes, permits him to recover the devaluation directly from Absa.

B [7] The SGHC (per Swart AJ) held:

'I am satisfied that claim A does not disclose a cause of action against the plaintiff and is bad in law as the legal duty relied upon is non-existent. The defendant's claim A in reconvention is struck out. Claim B in C reconvention falls within the ambit of s 218(2) read with s 22(1) of the Companies Act and is valid. Claim B in reconvention is allowed to proceed to trial in order for the averments made in the claim to be proved.'

It accordingly issued the following order:

'1.

D The exception on claim A is upheld.

2.

Claim B in reconvention is allowed to proceed to trial.

3.

Each party is ordered to pay its own costs.'

The appellant appeals against the order upholding Absa's exception, whilst Absa cross-appeals the dismissal of its exception in relation to the E appellant's counterclaim B.

[8] Counterclaim A is a delictual claim for pure economic loss. It is well established that in contrast to cases of physical harm, conduct causing pure economic loss is not prima facie wrongful. [3] As it was recently put by the Constitutional Court in F Country Cloud Trading CC v MEC, Department of Infrastructure Development 2015 (1) SA 1 (CC) (2014 (12) BCLR 1397; [2014] ZACC 28) para 23:

'So our law is generally reluctant to recognise pure economic loss claims, especially where it would constitute an extension of the law of delict. Wrongfulness must be positively established. It has thus far been G established in limited categories of cases, like intentional interferences in contractual relations or negligent misstatements, where the plaintiff can show a right or legally recognised interest that the defendant infringed.' [Footnotes omitted.]

Indeed, as the Constitutional Court pertinently pointed out in Country Cloud H (para 43):

Ponnan JA (Cachalia JA, Willis JA, Saldulker JA and Fourie AJA)

'Until we are satisfied the department wronged Country Cloud, its claim A does not get off the ground.' [4] [Emphasis original.]

[9] Absa's primary contention is, in principle, very simple: It is that damage, if suffered at all, had been suffered by AMU and that the appellant, being no more than in the position of a shareholder thrice removed from that company, could not sue to recover its (AMU's) loss, or, B in the language of Country Cloud, that the appellant had not been 'wronged' by Absa. In approaching this enquiry it is important to keep certain fundamental principles of company law in mind. [5] 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 C property vested in a company is not and cannot be regarded as vested in all or any of its members. [6] Generally, it is of cardinal importance to keep distinct the property rights of a company and those of its shareholders, even where the latter is a single entity. [7] A company's property belongs to the company and not its shareholders. A shareholder's general right of participation in the assets of the company is deferred until winding-up, D and then only subject to the claims of creditors. [8] In Gohlke and Schneider and Another v Westies Minerale (Edms) Bpk and Another 1970 (2) SA 685 (A) at 692E – G Trollip JA observed:

'The company and its members are bound only to the same extent as if E the articles had been signed by each member, that is, as if they have contracted in terms of the articles. The articles, therefore, merely have the same force as a contract between the company and each and every member as such to observe their provisions . . . .' [Emphasis original.]

[10] Of particular relevance to the present enquiry is the following statement in Lawsa: F

'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.' [9] [Footnote omitted.] G

In support of that proposition, reference is made to Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204 (CA) ([1982] 1 All ER 354) at 366j – 367a (All ER), in which it was pointed out that:

'(S)uch a loss is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only H

Ponnan JA (Cachalia JA, Willis JA, Saldulker JA and Fourie AJA)

A ...