Hlumisa Investment Holdings (RF) Ltd v Kirkinis

• Jurisdiction: South Africa
• Judge: Navsa JA, Makgoka JA and Schippers JA and Mojapelo AJA and Koen AJA
• Judgment Date: 03 July 2020
• Docket Number: 1423/2018
• Hearing Date: 09 March 2020
• Court: Supreme Court of Appeal
• Citation: 2020 JDR 1284 (SCA)

Navsa JA and Schippers JA (Makgoka JA and Mojapelo and Koen AJJA 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

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Navsa JA and Schippers JA (Makgoka JA and Mojapelo and Koen AJJA concurring)

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

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Navsa JA and Schippers JA (Makgoka JA and Mojapelo and Koen AJJA concurring)

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

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Navsa JA and Schippers JA (Makgoka JA and Mojapelo and Koen AJJA concurring)

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.

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Navsa JA and Schippers JA (Makgoka JA and Mojapelo and Koen AJJA concurring)

[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...