Hlumisa Investment Holdings Rf Ltd and Another v Kirkinis and Others

• Jurisdiction: http://justis.com/jurisdiction/166,South Africa
• Citation: 2020 (5) SA 419 (SCA)

Hlumisa Investment Holdings Rf Ltd and Another v Kirkinis and Others
2020 (5) SA 419 (SCA)

2020 (5) SA p419

Citation	2020 (5) SA 419 (SCA)
Case No	1423/2018; [2020] ZASCA 83
Court	Supreme Court of Appeal
Judge	Navsa JA, Makgoka JA, Schippers JA, Mojapelo AJA and Koen AJA
Heard	July 3, 2020
Judgment	July 3, 2020
Counsel	CDA Loxton SC (with P Green SC and NK Nxumalo) for the first to tenth respondents.; W Trengove SC (with M du P van der Nest SC, DJ Smit and L Zikalala) for the eleventh respondent.

Flynote : Sleutelwoorde

Company — Shares and shareholders — Shareholders — Proceedings by and against — Action against directors and auditors for compensation for share value loss due to alleged mismanagement of company — Company proper plaintiff in both claims — Claim against directors contrary to (entrenched) 'no reflective loss' rule — Not saved by exception to rule — Claim against auditors not meeting wrongfulness requirement — Exceptions correctly upheld in court a quo — Companies Act 71 of 2008, s 218(2).

Accountant — Auditor — Claim by shareholders against company's auditors for share value loss — Auditors not accountable to individual shareholders for negligent misstatements concerning company's financial statements — Duty owed to company — Claim one for pure economic loss — In absence of element of wrongfulness, no claim established — Auditing Profession Act 26 of 2005, s 46, not founding claim where none existed before

Headnote : Kopnota

When company A with subsidiary B suffered a dramatic collapse in its share price, minority shareholders (the appellants) sued A and B's directors (the first to tenth respondents) and B's auditors (the eleventh respondent) for damages, alleging (i) mismanagement of both companies by their directors; and (ii) failure by the auditors to adhere to auditing standards in their presentation of B's 2012 and 2013 annual financial statements, which hid losses. The appellants sought R721 million from the directors and R1,3 billion from auditors Deloitte. [*]

The principal issue was whether s 218(2) of the Companies Act 71 of 2008 permitted the shareholders' claim, in their capacity as individual shareholders in A, against the directors for their contravention of various other sections of the Companies Act. This in turn raised the applicability of the rule against recovery of reflective loss (the 'reflective loss rule'), which prevents shareholders from bringing claims where their loss merely reflects that of the company, the 'proper plaintiff' in such cases (see [21]). [*1] With the auditors the issue was whether they owed the shareholders, individually, legal duties not to have made misrepresentation in B's financial statements and to have qualified the audit (see [23]).

The Pretoria High Court ruled shareholders' claims excipiable for their contravention of the 'no reflective loss' and 'proper plaintiff' rules, which were not abrogated by s 218(2). The judge pointed out that while shareholders benefited from limited liability, they were excluded from the benefit of claims accruing to the company, and that if s 218(2) had the breadth ascribed to it by the shareholders, it would be a radical departure from the reflective loss rule, a core principle of company law, and that there was no

2020 (5) SA p420

indication that the legislature intended to alter it via s 281(2). The court held that B, not the shareholders, was the proper plaintiff in a claim against Deloitte.

On appeal to the Supreme Court of Appeal the appellants argued that s 218(2), which provided that '(a)ny 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', provided a general remedy to anyone, enabling their claim against the directors. They also argued that they were entitled to rely on s 218(2), read with s 30(2)(a) of the Companies Act, to found liability on the part of the auditors.

Held

The rule against claims for reflective damages was an established one, having been recognised by our courts both before and after the promulgation of the 2008 Companies Act (see [37]). Here the basis of the shareholders' claim was the wrong done to A, and while A itself had a common-law claim against the directors, that same claim precluded a personal claim by the shareholders (see [38]). There was no independent cause of action, as argued by the shareholders, nor did it fall into one of the recognised exceptions to the rule. The shareholders gave no reason why it would be unjust to deny their 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 (see [39]).

Section 218(2) of the Companies Act did not save the day for the shareholders. The Act defined a company as a distinct juristic person, and property vesting in it did not vest in its members, which was the basis for the rule against the claim for reflective loss (see [42]). The legislature must be taken to have been aware of the need to retain these common-law principles, which were applied under preceding legislation and were consonant with constitutional values and international company law (see [43]). Also relevant was the presumption that statutes did not intend to alter the common law unless they did so expressly or by necessary implication (see [44]).

The duties owed by directors were owed to the company, not individual shareholders, and under s 77(2)(b) they were liable 'in accordance with the principles of the common law' (see [48]). The legislature had preserved common-law principles, which made for a harmonious blend (see [50]). It was therefore clear that the rule against claims for reflective loss were not expressly or by necessary implication abolished by s 218(2) (see 52]).

It followed that the essential findings of the High Court could not be faulted, and that the exceptions were correctly upheld (see [54]).

The shareholders' claim against Deloitte was based on a cascade of reflective losses. The primary loss was B's, A's was in the second degree, and that of the shareholders in the third (see [56]). Besides, their claim was one for the recovery of pure economic loss, which the law was reluctant to entertain (see [58]). When auditors made negligent misstatements about companies' financial statements, individual shareholders did not have claims against the auditors because auditors were accountable to shareholders collectively, as a body, ie as the company (see [67]). Moreover, imposing a legal duty on auditors in a case such as the present raised the spectre of indeterminate liability, which disqualified the shareholders' claim (see [68] – [69]). And their reliance on s 46(3) of the Auditing Profession Act 26 of 2005 — 'liability to third parties' — did not found a claim where none existed before (see [72]). The duty of the auditors was owed primarily to the company and in the circumstances liability by Deloitte to shareholders was untenable (see [73]).

2020 (5) SA p421

Cases cited

Southern Africa

AB Ventures Ltd v Siemens Ltd 2011 (4) SA 614 (SCA) ([2011] ZASCA 58): dictum in para [5] applied

Attorney-General, Transvaal v Botha 1994 (1) SA 306 (A): dictum at 330I – J applied

Axiam Holdings Ltd v Deloitte & Touche 2006 (1) SA 237 (SCA) ([2005] 4 All SA 157; [2005] ZASCA 61): discussed and dictum in para [18] applied

Cape Empowerment Trust Ltd v Fisher Hoffman Sithole 2013 (5) SA 183 (SCA) ([2013] ZASCA 16): discussed and applied

Casserley v Stubbs 1916 TPD 310: dictum at 312 applied

Children's Resource Centre Trust and Others v Pioneer Food (Pty) Ltd and Others 2013 (2) SA 213 (SCA) ([2012] ZASCA 182): dictum in para [36] applied

Country Cloud Trading CC v MEC, Department of Infrastructure Development 2015 (1) SA 1 (CC) (2014 (12) BCLR 1397; [2014] ZACC 28): dicta in paras [22] – [24] applied

Delphisure Group Insurance Brokers Cape (Pty) Ltd v Dippenaar and Others 2010 (5) SA 499 (SCA) ([2010] ZASCA 85): referred to

Department of Land Affairs and Others v Goedgelegen Tropical Fruits (Pty) Ltd 2007 (6) SA 199 (CC) (2007 (10) BCLR 1027; [2007] ZACC 12): referred to

Dhanabakium v Subramanian and Another 1943 AD 160: dictum at 167 applied

Fourway Haulage SA (Pty) Ltd v SA National Roads Agency Ltd 2009 (2) SA 150 (SCA) ([2009] 1 All SA 525; [2008] ZASCA 134): referred to

Gihwala and Others v Grancy Property Ltd and Others 2017 (2) SA 337 (SCA) ([2016] 2 All SA 649; [2016] ZASCA 35): referred to

H v Fetal Assessment Centre 2015 (2) SA 193 (CC) (2015 (2) BCLR 127; [2014] ZACC 34): referred to

Hlumisa Investment Holdings RF Ltd and Another v Kirkinis and Others 2019 (4) SA 569 (GP) ([2018] ZAGPPHC 676): confirmed on appeal

Home Talk Developments (Pty) Ltd and Others v Ekurhuleni Metropolitan Municipality 2018 (1) SA 391 (SCA) ([2017] 3 All SA 382; [2017] ZASCA 77): dictum in para [1] applied

Indac Electronics (Pty) Ltd v Volkskas Bank Ltd 1992 (1) SA 783 (A) ([1991] ZASCA 190): referred to

Itzikowitz v Absa Bank Ltd 2016 (4) SA 432 (SCA) ([2016] ZASCA 43): applied

Le Roux and Others v Dey (Freedom of Expression Institute and Restorative Justice Centre as Amici Curiae) 2011 (3) SA 274 (CC) (2011 (6) BCLR 577; [2011] ZACC 4): dictum in para [122] applied

Lillicrap, Wassenaar and Partners v Pilkington Brothers (SA) (Pty) Ltd 1985 (1) SA 475 (A) ([1984] ZASCA 132): referred to

Minister of Law and Order v Kadir 1995 (1) SA 303 (A): referred to

Ngqukumba v Minister of Safety and Security and Others 2014 (5) SA 112 (CC): dictum in para [16] applied

Off-Beat Holiday Club and Another v Sanbonani Holiday Spa Shareblock Ltd and Others 2016 (6) SA 181 (SCA) ([2016] ZASCA 62): referred to

Pretorius and Another v Transport Pension Fund and Others 2019 (2) SA 37 (CC) ([2018] ZACC 10): referred to

South African Hang...