Revisiting the no reflective loss principle under the South African company law regulation: A reflective assessment through the lens of Hlumisa Investment Holdings (RF) Ltd v Kirkinis 2020 3 All SA 650 (SCA)

• Jurisdiction: South Africa
• Date: 01 June 2023
• Pages: 157-173
• Author: Justice Mudzamiri
• Published date: 01 June 2023
• DOI: 10.17159/2225-7160/2023/v56a12

No reflective loss principle under the South African company law regulation 157

Revisiting the no reflective loss principle

under the South African company law

regulation: A reflective assessment through

the lens of

Hlumisa Investment Holdings

(RF) Ltd v Kirkinis

2020 3 All SA 650 (SCA)

Justice Mudzamiri

LLB LLM LLD

Postdoctoral Research Fellow, Law Faculty and Commercial Law Department,

University of Cape Town

SUMMARY

One of the central concepts in company law is that a company is a juristic

person with a separate legal personality. Several consequences flow from

the doctrine of separate legal personality, among other things, that a

company owns its property and assets and may sue or be sued in its

name. Therefore, shareholders do not have a direct right of action for a

company’s loss. The company itself should institute such a claim save for

certain exceptional circumstances like derivative actions. Both the High

Court (court a quo) and the Supreme Court of Appeal in Hlumisa Investment

Holdings (RF) Ltd v Kirkinis (the Hlumisa case) confirmed that shareholders

cannot claim diminution of share value that is linked to the misconduct of

company directors and auditors. This article concurs with the court a quo

and the Supreme Court of Appeal’s interpretations that as a general rule,

directors owe fiduciary duty only to the company and that shareholders

cannot rely on a claim for reflective loss in company law. This article

assesses the proper plaintiff and reflective loss rules against the backdrop

of the Hlumisa case.

Keyword s: proper plaintiff, reflective loss, separate legal personality,

fiduciary duties.

1Introduction

One of the cornerstone concepts in company law is the principle of

separate legal personality.1 This notion has several consequences flowing

out of it. These consequences include the privilege of the limited liability

bestowed to shareholders, a perpetual succession of the company, and

that the company’s property, profits, debts, and liabilities belong to that

company and not its shareholders.2 The two central consequences of the

doctrine of separate legal personality that are most relevant to this article

are that, first, the assets of the company belong to that company and not

1Salomon v Salomon & Co Ltd (1897) AC 22 (HL) (hereinafter Salomon v

Salomon).

2 Cassim et al Contemporary company law 3rd ed (2021) 39. Cassim et al Law

of Business Structures 2 ed (2022) 63.

How to cite: Mudzamiri ‘Revisiting the no reflective loss principle under the South African company law

regulation: A reflective assessment through the lens of Hlumisa Investment Holdings (RF) Ltd v Kirkinis 2020 3

All SA 650 (SCA)’ 2023 De Jure Law Journal 157-173

http://dx.doi.org/10.17159/2225-7160/2023/v56a12

158 2023 De Jure Law Journal

shareholders.3 Secondly, a company can sue and/or be sued in its name.

Therefore, when a company sustains a loss, it is the proper plaintiff and

a shareholder will not have a direct right of action for the loss.4 The

reflective loss rule provides that the company’s loss is not a shareholder’s

loss, although such loss may reduce the shareholder’s share value.5 In

such circumstances, the proper plaintiff to seek redress would be the

company itself, not its shareholders.6

In South Africa, the concept of separate legal personality is established

in courts7 and under section 19(1) of the Companies Act 71 of 2008 (the

Companies Act). Section 19(1) of the Companies Act provides that from

the date of incorporation, a company becomes a juristic person that has

all the legal powers and capacity of an individual except to the extent a

juristic person8 is incapable of exercising any such powers, or the

Memorandum of Incorporation (MOI) provides otherwise.9 There are,

however, some exceptions to separate legal personality, for example,

lifting, piercing, and/or looking behind the corporate veil and an in-depth

discussion of these is outside the scope of this article and are

comprehensively dealt with somewhere.10 Based on the above-settled

principles and the approaches adopted by the High Court (court a quo)

and the Supreme Court of Appeal in Hlumisa v Kirkinis, this article seeks

to critically examine and demystify the “knotty” issues surrounding the

proper plaintiff and reflective loss rules in company law.

This article is divided into several parts. Immediately after the

introduction, the concepts of separate legal personality and fiduciary

duties are put into perspective, and then the policy rationales behind the

reflective loss principle will be explored. This article then surveys the

factual matrix and judgment in the Hlumisa case and critically assesses

the same. Lastly, the article provides concluding remarks.

3Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530 (hereinafter Dadoo)

at 550-551; Macaura v Northern Assurance Co Ltd 1925 AC 619 (HL)(lr) at

630 (hereinafter Macaura).

4 Cassim et al (2021) 52.

5Itzikowitz v Absa Bank Ltd 2016 JOL 35608 (SCA) (hereinafter Itzikowitz)

paras 10-12.

6 Cassim et al (2021) 52.

7 The case law includes Dadoo; Hlumisa Investment Holdings (RF) Ltd v

Kirkinis 2020 3 All SA 650 (SCA) (hereinafter Hlumisa v Kirkinis (SCA) para

42; Hughes v Ridley 2010 1 SA 381 (KZP) para 22; Itzikowitz para 27;

Macaura para 630; Stellenbosch Farmers’ Winery Ltd v Distillers Corporation

(SA) Ltd 1962 1 SA 458 (A) 471-472.

8 Ss 8(3)-(4) of the Constitution of the Republic of South Africa, 1996

(hereinafter the Constitution).

9 S 19(1) of the Companies Act 71 of 2008 (hereinafter the Companies Act).

10 S 20(9) of the Companies Act; Cassim et al (2021) 54-56; Cassim et al

(2022) 70-72.