Hlumisa Investment Holdings (RF) Ltd v Kirkinis

Reflective loss and wrongfulness considered in great detail by the SCA and confirmed the underlying principles that a company has a distinct legal personality and holding shares merely gives the right to participate in terms of the memorandum of incorporation and does not include a personal claim against a wrongdoer who caused loss to the company.

Essence

SCA declined to allow an appeal concerning a reflective loss after considering the principles relating to wrongfulness and pure economic loss allegedly caused by auditors.

Decision

(1423/2018) [2020] ZASCA 83 (3 July 2020)

Order:

Disallowed the appeal from High Court, Pretoria (Molopa-Sethosa J sitting as court of first instance) judgment reported Hlumisa Investment Holdings RF Limited and Another v Kirkinis and Others with costs, including the costs of two counsel.

Judges

NAVSA & SCHIPPERS JJA (MAKGOKA JA and MOJAPELO and KOEN AJJA concurring)

Heard; 9 March 2020

Delivered: 3 July 2020

‘[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.”

. . . . .

“[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.’

[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.”

. . . . . 

“[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] 2 AC 605 at 630). The purpose of audit reports is neither to protect the interests of investors nor individual shareholders.”

. . . . . 

“[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, 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.”

Quotations from judgment

Note: Footnotes omitted and emphasis added

[insert]

Court 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.”