THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable
Case no: 1423/2018

In the matter between:

HLUMISA INVESTMENT HOLDINGS (RF) LTD                                 First Appellant

EYOMHLABA INVESTMENT HOLDINGS (RF) LTD
Second Appellant

and

LEONIDAS KIRKINIS                                                                      First Respondent

NITHIANANTHAN NALLIAH

Second Respondent

MOJANKUNYANE FLORENCE GUMBI

Third Respondent

MORRIS MTHOMBENI

Fourth Respondent

MUTLE CONSTANTINE MOGASE

Fifth Respondent

NOMALISO LANGA-ROYDS

Sixth Respondent

NICHOLOAS ADAMS

Seventh Respondent

SAMUEL SITHOLE

Eighth Respondent

ANTONIO FOURIE

Ninth Respondent

ROBERT JOHN SYMMONDS

Tenth Respondent

DELOITTE & TOUCHE

Eleventh Respondent

Neutral citation:
Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and
Others (Case no 1423/2018) [2020] ZASCA 83 (03 July 2020)

Coram:
NAVSA, MAKGOKA and SCHIPPERS JJA and MOJAPELO and
KOEN AJJA

Heard:
9 March 2020

Delivered:
This judgment was handed down electronically via e-mail to the parties’
legal representatives on 03 July 2020. It has been published on the Supreme Court
of Appeal website.

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.

ORDER

On appeal from: Gauteng Division of the High Court, Pretoria (Molopa-Sethosa J
sitting as court of first instance): judgment reported sub nom Hlumisa Investment
Holdings RF Limited and Another v Kirkinis and Others [2018] ZAGPPHC 676; 2019
(4) SA 569 (GP).
The appeal is dismissed with costs, including the costs of two counsel.

JUDGMENT

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

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

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

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.

[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, excepted to the particulars of claim. Its exceptions
read as follows:
‘FIRST EXCEPTION: THE ALLEGED WRONG WAS COMMITTED AGAINST AFRICAN
BANK, NOT AGAINST THE PLAINTIFFS
The plaintiffs are shareholders of ABIL, the holding company of African Bank.
According to the plaintiffs, ABIL “tasked” Deloitte to audit and report on the financial standing
of ABIL and African Bank . . . .
ABIL’S shareholders have no claim over any assets of ABIL and/or African Bank and merely
have a personal right to participate in ABIL on the terms of its memorandum of incorporation.

1 Section 46(3) of the Auditing Profession Act provides:
‘Despite subsection (2), a registered auditor incurs liability to third parties who have relied on an opinion,
report or statement of that registered auditor for financial loss suffered as a result of having relied
thereon, only if it is proved that the opinion was expressed, or the report or statement was made,
pursuant to a negligent performance of the registered auditor’s duties and the registered auditor—
(a)
knew, or could in the particular circumstances reasonably have been expected to know, at the
time when the negligence occurred in the performance of the duties pursuant to which the opinion was
expressed or the report or statement was made-
(i)
that the opinion, report or statement would be used by a client to induce the third party to act
or refrain from acting in some way or to enter into the specific transaction into which the third party
entered, or any other transaction of a similar nature, with the client or any other person; or
(ii) that the third party would rely on the opinion, report or statement for the purpose of acting or
refraining from acting in some way or of entering into the specific transaction into which the third
party entered, or any other transaction of a similar nature, with the client or any other person; or
(b)
in any way represented, at any time after the opinion was expressed or the report or statement
was made, to the third party that the opinion, report or statement was correct, while at that time the
registered auditor knew or could in the particular circumstances reasonably have been expected to
know that the third party would rely on that representation for the purpose of acting or refraining from
acting in some way or of entering into the specific transaction into which the third party entered, or any
other transaction of a similar nature, with the client or any other person.’

Consequently, any culpable failure by Deloitte to discharge its duties pursuant to its
appointment as African Bank’s statutory auditor:
Constitutes a breach of its duties to ABIL and/or African Bank, not to individual shareholders
of ABIL in their capacity as such; and
May have caused a loss for African Bank – not for ABIL or for ABIL’S shareholders, in their
capacity as such.
Shareholders of ABIL have no claim in law against a third party which caused any loss which
African Bank may have suffered. The diminution of the value of the shares held by ABIL in
African Bank and by the plaintiffs in ABIL is merely a reflection of the loss suffered by African
Bank.
In the premises, [the claim against Deloitte] lacks allegations necessary to sustain a cause of
action.

SECOND EXCEPTION: DELOITTE OWED NO LEGAL DUTY TO THE PLAINTIFFS AS
INDIVIDUAL ABIL SHAREHOLDERS
The plaintiffs’ claim against Deloitte is a delictual claim for pure economic loss.
The plaintiffs’ claim is based upon negligent misstatements allegedly made by Deloitte in
expressing audit opinions in respect of the financial statements of African Bank.
At common law, a statutory auditor of a company owes its legal duties to the company itself
and to the shareholders in general meeting; it owes no legal duty to individual shareholders in
their capacity as such.
Further, the purpose of statutory audit of financial statements is to enable shareholders acting
as a collective to oversee management; not to enable individual shareholders from acting or
refraining to act in any way, whether in connection to their oversight over management or
otherwise.
The plaintiffs rely on section 46(3) of [the APA] to found a legal duty to them, based on the
alleged knowledge of Deloitte that the directors would use the [annual financial statements] to
induce them to refrain from exercising their rights as shareholders in a specific way.
Section 46 – the heading of which is “limitation of liability” – does not change the common-law
position and provides in subsection (4) that:
“Nothing in subsections (2) or (3) confers upon any person a right of action against a registered
auditor which, but for the provisions of those subsections, the person would not have had.”
In the premises, [the claim against Deloitte] lacks allegations necessary to sustain a cause of
action.’

[10] In short, the directors and Deloitte adopted the position that the claims by the
appellants – which, if proven, enured only to the company – were unsustainable at
common law, at the instance of shareholders in their capacity as such, and could also
not be brought in terms of s 218(2) of the Companies Act. Deloitte was adamant that
it owed a legal duty to the company but not to the appellants in their capacities as
individual shareholders in the company.

[11] The court below, in adjudicating the exceptions in relation to Claim A, had
regard to s 218(2) of the Companies Act which, although appearing in the exceptions
set out above, we restate for convenience:
‘Any person who contravenes any provisions of this Act is liable to any other person for any
loss or damage suffered by that person as a result of that contravention.’
Alongside this provision, Molopa-Sethosa J considered s 76(3) of the Act, which the
appellants contended the directors had contravened in conducting the affairs of the
company as alleged. Section 76, which concerns the standards of conduct expected
from company directors . . . is, in essence, a codification of the common law on
fiduciary duties. Section 76(3) essentially provides that directors must exercise their
powers and perform their functions in good faith and for a proper purpose; in the best
interests of the company; and with the degree of skill, care and diligence reasonably
expected of directors. Section 76(3) reads as follows in relevant part:
‘(3)
Subject to subsections (4) and (5), a director of a company, when acting in that
capacity, must exercise the powers and perform the functions of a director—
(a)
in good faith and for a proper purpose;
(b)
in the best interests of the company; and
(c) with the degree of care, skill and diligence that may reasonably be expected of a person—
(i) carrying out the same functions in relation to the company as those carried out by
that director; and
(ii) having the general knowledge, skill and experience of that director.’

[12] At para 26 of the judgment, the following appears concerning s 218(2) of the
Companies Act:
‘Section 218(2) is worded widely in respect of individuals who fall within its ambit; however, it
is restricted in its application and applies only to “damage suffered by that person as a result
of that contravention”. This restriction requires a particular person to have suffered damage
as a result of a particular contravention. What this means is that the particular person who has

suffered damage must be a person who is able to invoke a claim for damages as a result of a
particular contravention of the Companies Act. In para 21 of the amended particulars of claim,
the plaintiffs’ recourse to s 218(2) is articulated as follows:
“21
The directors’ conduct as aforesaid:
21.1
constituted a breach of the provisions of section 76(3) of the Companies Act and
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 . . . .’
Noting that s 76(3) sets the standard of conduct expected of a director, the court below
stated that the subsection does not, however, ‘deal with the liability of a director’. That
subject, said the court below, is dealt with in s 77 of the Companies Act, which reads
as follows:
’77
Liability of directors and prescribed officers—
. . .
(2) A director of a company may be held liable—
(a) in accordance with the principles of the common law relating to breach of a fiduciary duty,
for any loss, damages or costs sustained by the company as a consequence of any breach
by the director of a duty contemplated in section 75,2 76(2) or 76(3)(a) or (b) . . . .’

[13] Molopa-Sethosa J reached the following conclusion:
‘Therefore, a claim that alleges that directors are liable for damages as a result of a breach of
s 76(3) must be brought in terms of s 77(2), which specifically creates the liability for a breach
of s 76(3).’3
The court went on to state the following:
‘Where a statute expressly and specifically creates liability for the breach of a section, then a
general section in the same statute cannot be invoked to establish a co-ordinate liability; see
Gentiruco AG V Firestone SA (Pty) Ltd 1972 (1) SA 589 (A) at 603. This is the result of the
generalia specialibus non derogant maxim in terms of which general provisions do not
derogate from special provisions.’4

[14] The court below stated that if s 218(2) had the breadth ascribed to it by the
appellants, it ‘would be a drastic departure from a core principle of company law’.5

2 Section 75 deals with the personal financial interests of directors and is of no relevance in relation to
the present dispute.
3 Hlumisa Investment Holdings RF Limited and Another v Kirkinis and Others [2018] ZAGPPHC 676;
2019 (4) SA 569 (GP) para 29.
4 Ibid para 30.
5 Ibid para 31.

Molopa-Sethosa J then embarked on an extensive examination of case law, dealing
with the well-established principle of statutory interpretation that a statute should not
be taken to alter the common law unless it is clear that that is what was intended; and
even then, no more than what is necessary. She dealt with the qualification that
statutes must be interpreted in the context of constitutional values and that the
common law must be developed to promote the spirit, purport and objects of the Bill
of Rights and referred to Constitutional Court authority in that regard. The court below
proceeded to hold as follows:
‘It cannot be said that there is anything in s 218(2) to indicate that the legislature intended to
alter the common law and allow reflective-loss claims to be brought under that section.’6
It was emphasised that s 77(2) required claims for a breach of s 76(3) to be brought
‘in accordance with the principles of the common law’.7 Molopa-Sethosa J concluded
on this score by holding that ‘a reflective-loss claim cannot be brought under s 77(2),
because the common law does not permit such a claim. What the plaintiffs’ argument
involves is a finding that the Companies Act allows a reflective-loss claim which the
common law prohibits if the claim is brought under s 76(3)’.8

[15] In respect of the appellants’ reliance on s 22 of the Companies Act the court
below referred to the provisions of s 77(3)(b),9 which deal explicitly with losses suffered
by a company as a consequence of a director having acquiesced in the carrying on of
the company’s business, despite knowing that it was being conducted in a manner
prohibited by s 22. Thus, it held, as in the case of their reliance on s 76, the appellants’
reliance on s 22 was misconceived.

[16]  Dealing with the contention on behalf of the appellants that the words ‘as a
result of’ in s 218(2) do not import a legal causative requirement, the court below held
as follows:

6 Ibid para 39.
7 Ibid para 40.
8 Ibid para 41.
9 Section 77(3)(b) reads as follows: ‘A director of a company is liable for any loss, damages or costs
sustained by the company as a direct or indirect consequence of the director having—
. . .
(b) acquiesced in the carrying on of the company’s business despite knowing that it was being
conducted in a manner prohibited by section 22(1) . . .’

‘Basically, what the plaintiffs suggest in their interpretation of s 218(2) is that all the
requirements of the common law relating to fault, foreseeability, causation and the proper
plaintiff should be discarded, and this cannot be so.’10
In arriving at that conclusion, the court below rejected the appellants’ reliance on the
decision of the Constitutional Court in Department of Land Affairs and Others v
Goedgelegen Tropical Fruits (Pty) Ltd [2007] ZACC 12; 2007 (6) SA 199 (CC). The
Constitutional Court was there dealing with causation in relation to the application of
the Restitution of Land Rights Act 22 of 1994 and the meaning of the phrase ‘as a
result of’ in s 2(1) of that Act. It gave that expression an extended meaning because it
was considering a remedial measure to redress past imbalances and the effects of
historical dispossession of rights in land.11  The court below held that the comparison
with s 218(2) of the Companies Act was untenable.12

[17] Late in its judgment,13 the court below considered the judgment of this court in
Itzikowitz v Absa Bank Ltd [2016] ZASCA 43; 2016 (4) SA 432 (SCA) where there is
a discussion of the principle against reflective loss in relation to companies and their
shareholders.14 The underlying principles that find application are, first, that a
company has a distinct legal personality. Secondly, holding shares in a company
merely gives shareholders 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 and, in the light thereof, a personal claim by a shareholder against a
wrongdoer who caused loss to the company is misconceived.15 Thus, the court below
was fortified in its view that the appellants could not rely on s 218(2) of the Companies
Act for their reflective-loss claim.

[18] The court below went on to consider the appellants’ claim against Deloitte and
the related exceptions. It considered the appellants’ ‘pivotal’ allegation to be the
following: ‘In consequence of ABIL being the sole shareholder of African Bank, any

10 Hlumisa Investment Holdings above fn 3 para 44.
11 Department of Land Affairs and Others v Goedgelegen Tropical Fruits (Pty) Ltd [2007] ZACC 12;
2007 (6) SA 199 (CC) para 47.
12 Hlumisa Investment Holdings above fn 3 paras 47-48.
13 Ibid para 50.
14 See especially paras 9-20 of Ponnan JA’s judgment in Itzikowitz v Absa Bank Ltd [2016] ZASCA
43; 2016 (4) SA 432 (SCA).
15 Ibid paras 9-12.

acts or omissions by third parties causing patrimonial loss to African Bank would
consequently result in ABIL suffering patrimonial loss’.16 It held as follows:
‘It is clear that the plaintiffs sue for a loss caused by a third party (Deloitte) to African Bank
which allegedly resulted in an equivalent loss to ABIL. By parity of this reasoning, ABIL’s
minority shareholders would then also have suffered patrimonial loss due to ABIL’s loss.
This analysis is not correct. African Bank suffered the loss and it is the proper plaintiff. In
circumstances where African Bank has a claim against the third party, the shareholders of
African Bank (or of its shareholder) have no claim in their own name.’17

[19] Consequently, the court below upheld the exceptions by the directors and
Deloitte in respect of both Claims A and B with costs, and granted the plaintiffs an
opportunity to amend their particulars of claim, if so advised. It is against the order
based on the conclusions set out above, that the present appeal is directed.

[20] Deloitte was given leave to cross-appeal conditionally, ostensibly on the basis
that if this court found that liability attached to the directors in terms of s 218(2), it did
not follow that there was liability on the part of Deloitte, located either statutorily or
otherwise. It must be borne in mind that in their claim against Deloitte, the appellants
did not rely expressly on s 218(2).

[21] In considering whether the essential conclusions of the court below are correct
it is necessary, at the outset to deal with the contention by the appellants, near the
commencement of their heads of argument, that the directors’ reliance on the legally
recognised bar against a reflective loss claim is nowhere to be found in their
exceptions and, consequently, the court below erred in having regard to submissions
in that regard. This was all the more so, it was contended, if regard is had to rule 23(3)
of the Uniform Rules of Court, which provides that the grounds upon which an
exception is founded ‘shall be clearly and concisely stated’. That contention can be
disposed of briefly. The rule against claims for reflective loss will be examined in some
detail later in this judgment. For present purposes it suffices to state its essentials:
Where a wrong is done to a company, only the company may sue for damage caused
to it. This does not mean that the shareholders of a company do not consequently

16 Hlumisa Investment Holdings above fn 3 para 68. (Emphasis original.)
17 Ibid paras 69-70.

suffer any loss, for any negative impact the wrongdoing may have on the company is
likely also to affect its net asset value and thus the value of its shares. The
shareholders, however, do not have a direct cause of action against the wrongdoer.
The company alone has a right of action. In their exceptions, the directors contended
that ABIL and/or African Bank ought to have brought an action, if one was sustainable,
and not the appellants as shareholders in ABIL. The exceptions accordingly
encompassed the no reflective loss principle. There is thus no merit in this point.

[22] In deciding an exception a court must take the facts alleged in the pleading as
being correct. It is for the excipient to satisfy the court that the conclusion of law set
out in the particulars of claim is unsustainable. The court may uphold the exception
only if it is satisfied that the cause of action or conclusion of law cannot be sustained
on every interpretation that can be put on those facts.18 As Harms JA noted in
Telematrix, exceptions are a useful tool to ‘weed out’ bad claims at an early stage and
an unnecessarily technical approach is to be avoided.19 The facts are what must be
accepted as correct; not the conclusions of law.

[23] In the present case one must therefore accept that there was a diminution in
value of the shares held by the appellants; that losses were caused to both ABIL and
African Bank; and that these losses were due to the alleged misconduct on the part of
the directors. What is in issue, is whether s 218(2) of the Companies Act provides a
basis for a claim by the appellants, in their capacity as individual shareholders in ABIL,
against the directors based on contraventions by the directors of ss 22(1), 45 and 74
and breaches of s 76(3) of the Companies Act. In respect of the auditors the issue is
whether, in the circumstances pleaded, they owed the appellants, as individual
shareholders in ABIL, legal duties not to have made misrepresentations in African
Bank’s financial statements and to have qualified the audit; and whether, in that
regard, reliance could be placed on s 46(3) of the APA and s 218(2) of the Companies
Act to sustain a cause of action. To that end one must accept that there were

18 Children’s Resource Centre Trust and Others v Pioneer Food (Pty) Ltd and Others [2012] ZASCA
182; 2013 (2) SA 213 (SCA) para 36, cited with approval in H v Fetal Assessment Centre [2014] ZACC
34; 2015 (2) SA 193 (CC) para 10.
19  Telematrix (Pty) Ltd t/a Matrix Vehicle Tracking v Advertising Standards Authority SA [2005] ZASCA
73; 2006 (1) SA 461 (SCA) para 3, obtaining the Constitutional Court’s imprimatur in Pretorius and
Another v Transport Pension Fund and Others [2018] ZACC 10; 2019 (2) SA 37 (CC) para 15.

misrepresentations by Deloitte relating to African Bank’s financial statements, as well
as a failure to qualify the financial statements, and that this commission and omission
caused loss to African Bank and consequently a diminution in value of the appellants’
shares.

[24] A good starting point in considering whether the exceptions were correctly
upheld, is a revisiting of the rule against claims by shareholders for reflective loss.  In
Itzikowitz20 this court restated, with reference to the prevailing authorities, the following
established principle:
‘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 property vested in a company is not
and cannot be regarded as vested in all or any of its members. . . . A shareholder’s general
right of participation in the assets of the company is deferred until winding-up, and then only
subject to the claims of creditors.’

[25] Ponnan JA then went on to consider the following statement in Lawsa21
concerning our law on the rights of shareholders to sue personally when a wrong is
perpetrated against a company:
‘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.’

[26] Ponnan JA recognised that for that proposition in Lawsa reliance was placed
on Prudential Assurance Co Ltd v Newman Industries Ltd (No 2),22 where the following
was stated at 222-223:
‘[W]hat [a shareholder] cannot do is to recover damages merely because the company in
which he is interested has suffered damage. He cannot recover a sum equal to the diminution
in the market value of his shares, or equal to the likely diminution in dividend, because such a
“loss” is merely a reflection of the loss suffered by the company. The shareholder does not

20 Itzikowitz above fn 14 para 9. (Citations omitted.)
21 4(1) Lawsa 2 ed (2012) para 67. (Citations omitted.)
22 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204; [1982] 1 All ER 354
(HL).

suffer any personal loss. His only “loss” is through the company, in the diminution in the value
of the net assets of the company, in which he has . . . shareholding.’

[27] Itzikowtiz also referred to the more recent judgment of the House of Lords in
Johnson v Gore Wood & Co (a firm) [2000] UKHL 65; [2001] 1 All ER 481; [2002] 2
AC 1 (HL), where Lord Bingham observed:
‘(1) Where a company suffers loss caused by a breach of duty owed to it, only the company
may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity
and no other to make good a diminution in the value of the shareholder’s shareholding where
that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to
make good a loss which would be made good if the company’s assets were replenished
through action against the party responsible for the loss, even if the company, acting through
its constitutional organs, has declined or failed to make good that loss. . . . (2) Where a
company suffers loss but has no cause of action to sue to recover that loss, the shareholder
in the company may sue in respect of it (if the shareholder has a cause of action to do so),
even though the loss is a diminution in the value of the shareholding. . . . (3) Where a company
suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and
distinct from that suffered by the company caused by breach of a duty independently owed to
the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to
it but neither may recover loss caused to the other by breach of the duty owed to that other.’23

[28] Dealing with the first principle, Lord Millett stated that the rationale for the rule
was to avoid double recovery:
‘The position is, however, different where the company suffers loss caused by the breach of a
duty owed both to the company and to the shareholder. In such a case the shareholder’s loss,
in so far as this is measured by the diminution in value of his shareholding or the loss of
dividends, merely reflects the loss suffered by the company in respect of which the company
has its own cause of action. If the shareholder is allowed to recover in respect of such loss,
then either there will be double recovery at the expense of the defendant or the shareholder
will recover at the expense of the company and its creditors and other shareholders. Neither
course can be permitted. This is a matter of principle; there is no discretion involved. Justice
to the defendant requires the exclusion of one claim or the other; protection of the interests of

23 Johnson v Gore Wood & Co (a firm) [2000] UKHL 65; [2001] 1 All ER 481; [2002] 2 AC 1 (HL) at
35E-36B.

the company’s creditors requires that it is the company which is allowed to recover to the
exclusion of the shareholder.’24
He went on to say the following:
‘It is of course correct that the diminution in the value of the plaintiffs’ shares was by definition
a personal loss and not the company’s loss, but that is not the point. The point is that it merely
reflected the diminution of the company’s assets. The test is not whether the company could
have made a claim in respect of the loss in question; the question is whether, treating the
company and the shareholder as one for this purpose, the shareholder’s loss is franked by
that of the company. If so, such reflected loss is recoverable by the company and not by the
shareholders.’25

[29] More recently, in Novatrust Limited v Kea Investments Limited and Others
[2014] EWHC 4061 (Ch), with reference to Johnson v Gore Wood & Co,26 Day v Cook
[2003] BCC 256 para 39 and Gardner v Parker [2004] EWCA Civ 781; [2004] 2 BCLC
554 para 49, the rule against a claim by a shareholder that was purely reflective of a
loss suffered by the company was reaffirmed in paras 54 and 55.

[30] In 2018 the Court of Appeal considered the scope of the rule against reflective
loss in Garcia v Marex Financial Ltd [2018] EWCA Civ 1468; [2018] 3 WLR 1412;
[2019] QB 173. Flaux LJ observed that the justification for the rule is fourfold:
‘The four aspects or considerations justifying the rule which emerge from the authorities, in
particular Lord Millett’s speech in Johnson v Gore Wood & Co [2002] 2 AC 1, are: (i) the need
to avoid double recovery by the claimant and the company from the defendant …;
(ii) causation, in the sense that if the company chooses not to claim against the wrongdoer,
the loss to the claimant is caused by the company’s decision not by the defendant’s
wrongdoing …; (iii) the public policy of avoiding conflicts of interest particularly that if the
claimant had a separate right to claim it would discourage the company from making
settlements …; and (iv) the need to preserve company autonomy and avoid prejudice to
minority shareholders and other creditors.’27

24 Ibid at 62D-G.
25 Ibid at 66B-D.
26 Ibid.
27 Garcia v Marex Financial Ltd [2018] EWCA Civ 1468; [2018] 3 WLR 1412; [2019] QB 173 at 188-
189.

[31] Blackman, Jooste and Everingham provide a slightly different rationale for the
rule against reflective loss in their Commentary on the Companies Act,28 which is
perhaps more convincing. On the ‘double recovery’ justification for the rule, and the
view that allowing a personal action would subvert the rule in Foss v Harbottle,29 the
authors say the following:
‘This explanation is misleading. When the value of shares is depreciated or destroyed as a
consequence of harm done to the company, the shareholders suffer harm, albeit that the harm
is “indirect”. A person who suffers indirect harm, suffers harm. And there is no principle of law
that denies a person a claim for damages, merely because the harm he suffered was “indirect
harm”, although of course the question of remoteness of damage may arise.
The principle is that where harm is wrongfully caused directly to A (eg the company) and
indirectly to B (eg the company’s shareholders), the law gives the right of action to claim
compensation to A. It does so because if, instead, the right were given to B, A and A’s creditors
would be prejudiced. What is more, B’s action would involve a determination of A’s loss. In the
case of a company, each shareholder would have an action, and consequently there would
be a multiplicity of actions, many of which would be for very small sums. If, instead, the cause
of action is given to A, the law will not only ensure that A suffers no loss: it will also ensure
that B suffers no loss. This is not because B will, then, merely suffer “indirect” or “incidental”
harm. It is because B suffers no harm at all. A’s right of action is an asset which, itself,
compensates A for his loss. If A (eg the company) is able to obtain full compensation from the
wrongdoer, A’s financial position is unaffected. And therefore B’s financial position (eg the
value of the company’s shareholders’ shares) is also unaffected.’
And, in a later paragraph:
‘It is usually said that if both the company and the shareholder were given the right to recover,
the wrongdoer would suffer “double jeopardy” and the shareholder might receive “double
compensation”. If the shareholder sued first, the wrongdoer would be placed in double
jeopardy because, after paying the shareholder, he would still be liable to the company; and
if, then, the company obtained recovery, the shareholder would receive double
compensation. However, despite the frequency with which this argument has been advanced,
it is mistaken. If the company has the right of action, the wrong done to it causes its
shareholders no harm. Hence the shareholder can have no action. The problem of “double
jeopardy” and “double compensation” simply does not arise. Thus, it is not merely the
company's existence as a separate legal person that deprives the shareholder of an action

28 ‘Remedies of Members’ in MS Blackman, RD Jooste & GK Everingham Commentary on the
Companies Act (RS 9 2012) at 9-67 – 9-68-1. (Citations omitted; emphasis original)
29 Foss v Harbottle (1843) 67 ER 189; (1843) 2 Hare 461.

against the wrongdoer. What deprives the shareholder of a right of action is the fact that the
company has a right to recover damages for the loss it has suffered.’
There can however be no doubt that there are sound policy and jurisprudential reasons
for the rule.

[32] We pause to note that Novatrust also dealt with derivative claims. In a situation
where wrongdoers themselves control the company, so that they can prevent the
taking of the necessary steps, any one or more of its members may bring what is
known as a derivative action, that is, an action by an individual shareholder, in own
name, against the wrongdoers for relief to be granted to the company, the action being
one on the company’s behalf.30 In England and Wales derivative actions are
comprehensively regulated by Part 11 of Chapter 1 of the Companies Act 2006. In
South Africa it is regulated by s 165 of the Companies Act. In both statutes there are
requirements that must be met before such a claim may be brought. Derivative claims
are not in issue in this appeal.

[33] In Giles v Rhind [2002] 4 All ER 977; [2002] EWCA Civ 1428, the Court of
Appeal gave effect to the third policy consideration set out by Lord Bingham in
Johnson, referred to in para 27 above. It held that the rule against claims for reflective
loss did not operate to exclude a shareholder’s personal action for reflective loss
against a wrongdoer who had deprived the company of funds and who successfully
obtained security for costs against the company, essentially stifling the company’s
claim so that its directors discontinued the company’s action against him. The
shareholder then moved to litigate in the company’s stead. In those circumstances the
Court of Appeal permitted a shareholder’s personal claim, notwithstanding the
shareholder’s loss being, in part, a reflection of the loss suffered by the company.
Waller LJ (paras 33-35) justified the exception as follows:
‘In Johnson v Gore Wood & Co there was no difficulty about the company having a cause of
action and being able to recover on the cause of action. I also think that in the light of Lord
Bingham's observation that it is important for the “court to be astute to ensure that the party

30 See ‘Derivative actions’ in PA Delport (ed) Henochsberg on the Companies Act 71 of 2008 (SI 21
2019) 587-593 for a useful discussion on the proper plaintiff rule in Foss v Harbottle (above fn 29) and
the progression to derivative actions. Foss v Harbottle was the genesis of the rule against claims for
reflective loss and is referred to in subsequent cases, such as Prudential Assurance (above fn 22), in
terms of which the principle was refined, exceptions were developed and the rule was also relaxed as
against the development of the law in general.

who has in fact suffered loss is not arbitrarily denied compensation”, it is clear that he had the
particular facts in Johnson v Gore Wood & Co in mind, ie that there had been nothing to stop
the company continuing with its action if it had so chosen.
One situation which is not addressed is the situation in which the wrongdoer by the breach of
duty owed to the shareholder has actually disabled the company from pursuing such cause of
action as the company had. It seems hardly right that the wrongdoer who is in breach of
contract to a shareholder can answer the shareholder by saying “the company had a cause of
action which it is true I prevented it from bringing, but that fact alone means that I the
wrongdoer do not have to pay anybody”.
In my view there are two aspects of the case which [Giles] seeks to bring which point to [him]
being entitled to pursue his claim for the loss of his investment. First, as it seems to me, part
of that loss is not reflective at all. It is a personal loss which would have been suffered at least
in some measure even if the company had pursued its claim for damages. Secondly, even in
relation to that part of the claim for diminution which could be said to be reflective of the
company's loss, since, if the company had no cause of action to recover that loss the
shareholder could bring a claim, the same should be true of a situation in which the wrongdoer
has disabled the company from pursuing that cause of action. I accept that on the language
of Lord Millett's speech there are difficulties with this second proposition, but I am doubtful
whether he intended to go so far as his literal words would take him. Furthermore it seems to
me that on Lord Bingham's speech supported by the others, it would not be right to conclude
that the second proposition is unarguable.’

[34] The approach taken in Giles v Rhind was, of course, to mitigate the inflexible
proper plaintiff rule set out more than 175 years ago in Foss v Harbottle.31 Prudential
Assurance set that case, which is the genesis of the rule against claims for reflective
loss by shareholders, in historic perspective and in relation to derivative claims. In
Prudential Assurance (at 210-212), the Court of Appeal stated the following:
‘A derivative action is an exception to the elementary principle that A cannot, as a general
rule, bring an action against B for to recover damages or secure other relief on behalf of C for
an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore,
the person in whom the cause of action is vested. This is sometimes referred to as the rule in
Foss v Harbottle (1843) 2 Hare 461 when applied to corporations, but it has a wider scope
and is fundamental to any rational system of jurisprudence. The rule in Foss v Harbottle also
embraces a related principle, that an individual shareholder cannot bring an action in the

31 Above fn 29.

courts to complain of an irregularity (as distinct from an illegality) in the conduct of the
company’s internal affairs if the irregularity is one which can be cured by a vote of a company
in general meeting.
The classic definition of the rule in Foss v Harbottle is stated in the judgment of Jenkins LJ in
Edwards v Halliwell [1950] 2 All ER 1064 at 1066-7 as follows. (1) The proper plaintiff in an
action in respect of a wrong alleged to be done to a corporation is, prima facie, the corporation.
(2) Where the alleged wrong is a transaction which might be made binding on the corporation
and on all its members by a simple majority of the members, no individual member of the
corporation is allowed to maintain an action in respect of that matter because, if the majority
confirms the transaction, cadit quaestio; or, if the majority challenges the transaction, there is
no valid reason why the company should not sue. (3) There is no room for the operation of the
rule if the alleged wrong is ultra vires the corporation, because the majority of members cannot
confirm the transaction. (4) There is also no room for the operation of the rule if the transaction
complained of could be validly done or sanctioned only by a special resolution or the like,
because a simple majority cannot confirm a transaction which requires the concurrence of the
greater majority. (5) There is an exception to the rule where what has been done amounts to
fraud and the wrongdoers are themselves in control of the company. In this case the rule is
relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders’
action on behalf of themselves and all others. The reason for this is that, if they were denied
that right, their grievance could never reach the court because the wrongdoers themselves,
being in control, would not allow the company to sue.’

[35] As indicated above, there has been statutory and judicial intervention to
address concerns against injustices resulting from the rule against claims for reflective
loss being applied inflexibly. Commentators, whilst also voicing concerns that an
inflexible application of the rule might lead to injustice, have not suggested that it be
abolished. In P Koh’s contribution on ‘The Shareholder’s Personal Claim: Allowing
Recovery for Reflective Losses’32  she concludes as follows at 888-889:
Undoubtedly, the no reflective loss principle, as laid down in Prudential Assurance and as
clarified in Johnson, is driven by sound policy reasons. However, these policy reasons are not
always applicable nor are they in themselves unassailable. As the task of any court should be
to achieve justice and fairness on the particular facts before it, there is much to be said for
retaining discretion over whether to allow a personal suit or not. Justice is necessarily context-

32 P Koh ‘The Shareholder’s Personal Claim: Allowing Recovery for Reflective Losses’ (2011) 23
Singapore Academy of Law Journal 863-889.

driven. To apply a rigid rule regardless of context, therefore, raises the real risk of denying the
wronged party appropriate remedy. …
However, to ensure that the cause brought by a shareholder is indeed genuine, the asserted
claim must, in the first place, be one that can properly be classified as a personal one, taking
account of the source and nature of the right asserted. Only then should the court entertain
the shareholder’s claim and proceed to consider whether the policy concerns that support the
rule may be adequately dealt with in the particular case.’33

[36] In New Zealand, the legislature has provided for shareholders to bring an action
in instances where there is a duty owed to them. It also set out, though not
exhaustively, duties of directors that are owed to shareholders and not to the company,
and conversely, those owed to the company and not to shareholders (which include
the instances relied on by the appellants in the present case). It was emphatic that an
action may not be brought to recover any loss in the form of a diminution in the value
of shares in the company by reason of loss suffered by the company. Thus, s 169 of
the Companies Act 1993 (New Zealand) provides:
‘169         Personal actions by shareholders against directors
(1) A shareholder or former shareholder may bring an action against a director for breach of a
duty owed to him or her as a shareholder.
(2) An action may not be brought under subsection (1) to recover any loss in the form of a
reduction in the value of shares in the company or a failure of the shares to increase in value
by reason only of a loss suffered, or a gain forgone, by the company.
(3) Without limiting subsection (1), the duties of directors set out in—
(a)
section 90 (which relates to the duty to supervise the share register); and
(b)
section 140 (which relates to the duty to disclose interests); and
(c)
section 148 (which relates to the duty to disclose share dealings)—
are duties owed to shareholders, while the duties of directors set out in—
(d)
section 131 (which relates to the duty of directors to act in good faith and in the best
interests of the company); and
(e)
section 133 (which relates to the duty to exercise powers for a proper purpose); and
(f)
section 135 (which relates to reckless trading); and
(g)
section 136 (which relates to the duty not to agree to a company incurring certain
obligations); and

33 Emphasis original. See also the views of R Samuel in ‘Reflective loss reconsidered (Pt 1)’ (2019) NLJ
17-18, and ‘Reflective loss reconsidered (Pt 2)’ (2019) NLJ 17-18.

(h)
section 137 (which relates to a director’s duty of care); and
(i)
section 145 (which relates to the use of company information)—
are duties owed to the company and not to shareholders.’

[37] There can be no doubt that when the Companies Act became operative on 1
May 2011, and thereafter, our law recognised the rule against claims for reflective loss,
more particularly, in respect of claims by shareholders for compensation for a
diminution in the value of their shares due to loss occasioned to the company by a
wrongdoer. That much is clear from what is set out in paras 24 to 27 above. Our courts
applied the law as applied by English courts over time. See, in addition to the South
African judgments already referred to, Gihwala and Others v Grancy Property Ltd and
Others [2016] ZASCA 35; (SCA) 2017 (2) 337 (SCA) paras 107-112 and Off-Beat
Holiday Club and Another v Sanbonani Holiday Spa Shareblock Ltd and Others [2016]
ZASCA 62; 2016 (6) SA 181 (SCA) para 41 and the cases there cited.

[38] The appellants’ claims against the directors are quintessentially reflective loss
claims. The essentials of the particulars of claim are that:
(a)
The plaintiffs are shareholders of ABIL.
(b)
The directors were at all material times directors of ABIL.
(c)
African Bank was a wholly owned subsidiary of ABIL.
(d)
African Bank carried out the business of a bank.
(e)
The directors in their capacity as directors of ABIL conducted the business of
ABIL and African Bank recklessly and in contravention of ss 22(1), 74 and 45 of the
Companies Act and in breach of s 76(3) of that Act.
(f)
The breach of the aforesaid provisions resulted in significant losses on the part
of African Bank and consequently ABIL.
(g)
As a result of the loss suffered by ABIL, the appellants suffered a diminution in
the value of their ABIL shares. The losses ‘in turn caused the share price… to drop
from R28.15 ... to ... 31 cents ... being a total diminution of R27.84 per share’.
Simply put, the wrong done to the company (ABIL) is the basis of the appellants’ claim
and the diminution in share value is directly correlated to the losses suffered by ABIL.
The belated attempt in a submission before us, namely, that the diminution in value of
the appellant’s shares, although arising from a chain of events which includes the
losses suffered by African Bank and ABIL, is a loss distinct from the losses suffered

by African Bank and ABIL, is fallacious. Linked to that submission is one concerning
the manner in which listed shares are valued, that is, the price a willing buyer is
prepared to pay to a willing seller. That ignores the very basis of the rule referred to in
the first principle stated by Lord Bingham in Johnson and captured in the passage
from Lawsa, cited in para 25 above. In any event, that is not how the loss and its cause
were pleaded by the appellants. There can be no doubt, on the appellants’ version of
events, that ABIL would have a claim against the directors and that at common law,
the existence and viability of that claim precluded a personal claim by the
shareholders. In the present case there is no hint by the appellants of a derivative
claim and no assertion of oppression by the majority of shareholders, or that ABIL was
in some way, hindered or obstructed in pursuing a claim against the directors.

[39] There is no independent cause of action as submitted on behalf of the
appellants and no justification of any kind as to why the appellants’ claim fell within
any of the recognised exceptions, or why it would be unjust to deny the 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.

[40] There is simply no basis in fact for the contention on the part of the appellants
that the claim against the directors falls with the second or third principles set out by
Lord Bingham in Johnson, cited in para 27 above. We repeat them here for
convenience:
‘(2) Where a company suffers loss but has no cause of action to sue to recover that loss, the
shareholder in the company may sue in respect of it (if the shareholder has a cause of action
to do so), even though the loss is a diminution in the value of the shareholding. . . . (3) Where
a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss
separate and distinct from that suffered by the company caused by breach of a duty
independently owed to the shareholder, each may sue to recover the loss caused to it by
breach of the duty owed to it but neither may recover loss caused to the other by breach of
the duty owed to that other.’34
The appellants’ claim against the directors do not even begin to approximate the
claims envisaged in (2) and (3).

34 Johnson above fn 23 at 35G-36B.

[41] Does s 218(2) save the day for the appellants in relation to the claim against
the directors? The short answer is no. The reasons are set out hereafter. It is
necessary first to have regard to the purposes of the Companies Act within which
s 218(2) is located. The Act came into effect on 1 May 2011.The purposes of the Act
are, inter alia, to promote compliance with the Constitution; to provide for the creation
and use of companies in a manner that enhances the economic welfare of South Africa
as a partner within the global economy; to promote the development of the South
African economy by encouraging transparency and high standards of corporate
governance; and to re-affirm the concept of the company as a means of achieving
economic and social benefits. It was also enacted to balance the rights and obligations
of shareholders and directors within companies. The full list of the purposes of the Act
are set out in s 7. Whilst the Act was structured to deal with South African conditions,
the legislature was conscious of the global economy. In the interpretation of the Act
regard is also to be had to foreign law, to the extent that this would be appropriate. In
this regard see s 5(2) of the Act.

[42]  A company is defined in s 1 of the Act as a distinct juristic person. This distinct
personality is no mere technicality.35 It is foundational to company law. As observed
in Itzikowitz, referred to in para 24 above, property vesting in the company does not
vest in any or all of its members. It is the basis of the rule against the claim for reflective
loss, as referred to in Prudential, Johnson, Itzikowitz and captured in the statement in
Lawsa, referred to in para 25 above.

[43] Importantly, the legislature must have been aware of the need to retain those
principles of the common law that had been applied under preceding legislation that
were consonant with our constitutional values and in line with international company
law. The following statement in a policy paper published by the Department of Trade
and Industry, entitled ‘South African Company Law for the 21st Century – Guidelines
for Corporate Law Reform’,36 which is quoted in the Companies Bill,37 is elucidating:
‘It is not the aim of the [Department of Trade and Industry] simply to write a new Act by
unreasonably jettisoning the body of jurisprudence built up over more than a century. The

35 Itzikowitz above fn 14 para 9.
36 See GN 1183 in GG 26493 of 23-06-2004.
37 See the Companies Bill B 61-2008, an explanatory summary of which was published in GG 31104
of 30-05-2008.

objective of the review is to ensure that the new legislation is appropriate to the legal, economic
and social context of South Africa as a constitutional democracy and an open economy. Where
the current law meets these objectives, it should remain as part of company law.’

[44] A further factor to bear in mind is the presumption that statutory provisions are
not intended to alter or exclude the common law unless they do so expressly or by
necessary implication.38 Where possible, statutes must be read in conformity with the
common law.39 This enhances legal certainty and recognises the value of the common
law, which has developed systematically over time.40

[45] It is in that context that s 218(2) falls to be considered. Section 218(2) reads
as follows:
‘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.’
When a wrongdoer ‘contravenes’ the Act and causes loss to a person, the wrongdoer
is liable to that person. The ordinary meaning of ‘contravene’ is ‘to go counter to; to
transgress, infringe (a law, provision, etc); to act in defiance or disregard of’.41 The
decriminalisation of company law sanctions was one of the principles of the policy
underlying the Act.42 This indicates that the contravention envisaged in s 218(2) need
not be a criminal offence.43 It suffices to say that the word ‘contravenes’ in s 218(2)
includes a breach or an infringement of any provision of the Act, ‘which is by nature
prescriptive or which in some way regulates conduct’.44 Sections 22(1), 74, 45 and
76(3), which in the present case the appellants contend trigger the operation of s
218(2), clearly fall into this category.

38 Casserley v Stubbs 1916 TPD 310 at 312; Dhanabakium v Subramanium 1943 AD 160 at 167;
Attorney-General, Transvaal v Botha 1994 (1) SA 306 (A) at 330I-J.
39 Ngqukumba v Minister of Safety and Security and Others [2014] ZACC 14; 2014 (5) SA 112 (CC)
para 16
40 25(1) Lawsa 2 ed para 340.
41 Oxford English Dictionary (2008).
42 See para 4.7 of the policy paper, South African Company Law for the 21st Century – Guidelines for
Corporate Law Reform, at 44.
43 Henochsberg op cit fn 28 at 642.
44 R Stevens and P De Beer The Duty of Care and Skill, and Reckless Trading: Remedies in Flux?
(2016) 28 SA Merc LJ 250 at 274.

[46] Section 22(1)(a) provides that ‘[a] company must not carry on its business
recklessly, with gross negligence, with intent to defraud any person or for any
fraudulent purpose.’ Section 76(3) provides:
‘Subject to subsections (4) and (5), a director of a company, when acting in that capacity, must
exercise the powers and perform the functions of a director—
(a) in good faith and for proper purpose;
(b) in the best interests of the company; and
(c) with the degree of care, skill and diligence that may reasonably be expected of a person—
(i)
carrying out the same functions in relation to the company as those carried out by
that director; and
(ii)
having the general knowledge, skill and experience of that director.’
Section 45 is another section of the Companies Act on which the appellants relied.
That section regulates loans or other financial assistance to directors or prescribed
officers of the company or of a related or inter-related company, or to a related or inter-
related company or corporation, or to a member of a related or inter-related
corporation, or to a person related to any such company, corporation, director,
prescribed officer or member. In the appellants’ particulars of claim it was alleged that
the directors failed to vote against the granting of loans to certain corporations and
that these loans were in contravention of section 45. In not resisting the granting of the
loans the directors were said to have acted in contravention of s 22(1) of the Act and,
consequently, the appellants were entitled to bring a claim against them in terms of s
218(2) of the Act.

[47] Henochsberg,45 in the commentary on s 76(3) of the Companies Act, states the
following:
‘The common law position is that a director has to act bona fide and in the best interests of
the company. This is the fundamental duty which qualifies the exercise of any powers which
the directors in fact have . . . . The duties to act bona fide and in the best interests of the
company are now entrenched in the Act . . . . With regard to the duty to act in the best interests
of the company and who the beneficiary of a director’s duty is, the common law position is as
follows: At common law directors owe fiduciary duties to the company . . . . Such duties are
owed even by non-executive directors . . . . Where, therefore, a director acts in breach of a

45  ‘In good faith, in the best interests of the company for a proper purpose’ in Henochsberg op cit fn
28 at 298-9 – 298-11, 298-15 – 298-16, and 298-17.

fiduciary duty he may, depending on the circumstances, also act in breach of his duty of care,
skill and diligence . . . .
. . .
The duty of good faith and the duty to act for the benefit/interests of the company are two
separate duties . . . . The “interests”, in this context, are only those of the company itself as a
corporate entity and those of its members as such as a body (Alexander v Automatic
Telephone Co [1900] 2 Ch 56 (CA) at 67, 72; Coronation Syndicate Ltd v Lilienfeld 1903 TS
489 at 497; Parke v Daily News Ltd [1962] Ch 927 at 963; [1962] 2 All ER 929 at 948 . . . .
. . .
The “proper purpose” duty entails in the first instance that the director must not exceed the
limitations of his own authority and must not exceed the limitations of the company . . . .
In the second instance a director must exercise the duties only for the purpose for which they
were conferred and not for an “improper” purpose . . . .
Directors as such owe no fiduciary duty to the members/shareholders individually (Percival v
Wright [1902] 2 Ch 421; Pergamon Press Ltd v Maxwell [1970] 2 All ER 809 (Ch) at 814), not
even to a member who is the majority shareholder (Bell v Lever Brothers Ltd [1932] AC 161
(HL) at 228); their fundamental duty is to act only in the bona fide interests of the company
and its shareholders as a body (SA Fabrics Ltd v Millman NO 1972 (4) SA 592 (A); Minister of
Water Affairs and Forestry v Stilfontein Gold Mining Co Ltd 2006 (5) SA 333 (W) para 16 . . .’
(Emphasis added and some authorities omitted.)

[48] Returning to the provisions of s 218(2) of the Companies Act, the duties owed
by directors in terms of s 76(3) are owed to the company, not to individual
shareholders. The company, in the event of a wrong done to it in terms of any of the
provisions of that subsection, can sue to recover damages. The company would be
the proper plaintiff. It is no coincidence, then, that s 77(2)(a) provides that a director of
a company may be held liable for breaches of fiduciary duties resulting in any loss or
damage sustained by the company. Similarly, in respect of the particular wrongdoer
and claimant, s 77(2)(b) of the Act provides that:
‘A director of a company may be held liable—
. . .
(b) in accordance with the principles of the common law relating to delict for any loss,
damages or costs sustained by the company as a consequence of any breach by the
director of—
(i) a duty contemplated in section 76(3)(c);
(ii) any provision of this Act not otherwise mentioned in this section; or

(iii) any provision of the company’s Memorandum of Incorporation.’

[49] Even more significant are the provisions of s 77(3)(b), which read as follows:
‘A director of a company is liable for any loss, damages or costs sustained by the company
as a direct or indirect consequence of the director having—
. . .
(b) acquiesced in the carrying on of the company’s business despite knowing that it was
being conducted in a manner prohibited by section 22(1) . . .’

[50] These provisions of the Companies Act make it clear that the legislature
decided where liability should lie for conduct by directors in contravention of certain
sections of the Act and who could recover the resultant loss. It is also clear that the
legislature was astute to preserve certain common law principles. It makes for a
harmonious blend.

[51] There is no need to give the words ‘as a result of that contravention’ in s 218(2)
an extended meaning, as submitted on behalf of the appellants, so as to ignore the
conventional meaning of a consequence flowing from the misconduct. The provisions
referred to in the preceding paragraphs abound with recovery of loss resulting from
misconduct on the part of directors. There is no indication in the scheme of the
Companies Act or any of its relevant provisions that the words quoted at the beginning
of this paragraph should carry a different meaning. On the contrary, all indications lead
to the ineluctable conclusion that it was meant to have the conventional meaning and
that the person who can sue to recover loss is the one to whom harm was caused.
Simply put, there must be a link between the contravention and the loss allegedly
suffered. In the present case, loss was occasioned to the company and the company
is the entity with the right of action.

[52] From what is set out above it is clear that the rule against claims for reflective
loss has not expressly been abolished by s 218(2), nor does it follow by necessary
implication. Section 218(3) does not assist the appellants. It reads as follows:
‘The provisions of this section do not affect the right to any remedy that a person may
otherwise have.’

The provision thus provides a statutory remedy to ‘any person’ who can bring
themselves within its ambit. Subsection (3) does not detract from any existing rights
to sue but is, rather, an affirmation of those rights. The remedy is available to avoid
injustice where that would otherwise ensue. It is not necessary in this case to make
any findings in relation to the precise contours of this remedy and we deliberately
eschew doing so. However, we must accept that allowing individual shareholders in
their capacities as such to bring claims against miscreant company directors for a
diminution in the value of their shareholding may very likely prejudice companies
(and/or its creditors and/or other shareholders). Furthermore, we are constrained to
accept that a company has an established right to claim damages from its directors
for any losses sustained as a result of those directors’ breach of a duty owed to the
company. It follows that s 218(3) entrenches also the company’s right. If one were to
accede to the appellants’ claim based on a diminution in the value of their shares, it
would impinge on the company’s right preserved by s 218(3). This proves the fallacy
of the appellants’ claim.

[53] Finally, in relation to the directors’ third exception, it will be recalled that the
appellants alleged that the directors had authorised the publication of a prospectus
containing false or misleading information. In the exception the directors pointed out
that the appellants did not allege that they had acted on or relied on the
misrepresentations or the falsehoods and that they suffered loss in consequence of
such reliance. One cannot tell from the particulars of claim whether the appellants
were already shareholders at the time that the prospectus was published. It is no
answer to contend, as the appellants do, that the misrepresentation was pleaded in
support of their assertion that the directors had breached s 76(3) of the Companies
Act. The appellants’ claim based on the breach of s 76(3) has, in any event, been
demonstrated to be unsustainable.

[54] It follows that the essential findings of the court below in relation to the
exceptions by the directors cannot be faulted. They were correctly upheld. It is to the
claim against Deloitte and the related exceptions that we now turn.

[55] It is necessary to revisit the basis of the appellants’ claim against Deloitte. As
already recorded, the appellants were shareholders in ABIL, which was African Bank’s

sole shareholder. The directors, so the appellants said, mismanaged the affairs of the
Bank which caused it to sustain significant losses. Deloitte was the Bank’s auditor and
was obliged to perform its function with reasonable care and skill. Deloitte, in its
presentation of the Bank’s 2012 and 2013 annual financial statements, reported that
they fairly represented the Bank’s financial position. The audit reports were false in
that the financial statements did not reveal the losses the bank had sustained as a
result of the directors’ mismanagement. The false reports were due to the failure to
perform the audit with the requisite reasonable care and skill. The appellants stated
that Deloitte’s negligent audit caused the appellants to suffer loss as follows:
(a)
If Deloitte had performed proper audits, it would have withheld or qualified the
audit reports.
(b)
Had Deloitte withheld or qualified the reports, the appellants would have
convened a meeting of ABIL’s shareholders, and caused ABIL to remove the Bank’s
directors from office, which would have put an end to the mismanagement of the Bank
and would have prevented further losses.
(c)
Because of Deloitte’s false audit reports, the preventative measures were not
taken, the mismanagement of the Bank continued and it continued to suffer loss,
(d)
The ongoing losses suffered by the Bank caused ABIL to suffer loss in that its
shares in the Bank diminished in value, which then led to ABIL’s own share price
diminishing in the amounts stated above and the appellants suffering a total loss as
calculated above.

[56] The basis of the appellants’ claim reveals that the Bank suffered the primary
loss. Against that, one must accept that Deloitte wrongfully and negligently or
deliberately caused the loss. In the ordinary course, the Bank would have had statutory
and contractual claims against the directors and Deloitte for the recovery of the loss.
As pleaded, ABIL suffered loss in the second degree. Its loss is a reflection of the
Bank’s loss. ABIL did not suffer any loss of its own. The appellants, as shareholders
of ABIL, thus suffered loss in the third degree. They suffered loss only because of
ABIL’s loss.

[57] As pointed out by Deloitte’s counsel, this ‘cascade’ of reflective losses on which
the claim is based does not end with the appellants. They were minority shareholders
of ABIL, holding 1.73% and 3.24% of ABIL’s shares, respectively. The reflective losses

sustained by the appellants would have been suffered by everyone else who held
shares in ABIL. There must have been thousands of shareholders, if not more, who
suffered the same third-degree losses as the appellants. And these reflective losses
would be reversed if the Bank enforced its claim against the directors and was thereby
compensated for its loss.

[58] As was discussed earlier, in relation to claims against directors, a claim for
reflective loss by a shareholder is generally untenable. Furthermore, what has to be
borne in mind is that the claim against Deloitte is one for pure economic loss. As a
general rule our law does not allow for the recovery of pure economic loss. In Country
Cloud Trading CC v MEC, Department of Infrastructure Development,46 the
Constitutional Court said the following:
‘Wrongfulness is generally uncontentious in cases of positive conduct that harms the person
or property of another. Conduct of this kind is prima facie wrongful. However, in cases of pure
economic loss – that is to say, where financial loss is sustained by a plaintiff with no
accompanying physical harm to her person or property – the criterion of wrongfulness
assumes special importance. In contrast to cases of physical harm, conduct causing pure
economic loss is not prima facie wrongful. Our law of delict protects rights and, in cases of
non-physical invasion, the infringement of rights may not be as clearly apparent as in direct
physical infringement. There is no general right not to be caused pure economic loss.
So our law is generally reluctant to recognise pure economic loss claims, especially where it
would constitute an extension of the law of delict. . . .
In addition, if claims for pure economic loss are too freely recognised, there is the risk of
“liability in an indeterminate amount for an indeterminate time to an indeterminate class”.’

[59] In Home Talk Developments (Pty) Ltd and Others v Ekurhuleni Metropolitan
Municipality [2017] ZASCA 77; 2018 (1) SA 391 (SCA) para 1, the following appears:
‘The first principle of the law of delict, as Harms JA pointed out in Telematrix, is that everyone
has to bear the loss that he or she suffers. And, in contrast to instances of physical harm,
conduct causing pure economic loss is not prima facie wrongful. Accordingly, a plaintiff suing
for the recovery of pure economic loss, is in no position to rely on an inference of wrongfulness
flowing from an allegation of physical damage to property (or injury to person), because “the
negligent causation of pure economic loss is prima facie not wrongful in the delictual sense

46 Country Cloud Trading CC v MEC, Department of Infrastructure Development [2014] ZACC 28; 2015
(1) SA 1 (CC) paras 22-24. (Citations omitted.)

and does not give rise to liability for damages unless policy considerations require that the
plaintiff should be recompensed by the defendant for the loss suffered”.’ (Emphasis added
and citations omitted.)

[60] Some categories of liability for pure economic loss have, as pointed out on
behalf of Deloitte, crystallised. However, the categories do not in general terms include
the liability of auditors. In Axiam Holdings Ltd v Deloitte & Touche [2005] ZASCA 61;
2006 (1) SA 237 (SCA) para 18, the following appears:
‘It is universally accepted in common-law countries that auditors ought not to bear liability
simply because it might be foreseen in general terms that audit reports and financial
statements are frequently used in commercial transactions involving the party for whom the
audit was conducted (and audit reports completed) and third parties. In general, auditors have
no duty to third parties with whom there is no relationship or where the factors set out in the
Standard Chartered Bank case are absent.’47

[61] In Standard Chartered Bank of Canada v Nedperm Bank Ltd 1994 (4) SA 747
(A) this Court had regard to the context in which the alleged negligent misstatement in
that case was made, the purpose for which it was sought and made, the reliance
placed on it by the third party, the relationship between the parties and, finally, and
significantly for present purposes, public policy and fairness. It is true that in Axiam,
having regard to those factors, it was held that the question of wrongfulness could not
be decided at exception stage. The minority in Axiam held that the exception ought to
have been upheld. As in Standard Chartered Bank, this Court in Axiam did not find
any policy factors that militated against a finding at that stage against the auditors
being held liable. The facts in Standard Chartered and Axiam are far removed from
the facts in this case. In Axiam the question was whether the auditors of one company
owed legal duties to other companies, who were in the process of negotiating
agreements for share purchases and business financing and for this purpose relied on
the audit statements and opinion which allegedly misrepresented the company’s
financial position. In both cases there was no claim by shareholders based on a
diminution in share value.

47  (Citations omitted.) See also Cape Empowerment Trust Ltd v Fisher Hoffman Sithole [2013] ZASCA
16; 2013 (5) SA 183 (SCA) para 21.

[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.’48

[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.49

[64] The appellants submitted that it would not be appropriate to decide
wrongfulness on exception. In this case, as in all cases in which a plaintiff claims
damages for pure economic loss, it is incumbent that the facts upon which such a
plaintiff relies for its contention that the loss was wrongfully caused be pleaded. The
pleadings are thus the high-water mark of its case on wrongfulness. In Telematrix (Pty)
Ltd t/a Matrix Vehicle Trading v Advertising Standards Authority [2005] ZASCA 73;
2006 (1) SA 461 (SCA) para 2 this court noted that it has often determined
wrongfulness on exception.50

[65] In Telematrix, para 3, Harms JA said that ‘[s]ome public policy considerations
can be decided without a detailed factual matrix, which by contrast is essential for
deciding negligence and causation’. In AB Ventures Ltd v Siemens Ltd [2011] ZASCA
58; 2011 (4) SA 614 (SCA) para 5, Nugent JA noted that in a case such as this, the
issue of wrongfulness is ‘quintessentially a matter that is capable of being decided on
exception’. In the present case all the policy factors upon which a decision would rest
are known.

48 Le Roux and Others v Dey [2011] ZACC 4; 2011 (3) SA 274 (CC) para 122. (Citations omitted.)
49 See Trustees, Two Oceans Aquarium Trust v Kantey & Templer (Pty) Ltd [2005] ZASCA 109; 2006
(3) SA 138 (SCA) para 12.
50 See Lillicrap, Wassenaar and Partners v Pilkington Brothers (SA) (Pty) Ltd 1985 (1) SA 475 (A); Indac
Electronics (Pty) Ltd v Volkskas Bank Ltd 1992 (1) SA 783 (A); and Minister of Law and Order v Kadir
1995 (1) SA 303 (A). See also Fourway Haulage SA v National Roads Agency [2008] ZASCA 134; 2009
(2) SA 150 (SCA).

[66] The question to be addressed on the issue of wrongfulness is whether public
and legal policy considerations dictate that the auditors of African Bank be held liable
to the shareholders of ABIL for the reflective losses they sustained as a result of the
underlying losses suffered by the Bank. As the extensive discussion on the rule
against claims for reflective losses above reveals, the appellants’ claims are barred by
the rule. Moreover, as noted in para 60 above, in general, auditors have no duty to
third parties with whom there is no relationship. In 4(3) Lawsa 2 ed para 4 the following
appears:
‘If the auditors perform their work negligently, it is the company, and not its members, that is
the proper plaintiff to sue for any loss caused to it by that negligence.’

[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.

[68] Imposing a legal duty on auditors in a case such as this raises the spectre of
indeterminate liability. Policy considerations require that liability in delict be confined
to reasonably predictable limits (15 Lawsa 3 ed para 87). Limitation of liability is
therefore a key policy consideration in deciding whether pure economic loss should
be actionable. This court, citing Gaudron J in Perre v Apand (Pty) Ltd (1999) 198 CLR
180 (HC of A) para 32, in Fourway Haulage,51 said that ‘[t]he first policy consideration
is the law’s concern to avoid the imposition of liability in an indeterminate amount for
an indeterminate time to an indeterminate class’; and that liability would be more

51 Ibid paras 23-24.

readily imposed for ‘a single loss of a single identifiable plaintiff occurring but once and
which is unlikely to bring in its train a multiplicity of actions’.

[69] If the appellants’ claims were to be recognised despite the fact that their loss is
merely a reflection of the underlying loss suffered by the Bank and ABIL, there is no
reason to prevent all others who suffered reflective losses from pursuing similar
claims. They would include all other shareholders of both the Bank and ABIL (of whom
there are likely to be many) and, in the case of corporate shareholders like the
plaintiffs, their shareholders up the corporate chain who ultimately include natural
persons. This would expose the auditors to ‘liability in an indeterminate amount for an
indeterminate time to an indeterminate class’. The courts have frequently held that this
risk disqualifies the recognition of a new category of claim.52 (). And, if an action were
granted to shareholders to claim compensation directly from the wrongdoers, the
Bank’s creditors would demand the same facility, particularly if it is insolvent.

[70] In the latter circumstances, if only the Bank is allowed to claim from the
wrongdoers for the loss sustained the amount recovered is, in the ordinary course,
distributed amongst its creditors pro rata to their claims. ABIL and its shareholders do
not share in the recovery unless there is a residue after all the bank’s creditors have
been paid in full. However, if ABIL and its shareholders are also allowed to sue the
wrongdoers, the ranking of claims gets distorted. Questions of undue preferences
might arise. This consideration is part of the policy reasons for the retention of the rule
against claims for reflective losses as set out in Johnson at 14C-D. Under insolvency
law, any damages recovered from the wrongdoers should in the first place go to
creditors before there is any distribution to shareholders. But what if ABIL or its
shareholders have already recovered the full amount of the loss: does it mean that
they circumvented the order of distribution to the prejudice of other creditors? To allow
the claim would have a result that cannot be countenanced.

52 Delphisure Group Insurance Brokers Cape (Pty) Ltd v Dippenaar and Others [2010] ZASCA 85;
2010 (5) SA 499 (SCA) para 25; Country Cloud above fn 46 para 24; Fourway Haulage above fn 50
paras 23-24; South African Hang and Paragliding Association and Another v Bewick [2015] ZASCA
34; 2015 (3) SA 449 (SCA) para 32.

[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,53 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.

[72] We turn, now, to deal with the appellants’ reliance on s 46(3) of the APA. In
para 28 of their particulars of claim, they cite the following parts of that subsection:
‘(3)
Despite subsection (2), a registered auditor incurs liability to third parties who have relied
on an opinion, report or statement of that registered auditor for financial loss suffered as
a result of having relied thereon, only if it is proved that the opinion was expressed, or
the report or statement was made, pursuant to a negligent performance of the registered
auditor’s duties and the registered auditor—
(a)
knew, or could in the particular circumstances reasonably have been expected to know,
at the time when the negligence occurred in the performance of the duties pursuant to
which the opinion was expressed or the report or statement was made—

(i)
that the opinion, report or statement would be used by a client to induce the
third party to act or refrain from acting in some way or to enter into the specific
transaction into which the third party entered, or any other transaction of a similar nature,
with the client or any other person; or
. . .
(b)
in any way represented, at any time after the opinion was expressed or the report or
statement was made, to the third party that the opinion, report or statement was correct, while
at that time the registered auditor knew or could in the particular circumstances
reasonably have been expected to know that the third party would rely on that representation
for the purpose of acting or refraining from acting in some way or of entering into the specific
transaction into which the third party entered, or any other transaction of a similar nature, with
the client or any other person.’(Emphasis added.)

53 Cape Empowerment Trust above fn 47 paras 28 and 30.

Nothing further is said by the appellants about the significance of these provisions, with
the appellants going on to state that the omission to qualify the Bank’s financial
statements was deliberate and that Deloitte negligently misrepresented the Bank’s
financial position and ‘had a duty’ not to make the statements, thus incurring liability
towards the appellants. A third party might be able to rely on this subsection in
circumstances such as those in Standard Chartered or in Axiam. The third party would
have to state facts that would bring it within the subsection’s field of operation. The
appellants did not say how or why their claims fell within the ambit of the subsection.
s 46(4) of the APA is of significance. It reads as follows:
‘Nothing in subsections (2) or (3) confers upon any person a right of action against a
registered auditor which, but for the provisions of those subsections, the person would not
have had.’
This means that ss 46(2) and 46(3) do not found a claim where none existed before.
The discussion above shows why, in the circumstances of this case, a claim should
not be held to exist. For the aforesaid reasons, the appellants have not established
wrongfulness. The high court thus correctly upheld Deloitte’s exception to the
appellants’ particulars of claim.

[73] In their pleaded case against Deloitte, the appellants did not rely on the
provisions of s 218(2) of the Companies Act. Before us, however, they contended that
they were entitled to rely on that subsection if such reliance could be inferred. For this
proposition they referred to s 30(2)(a) of the Act, which provides that the annual
financial statements of companies like ABIL and African Bank must be audited and, if
read with the definition of ‘audit’ in s 1 of the Act, it must mean in accordance with
prescribed or applicable auditing standards. It was contended on behalf of the
appellants that the auditors contravened s 30(2)(a). Thus, so they argued, they were
entitled to rely on s 218(2). This is fallacious. The duty to have its annual financial
statements audited rests on the company. In relation to liability on the part of Deloitte
for contraventions of the Act, the discussion earlier in this judgment applies. The duty
of the auditors is owed primarily to the company. For all the stated reasons, liability by
Deloitte to shareholders in the circumstances of this case is untenable.

[74] For all the aforesaid reasons, the following order is made:
The appeal is dismissed with costs, including the costs of two counsel.

___________________
M S Navsa
Judge of Appeal

___________________
A Schippers
Judge of Appeal

Appearances

For Appellants

A Subel SC with D Mahon
Instructed by

Faber, Goertz, Austen Inc

Johannesburg

McIntyre
&
Van
der
Post,
Bloemfontein

For First to Tenth Respondents
C D A Loxton SC, I P Green SC and
N K Nxumalo
Instructed by Clyde and Company,
Johannesburg
Webber Attorneys, Bloemfontein

For Eleventh Respondent
W Trengove SC, M du P van der Nest
SC, D J Smit and L Zikalala
Instructed by

Webber Wentzel, Johannesburg

Honey Attorneys Bloemfontein
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others (Case no 1423/18)
[2020] ZASCA 83 (3 July 2020)

From:
The Registrar, Supreme Court of Appeal

Date:
03 July 2020

Status:
Immediate

The following summary is for the benefit of the media in the reporting of this case and does not
form part of the judgment of the Supreme Court of Appeal

Today the Supreme Court of Appeal (SCA) handed down judgment in an appeal against an order of the
Gauteng Division of the High Court, Pretoria (Molopa-Sethosa J, sitting as court of first instance). The
appeal was dismissed with costs.

The matter concerned, principally, the question whether shareholders have a claim against directors for
damages in relation to a diminution in the value of their shares under s 218(2) of the Companies Act 71
of 2008.  It also concerned 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.

The first appellant, Hlumisa Investment Holdings (RF) Ltd, and the second appellant, Eyomhlaba
Investment Holdings (RF) Ltd, the first and second plaintiffs in the court a quo, were shareholders in
African Bank Investments Limited (ABIL). They owned, respectively, 1.73% and 3.24% of the issued
share capital of ABIL. The first to tenth respondents were at all material times directors of ABIL and
African Bank Limited (African Bank), a wholly-owned subsidiary of ABIL. The eleventh respondent,
Deloitte & Touche (Deloitte), was the auditor of both ABIL and African Bank.

The appellants 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 (Claim A) and on account of Deloitte
failing to conduct audits in accordance with generally recognised auditing standards (Claim B). In
respect of Claim A the appellants submitted that, between 2012 and 2014, the directors had breached

their fiduciary duties in that they failed to exercise their powers in good faith and in the best interests of
ABIL and African Bank. This, they alleged, resulted in the business of ABIL and African Bank being
carried out recklessly or with gross negligence, in contravention of s 22(1) of the Companies Act. It also
caused African 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.  The alleged
misconduct of the directors included, amongst others, the publication of false financial statements in
respect of both entities, the authorisation of a loan in contravention of s 45 of the Companies Act, and
pursuing reckless and aggressive accounting practices.

The directors excepted to the appellants’ particulars of claim on three bases. First, because the loss in
respect of which the plaintiffs sought to claim was merely reflective of the loss sustained by ABIL and
African Bank, which meant that the claim lacked the necessary averments to sustain a cause of action.
Secondly, because the appellants had not alleged that their losses were suffered as a result of the
contravention of ss 45, 74, 76(3) or 22(1) of the Companies Act, and s 218(2) only made provision for
liability to any person who had suffered loss ‘as a result of’ a contravention of the Companies Act. And
thirdly, in respect of the prospectus which the directors had authorised to be published, and which was
alleged to be a misrepresentation, because the appellants had not alleged that they relied on the
misrepresentation, nor that they acted on the strength thereof, nor that they suffered loss in
consequence.

In respect of Claim B the appellants submitted that, during the period between December 2012 and
December 2014, Deloitte reported that African Bank’s financial statements fairly represented the Bank’s
financial position when, according to the appellants, the financial statements did not reveal the true
state of affairs at the Bank. It was further alleged that Deloitte knew, or could reasonably have been
expected to know, that this would induce investors to act or refrain from acting in a certain way. Deloitte
also excepted to the particulars of claim – for one, because the alleged wrong was committed against
the company and not against the appellants; and two, because Deloitte owed no legal duty to the
appellants in their capacity as individual shareholders. The case of the directors and Deloitte was that
the appellants’ claims were unsustainable at common law and could also not be brought under s 218(2)
of the Companies Act.

The claim was dismissed by Molopa-Sethosa J. It was held that a claim for damages for the alleged
breach of s 76(3) was to be brought in terms of s 77(2), which specifically created the liability for such
a breach. The high court found that a general provision could not be invoked in the event of a specific
provision being available in the same statute. It also confirmed a well-established principle of statutory
interpretation, viz. that a statute is not intended to alter the common law unless it does so expressly or
by necessary implication. It then referred to cases on the principle against reflective loss and concluded
that the appellants could not rely on s 218(2) of the Companies Act for their claim. The exceptions by
the directors and Deloitte were upheld.

The SCA considered whether the exceptions were correctly upheld. It did so by looking, firstly, at the
present position of the rule against claims for reflective loss in South Africa. This involved a careful
analysis of the leading authorities both locally and in the United Kingdom, from where the rule originates.
The SCA concluded that the rule against claims for reflective loss remains good law, particularly in
relation to claims of shareholders based on diminution in share value. The appellants had not been able
to prove an independent cause of action, as they had submitted. They were also not successful in
showing that their claim fell within one of the recognised exceptions to the rule.

The SCA then considered whether the appellants’ claim could nevertheless be allowed under s 218(2)
of the Companies Act. After having regard to all of the relevant provisions of the Companies Act, it held
that the Legislature had clearly decided where liability should lie for conduct by directors in
contravention of certain provisions, and who could recover the resultant loss. Section 218(2) had not
abolished the rule against claims for reflective loss expressly, nor did it follow by necessary implication.
The SCA concluded that the essential findings of the high court in relation to the directors’ exceptions
could not be faulted.

In relation to the claim against Deloitte, the SCA found that the appellants had in fact suffered loss only
in the third degree. It was African Bank who suffered the primary loss. ABIL’s loss was a reflection of
that primary loss, which was in turn reflected in the appellants’ loss. Couched in delict, the claim against
Deloitte had a further hurdle in that conduct causing pure economic loss is not prima facie wrongful.
The SCA noted that the question to be addressed on the issue of wrongfulness was whether public and
legal policy considerations dictated that the auditors of African Bank be held liable to the shareholders
of ABIL for the reflective losses they sustained. On this score it held that the imposition of a legal duty
on auditors in a case such as this would raise the spectre of indeterminate liability. Recognition of the
appellants’ claims would open the door to all others who suffered reflective losses to pursue similar
claims. This would, in turn, expose the auditors to ‘liability in an indeterminate amount for an
indeterminate time to an indeterminate class’. It might also detract from the rights of creditors in the
event of insolvency. This disqualified the recognition of a new category of claim.

In the result, the appeal was dismissed with costs, including the costs of two counsel.