What happens when a company which suffered damages, chooses not to claim those damages against the wrongdoer? What are the rights of a shareholder whose share has suffered as a result? What is the legal position in such an instance?
The Supreme Court of Appeal has brought clarity on this question in the case of Itzikowitz v Absa Bank Limited (20729/2014)  ZASCA 43 (31 March 2016) in which the court gave clarity as who is capable of suing for damages suffered by the company as a result of wrongdoing against it, committed by third parties, between the company itself and its shareholders.
The facts of the case were briefly as follows: - The appellant, Mr Itzikowitz, was a sole shareholder in a company (Compass) which in turn held 17.29 per cent in another company (QPG). QPG was the sole shareholder in yet another company (AMU). Compass was owed over R5 million by AMU through a loan account. The respondent, Absa (the bank) was the banker for AMU and QPG and had provided loan facilities to AMU which had been increased after June 2010 from R390 million to an amount in excess of R500 million as at 31 August 2011. On 4 June 2012 AMU’s board resolved to voluntarily commence business rescue.
The bank was not impressed with the resolution to commence business rescue and, on 18 June 2012, it applied for and obtained an order setting it aside in the Western Cape High Court (WCHC) and, on 29 June 2012, the bank again applied for and obtained another order placing AMU under provisional liquidation on the basis that AMU was hopelessly insolvent. The provisional order was made final by the WCHC on 14 August 2012.Then, on 30 August 2012, the bank sued Itzikowitz out of the South Gauteng High Court (SGHC) for the payment of R20 million on the basis of a suretyship agreement he had entered into on 9 January 2008 in terms of which he bound himself as surety and co-principal debtor jointly and severally liable with AMU in favour of the bank in the amount to R20 million. Itzikowitz filed a plea and two counterclaims, which were the subject of the appeal to the SCA. The two counterclaims were claims for damages Itzikowitz allegedly suffered when the 17, 29 per cent shares, held by Compass, in QPG were diminished to zero and when the loan account Compass had against AMU became irrecoverable as a result of the liquidation of AMU. Remember, Itzikowitz was a sole shareholder in Compass. He blamed the bank for the demise of AMU in that the bank (intentionally and/or negligently) pushed AMU into a bad financial position where it was unable to pay its debts. He argued that the bank failed on its legal duty it owed to the AMU. He claims that the bank did this by increasing AMU’s overdraft, despite his protests against this, to over R500 million while knowing very well that AMU was not going to be able to pay it back.
In deciding this matter, the court had to consider the principle in company law that a company has a distinct legal personality, separate from its members and that any property vested in the company cannot be regarded as property vested in all the members. The right of a shareholder in a company is a right to participate in the company on the terms of the company’s founding documents, i.e. memorandum of incorporation. The shareholder’s right is limited to the provisions of these documents which are akin to a contract that the shareholder has with the company. The court therefore determined whether the alleged wrong was committed against the company or against a shareholder in question. The court looked at case law, both local and English case law, and legal principles to decide on the matter and it concluded that where a wrong has been committed against a company as a distinct legal personality, only a company may sue for those damages and not the shareholder. Put differently, where no wrong has been committed against a shareholder, the shareholder is therefore not entitled to sue. Accordingly, Mr Itzikowitz’s claim against the bank had to fail.
It is worth noting that whether the bank acted negligently, intentionally or wrongfully against the company was irrelevant for the purposes of this case. The law is now that a shareholder cannot rely on legal duty owed to the company by another party to claim personally to recover a decrease in the value of his/her shareholding.
Authors: Agrippa Mpungose & Sikhumbuzo Hlope (Public Law) (PMB Office)
E-mail: aprippa email@example.com
Tel: 033 341 9100
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