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It is trite that a company with limited liability is an entity separate and distinct from its shareholders or directors. The distinct corporate personality of a company has far-reaching implications that are seldom fully appreciated when wrongs are committed, losses suffered, and disputes arise, by and between the various participants in the corporate structure. Until recently, there was a measure of uncertainty regarding the rights of shareholders as against miscreant directors, more particularly whether a shareholder may hold a director personally liable for losses suffered as a result of misconduct by that director.

The applicable principle

At common law, the general rule – known as the ‘proper plaintiff’ rule – is that, when a wrong is done to a company (i.e. a duty to the company is breached), only the company may sue the wrongdoer for any loss caused by the wrong. The rule derives from the English case of Foss v Harbottle.

A related rule, known as the “no reflective loss rule”, says that where a wrong is done to the company by its directors or other persons, and both the shareholder and company suffer a loss, the shareholder is precluded from directly recovering his loss – that is, shareholders lack a direct right of recourse against the wrongdoer – if the shareholder’s loss is simply “reflective” of the company’s loss.

But what is the no reflective loss rule?

“Reflective loss” is a company law term that refers to the resulting loss suffered by shareholders when a company suffers a wrong. Conceivably, a shareholder suffers loss in one of two principal ways, either by a drop in the market value of their shares or through a loss in expected dividend income.

In earlier cases, such as Golf Estates (Pty) Ltd v Malherbe and Others 1997 (1) SA 873 (C), McLelland v Hullet 1992 1 (SA) 456, and Kalinko v Nisbet and Others 2002 (5) SA 766, the rationale for the no reflective loss rule was this: allowing both a shareholder and the company to recover loss against a miscreant director could result in “double recovery” against the wrongdoer, prejudicing not only the wrongdoer but also other shareholders and creditors, and ultimately circumvent the established method for distributing company assets, for instance, on winding up. However, the courts appeared to agree that there was an exception: where there was no risk of “double recovery”, for example, because the company had chosen not to sue or lacked the funds to do so, shareholders would be free to pursue their claims as they saw fit.

Double recovery rationale

Two recent SCA decisions have clarified that the “double recovery” rationale for the no reflective loss rule is misleading, that no exception exists that would allow shareholders to recover loss in lieu of a company that is unable or unwilling to do so itself, and that – more generally, and perhaps dispiritingly – claims by shareholders against directors are almost never compensable, whether under the common law or the Companies Act 71 of 2008 (“the Act”).

In Itzikowitz v Absa Bank 2016 (4) SA 432 (SCA), the respondent bank caused a reduction in the value of the appellant’s shareholding in a company (Compass) by placing another company (AMU), which was at the time indebted to Compass, in liquidation. The court found that the appellant, being no more than a shareholder three times removed from AMU, could not sue to recover its loss as the appellant had not been wronged by the respondent. In this regard, Ponnan JA, endorsing the English case of Prudential Insurance Co Ltd v Newman Industries Ltd and Others (1982) Ch 204, held that:

The fact that a double recovery may not be likely in a particular situation does not create an entitlement in the hands of a shareholder that he or she did not have in the first place. Where there is only one wrong that was committed against the company, the risk of double recovery simply does not arise. The fact that the company has chosen not to sue, or is unable to sue, does not convert that wrong into a wrong against its shareholders.

In Prudential, the court noted that:

A shareholder cannot 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 dividends because such a loss is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only “loss” is through the company, in the diminution in the value of the net assets of the company . . .

Diminution in the value of shares

In Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others (2020) 3 All SA 650, the question before the SCA was whether section 218(2) of 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 first and second appellants were shareholders in African Bank Investments Limited (ABIL). The first ten respondents were directors of ABIL, and the eleventh respondent was Deloitte – auditor of both ABIL and African Bank Limited (a wholly owned subsidiary of ABIL). 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 and on account of Deloitte failing to conduct audits in accordance with generally recognised auditing standards.

In dismissing the appellant’s claim for damages, the court in Hlumisa endorsed the following passage in Blackman’s Commentary on the Companies Act:

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.


The practical importance of these recent judgments is significant for shareholders who seek redress against director misconduct under the salient provisions of the Act. It is now clear that, in almost all cases, shareholders’ claims against directors will be barred if the loss caused by the directors’ breach of duty consists in the diminution in the value of a shareholding or in distributions to shareholders. This has nothing to do with the risk of “double recovery”. Instead, the true rationale is that such loss is not, in the eyes of the law, a loss that is separate and distinct from the loss suffered by the company.