Another chapter in the African Bank saga: The Directors
By Jerome Veldsman
The Directors contended that ABIL and/or African Bank ought to have brought an action, if one was sustainable, and not the Shareholders. Technically, the Directors relied on the common law no reflective loss principle.
That principle is that, 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 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.
And if the wrongdoers themselves control the company, so that they can prevent the taking of the necessary steps, any one or more of its shareholders may bring what is known as a derivative action, an action by a shareholder, in own name, against the wrongdoers for relief to be granted to the company, the action being one on the company’s behalf.
In order to counter the (good) reliance on the no reflective loss principle, the Shareholders argued that section 218(2) of the new Companies Act overrides that principle. That section reads as follows:
Any person who contravenes any provision of [the Companies Act] is liable to any other person for any loss or damage suffered by that person as a result of that contravention.
On the face of section 218(2), it does appear to assist the Shareholders, but statutory interpretation is for specialists. The SCA applied a contextual and purposive interpretation to section 218(2), and applied the presumption that statutory provisions are not intended to alter or exclude the common law unless they do so expressly or by necessary implication. Under the relevant provisions of the Companies Act, the duties owed by the directors of a company are owed to that company, and not to its shareholders. Accordingly, if the directors breached any such duty, they would be liable to the relevant company only.
The Directors won.
The SCA also discussed the merit of the no reflective loss principle.
Where harm is wrongfully caused directly to a company and indirectly to its shareholders, the law gives the right of action to claim compensation to the company. It does so because if, instead, the right was given to the shareholders, the company and its creditors would be prejudiced. 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 the company, it will also ensure that the shareholders suffer no loss. This is because the company’s right of action is an asset which, itself, compensates the shareholders for their loss.
Double recovery by the shareholders and the company from the directors must be avoided. Also, if the company chooses not to claim against the directors, the loss to the shareholders is caused by the company’s decision not by the directors’ wrongdoing.
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