Claiming for diminution in value of shareholding

Shareholding-Patterns2Introduction

Can a shareholder claim for the loss he or she suffered as a result of diminution in the value of his or her shares? This is the question the Supreme Court of Appeal had to answer in the case of Itzikowitz v Absa Bank Ltd (20729/2014) [2016] ZASCA 43.

Facts

The facts of the abovementioned case are as follows: Mr. Itzikowitz (the Applicant) was a shareholder in Compass Projects (Pty) Ltd (Compass). Compass Projects was a shareholder in a public company called Quantum Properties Group Ltd (QPG), which in turn was a shareholder in A Million UP Ltd (AMU). ABSA bank advanced a loan to AMU. The Applicant was a surety for the loan to AMU. ABSA bank issued Summons against the Applicant calling up the surety. The Applicant filed a counterclaim against the bank for the following: that as a result of ABSA’s conduct in advancing funds, etc. to AMU it essentially caused AMU to go file for business rescue proceedings. As such  the amount he claimed was for the reduction in value of his shareholding in Compass. The Applicant’s claim is founded in delict, more particularly a claim for pure economic loss. This is a claim recognised in SA law.

The Appeal court again confirmed the fundamental principles of company law in that a company is a distinct legal person. 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. It is of cardinal importance to keep the property rights of a company and those of its shareholders, even where the latter is a single entity, separate. As stated in LAWSA: “The shareholders has a right to participate in the company as set out in the Memorandum of Incorporation. This right remains unaffected by a wrong done by the company. 

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