Itzikowitz v Absa Bank Limited

Gary Itzikowitz was the sole shareholder of Compass Projects (Pty) Ltd. Compass held 17.29% of shares in Quantum Properties Group Limited (QPG), which in turn held 100% of shares in A Million UP (Pty) Ltd (AMU), a property development company. Compass also had a loan account in AMU of R5,292,442. Absa Bank was AMU's banker and had extended loan facilities to AMU exceeding R500 million. On 4 June 2012, AMU's board resolved to commence voluntary business rescue. At Absa's instance, the Western Cape High Court set aside this resolution on 18 June 2012. Absa then applied for AMU's provisional winding-up, which was granted on 29 June 2012 and made final on 14 August 2012. Absa then sued Itzikowitz on a suretyship he had signed on 9 January 2008 limiting his liability to R20 million plus interest and costs. Itzikowitz filed a plea and two counterclaims, alleging that Absa's intentional, reckless or negligent conduct caused AMU's demise, resulting in the devaluation of his indirect shareholding in Compass to nil. He sought to recover R50,002,338 in damages from Absa.

• Whether a shareholder can sue for pure economic loss in the form of diminution in the value of his shareholding where the wrong was committed against the company rather than the shareholder personally
• Whether conduct causing pure economic loss to a shareholder is wrongful vis-à-vis the shareholder when the wrong was done to the company
• Whether sections 218(2) and 22(1) of the Companies Act 71 of 2008 create a personal right for a shareholder to recover diminution in share value caused by conduct directed at the company
• Whether an exception to a counterclaim should be upheld where there is no legal duty owed to the shareholder personally
• Whether a cross-appeal against the dismissal of an exception is appealable

The appeal was dismissed with costs. The cross-appeal was struck from the roll with costs. The court afforded the appellant 15 days to deliver a notice to amend counterclaim A if so advised.

Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. A shareholder cannot sue in his personal capacity to recover damages for diminution in the value of his shareholding where that merely reflects the loss suffered by the company, even where the shareholder is multiple levels removed from the company that suffered the direct wrong. For a shareholder to have a personal claim, there must be a separate and independent duty owed to the shareholder personally, not merely to the company. Conduct causing pure economic loss is not prima facie wrongful and wrongfulness must be positively established vis-à-vis the particular claimant. The absence of a risk of double recovery does not create an entitlement in the hands of a shareholder which he or she did not have in the first place. The dismissal of an exception (save an exception to jurisdiction) is not appealable, and this principle applies equally to cross-appeals as to appeals.

The court observed that there was a fundamental illogicality to the appellant's allegations, noting that Absa as a secured creditor with a pledge over AMU shares had nothing to gain and everything to lose by AMU's failure. The court also noted that the appellant's pleadings focused on QPG as a shareholder in AMU but failed to explain how Compass (as only a 17.29% shareholder in QPG) also acquired a right of action. The court indicated that this was 'quintessentially a matter that is capable of being decided on exception' given the novelty of the claim and the clear legal principles involved. The court emphasized that exceptions provide a useful mechanism to weed out cases without legal merit and should be dealt with sensibly, not over-technically. The court expressed some difficulty in understanding the distinction Absa sought to draw between appeals and cross-appeals in the context of the Maize Board principle, questioning why a cross-appellant should be treated more favorably than an appellant.

This case is a leading South African authority on the principle that shareholders cannot sue for pure economic loss in the form of diminution in share value where the wrong was committed against the company rather than the shareholder personally. It reinforces fundamental company law principles regarding the separate legal personality of companies and clarifies that wrongfulness in delict must be established vis-à-vis the particular claimant. The judgment rejected a line of High Court decisions that had created exceptions based on the absence of double recovery, clarifying that such absence does not create an entitlement where none existed. The case also confirms that the Maize Board principle (that dismissal of exceptions is generally not appealable) applies equally to cross-appeals. The judgment provides important guidance on when shareholders can maintain personal claims as opposed to derivative actions, adopting the three-fold categorization from the English case Johnson v Gore Wood & Co into South African law.