Ex-BEE partners of African Bank seek ConCourt aid in R2.1bn claim

Shareholders have an enormous benefit when investing in a company of limited liability, which means they are responsible for the debts of a company only to the extent of the value of the shares they hold. But the opposite seems to apply too: a series of cases has held that this benefit also limits their ability to make claims on the directors when their shares get whacked. Some shareholders want to test the constitutionality of this finding. 

The Supreme Court of Appeal (SCA) in its ruling on July 3 put a strong emphasis on the common law, derived from age-old custom and court precedent, as opposed to the sections of the new Companies Act, which came into effect in May 2011.

The BEE partners, Hlumisa and Eyomhlaba, are seeking to claim R2.1-billion from the 10 former directors of African Bank Investments Limited (Abil) and African Bank as well as the bank’s former auditor, Deloitte, in a case they filed in 2015 following the failure of the bank in August 2014.

The common law should develop to recognise claims of this nature to ensure the fair treatment of shareholders by acknowledging the loss suffered by them, and to prevent injustice, Diaan Ellis, who is a director of Faber Goertz Ellis Austen Inc, wrote.

Ellis stated this on behalf of the two litigants in a founding affidavit filed on Thursday 23 July.

He also pointed out that Section 158 of the Companies Act urged the courts to “develop the common law” to improve the rights established by this act.

Remedies for the losses that shareholders suffer are mostly ineffectual and, in practice, entirely unfeasible, Ellis said.

“The potential recognition of a statutory cause of action upon which shareholders can seek redress in these circumstances from the directors whose malfeasance has caused the company, and its shareholders, to suffer loss, is thus critically important for both shareholders and directors alike,” he added.

So far the empowerment partners haven’t met with success, as five judges of the SCA this month, and Judge Letty Molopa-Sethosa of the Gauteng North High Court in August 2018, dismissed their claims.

The battle by African Bank’s former shareholders highlights the difficulty shareholders have in holding corporate directors and auditors accountable when a company fails. Other cases have demonstrated the same issue.

Addressing this situation is pertinent given the combined total of hundreds of billions of rand that investors have lost because of recent accounting and auditing scandals at African Bank, Steinhoff International, Tongaat Hulett and VBS Mutual Bank.

Shareholders of other companies are battling to make headway with their claims too. Judge David Unterhalter in the South Gauteng High Court in late June dismissed a class action case brought by a Steinhoff shareholder against many parties due to the losses suffered after accounting irregularities were discovered at the group.

But the BEE parties aren’t giving up, and Ellis argued that the SCA had erred in many areas in its ruling.

In particular, the Companies Act provided a “novel provision” that had no counterpart in any common law jurisdiction, he added.

This provision is Section 218(2) that provided a remedy to any person, which could include the company, its shareholders, creditors and others to hold any person who contravened any provision of the act liable for any loss or damage suffered because of an infringement, Ellis said.

Section 218(2) was increasingly the subject of many court decisions and academic writing, he added.

The two empowerment partners alleged that the former African Bank directors made representations regarding that rights offer, which were false. The rights offer, which is an issue of shares for cash to shareholders, failed to provide Abil and African Bank with enough funding to ensure their survival.