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Where a wrong is suffered by the company, the company is the only proper plaintiff

Where a manager's unlawful conduct caused the company's business to collapse, the company was the only proper plaintiff and the shareholders had no claim for damages

The decision in Roestorf NO v Johns 2013 (2) SA 459 (KZD) concerned a company that carried on business in the motorcycle industry and had since gone into liquidation. The company had three shareholders and three directors.

The plaintiffs in this matter were two shareholders who between them held 75% of the shares in the company and they were also directors. The defendant had been appointed as the manager of the company's business and held 25% of the shares in the company.

The two plaintiffs were suing the defendant for damages of nearly R3 million in respect of the decline in the value of their shares in the company, and the decline in the value of their loan accounts, as a result of the allegedly fraudulent or negligent conduct of the defendant in her capacity as manager.

The latter, according to the testimony of witnesses in the proceedings, had by her misconduct toward the company's major trading associates, brought about the virtual collapse of the company's business, with the result that its shares had become worthless.

The issue of locus standi

The plaintiff's immediate difficulty was to establish that they had locus standi to sue for such damages.

In this regard the question was whether the wrong allegedly committed by the defendant had been suffered by them, as shareholders, or by the company. For if only the company had suffered the wrong, then the rule in Foss v Harbottle decreed that the company was the only proper plaintiff.

The court quoted from the summary of the rule in Foss v Harbottle as expressed in the judgment of the English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (no 2) [1982] 1 All ER 354, where it was said that–

'(1) The proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is, prima facie, the corporation.

(2) Where the alleged wrong is a transaction which might be made binding on the corporation and on all its members by a simple majority of the members, no individual member of the corporation is allowed to maintain an action in respect of that matter because, if the majority confirms the transaction, cadit quaestio; or, if the majority challenges the transaction, there is no valid reason why the company should not sue.

(3) ...

(4) There is also no room for the operation of the rule if the transaction complained of could be validly done or sanctioned only by a special resolution or the like, because a simple majority cannot confirm a transaction which requires the concurrence of a greater majority.

(5) There is an exception to the rule where what has been done amounts to fraud and the wrongdoers are themselves in control of the company. In this case the rule is relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders' action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue.'

In the present case, Lopes J pointed out that the plaintiffs held a majority of the shares in the company and that there was no reason why they could not have procured the company to sue the defendant for the damages that the latter had caused to the company's business by her conduct.

If that course of action had been followed, the damages would have been paid into the coffers of the company and, after payment of its creditors, the residue would have been distributed to the shareholders as a liquidation dividend.

Lopes J went on to say (at para [16] of the judgment) that –

'I accept without question that the plaintiffs had a financial interest in the business of the company. But the fact that their shareholding was affected by the conduct of the defendant does not give them a right of action per se against the defendant. In my view they have not demonstrated that this action falls outside the rule, or within any of the exceptions envisaged, in Foss v Harbottle.'

Lopes J went on to point out that a further reason for not permitting the plaintiffs, as shareholders, to sue for damages was that, if there was insufficient in the company's coffers to pay all its creditors, the payment to the plaintiffs would have circumvented the requisite order of distribution on liquidation.

In the result, Lopes J granted the defendant absolution from the instance and ordered the plaintiffs to pay the defendant's costs.

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