The relationship between the Reflective Loss Principle and Section 163 (2)(j) of the Companies Act: Demystifying the current position and proposing a balanced path forward

Westermeyer, Brigitte Leonie

The relationship between the Reflective Loss Principle and Section 163 (2)(j) of the Companies Act: Demystifying the current position and proposing a balanced path forward

Master Thesis

2022

Abstract

A shareholder may not institute a claim for the recovery of a loss suffered, in the form of a diminution in the company's share value, where the diminution is a consequence of loss suffered by the shareholder's company. This is due to the operation of the reflective loss principle, which holds that the loss suffered by a shareholder in this scenario is merely a reflection of the loss suffered by the company. Accordingly, the company acquires a cause of action to pursue the loss it has suffered, while a shareholder does not acquire a concurrent cause of action to recover the reflective loss. This is the position in terms of the common law. The effect of the reflective loss principle on statutory shareholder claims was recently addressed in two consequential judgments – Hlumisa Investment Holdings (RF) Ltd v Kirkinis1 and De Bruyn v Steinhoff International NV.2 These judgments established that the strictures of the reflective loss principle remain a barrier to shareholder claims brought in terms of section 218(2) and section 20(6) of the Companies Act. It is now firmly established that a statutory claim based on section 218(2) or section 20(6) does not enable a shareholder to outflank the reflective loss principle. Stated differently, a shareholder cannot rely on these sections to obtain compensation for loss suffered in the form of a diminution in the company's share value, where the diminution in share value is a result of a loss sustained by the company. By contrast, the interplay between the reflective loss principle and section 163 of the Companies Act remains unclear. Section 163 provides that a court may make any order ‘it considers fit' to afford a shareholder relief from oppressive or unfairly prejudicial conduct, or conduct which unfairly disregarded the interests of the shareholder. This section clearly vests a court with a wide discretionary power to grant relief to an aggrieved shareholder. This thesis explores whether the broad discretion vested in a court by virtue of section 163 is curtailed by the strictures of the reflective loss principle, or whether a court may under this section grant relief to a shareholder in contravention of the principle, in instances where the court considers it fit to do so. In other words, this thesis questions whether a shareholder who has shown the requisite oppression, unfair prejudice or unfair disregard of shareholder interests in terms of section 163, may seek to recover reflective loss as relief from the conduct complained of. A detailed analysis of section 163 reveals two elements contained within the provisions of the section which strongly militate in favour of a conclusion that shareholder claims brought in terms of this section – particularly section 163(2)(j) - are not subject to the reflective loss principle: First, the distinction between personal and corporate claims is not maintained by the provisions of section 163. Second, section 163(2)(j) allows a shareholder to seek compensation as relief from oppressive or unfairly prejudicial conduct. Taken together, these elements serve to exclude the application of the reflective loss principle and create a basis upon which a shareholder may seek compensation for loss in the form of a diminution in share value, where the diminution in share value is a result of a wrong committed against the shareholder's company.. The thesis considers the implications of the current formulation of section 163(2)(j) and argues that, by excluding the application of the reflective loss principle, the section creates an avenue whereby an individual shareholder may institute a claim for relief which infringes on and erodes the separate legal personality of the shareholder's company. The doctrine of separate legal personality plays a critical role in incentivising the formation of new companies, as well as the continued expansion of existing companies – phenomena that are of invaluable importance to the national economy. An outcome which facilitates an erosion of the separate legal personality of a company, is therefore untenable. The thesis identifies the partial codification of the reflective loss principle as a solution to the undesirable outcome created by the current formulation of section 163(2)(j).

Keywords

Commercial Law

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