South Africa’s Supreme Court of Appeal Judgement and Its Implications on the City Power, City of Johannesburg and Setheo Case

I was listening to a conversation between Mutumwa Mawere and another gentlemen where a dispute arose in relation to the rights and obligations of shareholders and directors of a company.

The other gentlemen was adamant of his assertion that shareholders can control the affairs of a company including the right to institute legal proceedings in the name of a company that they hold shares in and he believed that his view is supported by the law.

On the other hand, Mawere emphasised that the control and direction of a company is vested in the directors and not shareholders.

Pursuant to that conversation, Mawere later on shared two news articles (write-ups) in the C2C Legal Literacy platform in regards to a South African Supreme Court of Appeal (SCA) judgement under the title: Directors owe duty to their company, not to shareholders.

Clyde&Co who successfully represented the directors in this case wrote that “At the heart of the SCA’s decision is the concept of separate legal personality which is fundamental to company law. A company is an entity separate and distinct from its members. Loss sustained by a shareholder in the value of his/her shares is reflective of the loss suffered by the company. The shareholder does not suffer any personal loss, but rather a loss in the value of a company.

From the findings and ruling of that judgement, I can now clearly see and understand the clarity of law in the premise that if a wrong is done against a company, it is only the company in dispute which can sue for damages.

This then brings me to the long winding and twisted case involving City of Johannesburg, City Power and Setheo, including some employees of the last two.

There is a dispute before the Palm Ridge Magistrate Court involving a contractual relationship between Setheo Engineering and City Power.

Setheo Engineering signed a contract to upgrade the Eldorado Park Substation in 2015 with City Power, but in 2016, the then Mayor of Johannesburg, Herman Mashaba, under the belief that City as wholly owned by City of Johannesburg, thought that he had direct interest in any contract that City Power concluded with third parties.

He therefore thought it was in the jurisdiction of the City of Johannesburg to cause an investigation on contractual matters of City Power.

An agency of the City of Johannesburg, GFIS, based on what was alleged to be a complaint by Setheo’sub-contractors in the project conducted an investigation without the knowledge and consent of City Power resulting in the arrest of Setheo directors and City Power project coordinators.

The matter was investigated by the Hawks and is now before the Palm Ridge Magistrate Court with five accused in the case including Brighton Chifamba an employee of Setheo

A question that arose from various stakeholders in this matter which now seems to be getting addressed by the Supreme Court of Appeal judgement is whether City of Johannesburg can substitute City Power to become a complainant in this case which is before the courts.

Relative to the SCA judgement, we can see that in the dispute between City Power and Setheo, we can deduce that it is only City Power that can claim injury caused to it since City of Johannesburg does not have direct cause of action against the wrong doer.

It would then be expected of the authorities in City Power and City of Johannesburg to know the fundamental tenet of the rule of law which says that if a son commits murder, the parent cannot be held culpable for the crime.

This is because fiduciary duties of directors of City Power as codified in Section 76 Subsection 3 (s76 (3)) are owed to the company and not to shareholders (City of Johannesburg) since a company is separate and distinct from its members.

In the SCA judgment it is emphasised that where a wrong is done to a company, only the company alone may sue for damage caused to it and that shareholders do not have a direct cause of action against the wrong doer.

When taking into account the relationship between City of Johannesburg which owns 100% shareholding in City Power, it is important to understand that irrespective of the amount of shares held, City Power is still a separate and distinct legal entity from the City of Johannesburg.

As such, according to the said SCA judgement, when the loss sustained by a shareholder in the value of his/her shares is reflective of his loss suffered by the company, it shows that City of Johannesburg does not have any legal standing to claim that it suffered any personal loss as a shareholder resulting from the payment by City Power to Setheo.

If the City of Johannesburg had an assumption of loss, it is only in the value of loss by City Power and thus it’s legal recourse must be against the Directors of City Power and not against the contracting parties of City Power as is the case before the courts at the moment.

Iniafrica.com and its other affiliated publications regularly do write ups on literacy matters covering legal, corporate and civic matters in order to promote informed reasoning and action amongst its readers.

These legal literacy articles are part of the C2C legal and corporate initiatives that are aimed at developing a shared understanding on the identity as well as duties and obligations of shareholders and directors in relation to a company.