Lurking in the back of the Companies Act is a potentially devastating provision

Section 218(2) provides that:

Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.

The High Court had cause recently to consider this legislation in Sanlam Capital Markets v Mettle Manco 2014 (3) All SA 454 (GJ).

The terms of law do not come wider than this: the gist of the section means that any person, including shareholders, directors and creditors could use it to claim back a loss caused by any other persons for any contravention of the Act.

The court was faced with a complex transaction concerning buying and selling of financial instruments based on debts. The claimant engaged in transactions as a result of representations made by the defendants. Things did not go according to plan and the claimant lost money. In suing the defendants, the claimant argued that the defendants had a duty of care not to make the representations to the claimant unless they were correct in all material respects. In the alternative, the claimant claimed that the defendants contravened s76(3) of the Act by acting recklessly, and further in the alternative that the defendants were liable to the claimant for the loss they had suffered in terms of s218(2).

The defendants tried to invoke various legal arguments to have the claim based on s218(2) dismissed at the exception stage. The court dismissed these arguments, reinforcing what has already been established in common law: s218 imposes liability on any person who contravenes any provision of the Act and by so doing causes that person to suffer a loss.

Section 218 of the Act is therefore hugely significant as it enables persons who allege they have suffered losses to found such claims provided that they can link such losses to a contravention of any provision of the Act. It may become even more powerful when read in combination with the section of the Act dealing with directors’ duties (ss 76 and 77) and s424 of the Companies Act, No 61 of 1973 (dealing with fraudulent and reckless trading).