Republic of South Africa

IN THE HIGH COURT OF SOUTH AFRICA (WESTERN CAPE DIVISION, CAPE TOWN)

Case No: 9900/2016

Before: The Hon. Mr Justice Binns-Ward

Dates of hearing: 29-30 August, 1 September 2016 Date of judgment: 11 October 2016

In the matter between:

LEWIS GROUP LIMITED Applicant and DAVID FARRING WOOLLAM First Respondent JOHAN ENSLIN Second Respondent LESLIE ALAN DAVIES Third Respondent DAVID MORRIS NUREK Fourth Respondent HILTON SAVEN Fifth Respondent

JUDGMENT BINNS-WARD J: [1] Lewis Group Limited, the applicant in this case, is a public company listed on

the Johannesburg Securities Exchange. It is the holding company of Lewis Stores

(Pty) Ltd, which operates over 700 retail outlets throughout Southern Africa. The

company also owns all the shares in Monarch Insurance Company Ltd. It has applied,

in terms of s 165(3) of the Companies Act 71 of 2008 (‘the 2008 Companies Act’),

for an order setting aside a demand in terms of s 165(2)1 served on it by the first

respondent, Mr David Woollam. Section 165(3) of the Act permits a company upon

1 The text of the relevant parts of s 165 is set out in note 17, below.

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which such a demand has been served to apply ‘to a court to set aside the demand

only on the grounds that it is frivolous, vexatious or without merit’.

[2] Woollam is a person entitled to be registered as a shareholder of the applicant

company. His entitlement arises from his quite recent acquisition of 3010 ordinary

shares in the applicant. The shares are currently held for him by a nominee. He

describes himself as their ‘beneficial owner’.

[3] Woollam served the demand purporting thereby to exercise the right conferred

in terms of s 165(2)(a) of the 2008 Companies Act. That provision entitles any

shareholder or person entitled to be registered as a shareholder to ‘serve a demand

upon a company to commence or continue legal proceedings, or take related steps, to

protect the legal interests of the company’. The service of such a demand is the first

step that any person with standing2 is required to take to enable such person, if so

advised, and if the company does not accede to the demand, thereafter, with the leave

of the court to be obtained in terms of s 165(5), to commence or continue the relevant

legal proceedings in the company’s name.

[4] The demand, dated 20 May 2016, calls upon the applicant company ‘to protect

its legal interests, more specifically, … [by commencing] proceedings to declare as

delinquent’ four of the company’s directors, namely Messrs Johan Enslin, Leslie

Davies, David Nurek and Hilton Saven (the second to fifth respondents, respectively).

The demand presaged six separate grounds for Woollam’s contention that

proceedings should be instituted by the company for a declaration that the second to

fifth respondents should be declared delinquent directors. These were:

1. That loss of employment insurance was being sold to customers of Lewis

Stores who were pensioners and self-employed persons and thus had no

insurable interest in terms of the relevant insurance policies.

2. That Lewis Stores’ customers were required, whether they wished to or not, to

purchase extended warranties on goods purchased.

3. That compulsory delivery fees were charged to Lewis Stores customers,

irrespective of whether they required delivery of the goods to be effected.

2 The classes of person afforded standing to initiate derivative proceedings are identified in s 165(2) of Act 71 of 2008; see note 17, below.

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4. That the group’s accounts had for many years appeared to overstate revenue

from the sale of insurance policies.

5. That the group had inappropriate revenue recognition policies with regard to

the sale of extended warranties that resulted in the on-going overstatement of

reported revenue.

6. ‘The incorrect processing of various accounting policy errors and the changing

of estimates, as “prior year adjustments” in the interim results for the period

ended 30 September 2015.’3

[5] It is common ground that the proceedings that Woollam wants the company to

commence would be those provided for in terms of s 162 of the 2008 Companies Act.

The provision that a person with standing can apply to have a director or former

director declared delinquent or ‘placed under probation’ is a novel remedy. It was not

available under any of the statutory predecessors of the 2008 Companies Act. The

effect of a declaration of a person as delinquent is that he or she is thereupon

disqualified, for so long as the declaration remains in force, from being a director of

any company;4 see s 69(8)(a) of the 2008 Companies Act.5

[6] The informed reader will have deduced from what has been said so far that the

statutory demand provided for in terms of s 165(2) of the 2008 Companies Act is a

procedural precursor to the possible institution by the person serving it of what

lawyers refer to as a ‘derivative action’. Such reader would therefore find no surprise

in the heading to s 165, which is ‘Derivative actions’. As far as my researches could

determine, however, he or she would not have encountered a case, here or abroad, in

which the type of relief that Woollam ultimately seeks to obtain under s 162 in this

matter has been sought or granted in derivative proceedings. Indeed, in the other

jurisdictions, to whose systems and law our courts make most frequent comparative 3 The wording of the sixth ground of complaint is quoted directly from the notice of demand. 4 Unless, in terms of s 162(6)(b)(i), the court making the declaration limits the application of its order ‘to one or more particular categories of companies’. 5 A declaration of delinquency in terms of s 162 of the 2008 Companies Act can potentially even have repercussions for the affected individual beyond the borders of South Africa. So, for example, in terms of s 206B(6) of the Australian Corporations Act, 2001, a person who is the subject of an order made by a court in a foreign jurisdiction prohibiting that person from being the director of a company is thereby disqualified from managing any corporation in Australia if that foreign jurisdiction is identified in the relevant regulations to the Act. A delinquency order obtained in South Africa may also afford grounds for the granting of a similar order in New Zealand in terms of s 383(1)(ca) of the Companies Act, 1993 (NZ).

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reference in the field of company law,6 equivalent orders to the ones identified in

Woollam’s demand are generally to be had at the instance of the relevant regulatory

or statutory authority, rather than private litigants - although there are exceptions.

[7] In the United Kingdom, the disqualification of directors is regulated in terms

of the Company Directors Disqualification Act, 1986.7 Under the UK legislation,

courts can make disqualification orders mero motu in certain circumstances8 and in

other instances upon the application of the Secretary of State or, upon the direction of

the Secretary of State, by the official receiver of a company in winding-up.

Liquidators and official and administrative receivers are required to report to the

Secretary of State any circumstances discovered by them in the discharge of their

functions in which a disqualification order might be indicated. The only individuals

who appear to have standing to apply for disqualification orders under the UK

legislation are past or present members or creditors of any company ‘in relation to

which that person has committed or is alleged to have committed an offence or other

default’.9 An application by a member or creditor in terms of the relevant standing

provision under the UK legislation is unambiguously personal in character, and

definitely not to be brought derivatively.

[8] In Australia, disqualification orders are obtained at the instance of the

Australian Securities and Investments Commission (ASIC).10 The relevant objects

and functions of ASIC include maintaining, facilitating and improving the

performance of the Australian financial system and the entities within that system in

the interests of commercial certainty, reducing business costs, promoting the

efficiency and development of the economy and the confident and informed

participation of investors and consumers in the financial system.11 ASIC’s functions

are clearly directed in the public interest.

6 Section 5(2) of the 2008 Companies Act provides: ‘To the extent appropriate, a court interpreting or applying this Act may consider foreign company law.’ 7 An account of the history, going back to 1928, of the preceding legislation that culminated in the currently applicable statute is given in Official Receiver v Wadge Rapps & Hunt (a firm) & Anor [2003] UKHL 49, [2003] 4 All ER 18 (HL), at paras. 32-38. 8 In the context of making winding-up orders, for example. 9 Section 16(2) of the Company Directors Disqualification Act, 1986 (UK). 10 See Part 2D.6 of the Australian Corporations Act, 2001. 11 See s 1 of the Australian Securities and Investment Commission Act, 2001.

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[9] In New Zealand, a director of a company commits an offence if the director

exercises powers or performs duties as a director of the company - (a) in bad faith

towards the company and believing that the conduct is not in the best interests of the

company; and (b) knowing that the conduct will cause serious loss to the company

(s 138A of the Companies Act, 1993 (NZ)). Upon conviction for such an offence a

director is liable to imprisonment for up to five years or a fine not exceeding

NZ$200 000 (s 373(4)). Any person so convicted is prohibited for a period of five

years from the date of the conviction from being a director or from being in any way,

directly or indirectly, involved in the management of a company without first

obtaining the court’s permission (s 382). Notice of any application for such

permission must be given to the Registrar of Companies, who may oppose it. In

addition to the automatic disqualification provided for in terms of s 382, application

for a disqualification order may be made in terms of s 383 of the New Zealand

Companies Act by the Registrar of Companies, the Financial Markets Authority, the

Official Assignee12, or by the liquidator of the company, or by a person who is, or has

been, a shareholder or creditor of the company. There is no provision for the

company itself to make the application. It is plain therefore that the New Zealand

legislation does not contemplate a disqualification application being brought by way

of derivative proceedings. As in the case of the UK and Australian legislation, it is

evident that the New Zealand disqualification of directors regime is directed in the

public interest.

[10] The critical difference between the statutory disqualification of directors

regimes in the foreign jurisidctions to which I have had reference and that in terms of

s 162 of the 2008 Companies Act is that the latter gives standing to companies to

bring proceedings for the disqualification of their directors or former directors.

[11] As indicated, assuming the company does not accede to his demand, Woollam

seeks to use the derivative action remedy in terms of s 165 to achieve a declaration in

terms of s 162 of the 2008 Companies Act in respect of four of the company’s seven

directors. Section 162 of the 2008 Companies Act gives standing to a number of

categories of persons, including shareholders and companies, to apply for an order

declaring a person to be delinquent. Subsections 162(2) and 162(5)(c) contain the

12 In New Zealand official assignees are officers of the court, whose functions are comparable to those exercised by the masters of the court in this country.

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provisions concerning standing that pertain in the context of the current case. They

apply equally irrespective of whether the company or a shareholder is the applicant.

It is with reference to those subsections that any assessment of whether Woollam’s

complaints make out a prima facie case has to occur. If the complaints do not concern

instances of the sort of conduct identified in s 162(5)(c), it would follow that his

demands must be unsustainable and therefore without merit.

[12] Sub-section (2) goes as follows, insofar as relevant:

(2) A company, a shareholder, director, company secretary or prescribed officer of a

company, a registered trade union that represents employees of the company or

another representative of the employees of a company may apply to a court for an

order declaring a person delinquent or under probation if-

(a) the person is a director of that company or, within the 24 months

immediately preceding the application, was a director of that company; and

(b) any of the circumstances contemplated in-

(i) subsection (5)(a) to (c) apply, in the case of an application for a

declaration of delinquency; or

(ii) ...

Subsection (5)(c) provides:

(5) A court must make an order declaring a person to be a delinquent director if the

person-

(a) …;

(b) …;

(c) while a director-

(i) grossly abused the position of director;

(ii) took personal advantage of information or an opportunity, contrary

to section 76(2)(a);13

(iii) intentionally, or by gross negligence, inflicted harm upon the

company or a subsidiary of the company, contrary to section

76(2)(a);

(iv) acted in a manner-

13 Section 76(2)(a) of the Act provides:

A director of a company must- (a) not use the position of director, or any information obtained while acting in the capacity of a

director- (i) to gain an advantage for the director, or for another person other than the company or a

wholly-owned subsidiary of the company; or (ii) to knowingly cause harm to the company or a subsidiary of the company; …

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(aa) that amounted to gross negligence, wilful misconduct or

breach of trust in relation to the performance of the

director's functions within, and duties to, the company; or

(bb) contemplated in section 77(3)(a),(b) or (c)14

[13] The import of s 162(5)(c) received consideration in the quite recent judgment

of the Supreme Court of Appeal in Gihwala and Others v Grancy Property Ltd and

Others [2016] ZASCA 35; [2016] 2 All SA 649 (SCA) at paras. 143-144.

[14] Treating of sub-paragraph (i) thereof, Wallis JA remarked that a gross abuse

of the position of director did not involve ‘a trivial misdemeanour or an unfortunate

fall from grace’. Indeed, the adjective ‘gross’ used in a context like ‘gross abuse’

denotes obvious and egregious conduct.15 The conduct in question must relate to the

use of the position as director, it does not relate to the performance by the person

concerned of his or her duties and functions as a director because that is a matter dealt

with discretely in terms of sub-paragraph (iv). Sub-paragraph (i) does not appear to

be applicable in respect of Woollam’s complaints.

[15] There is no suggestion in the complaints that any of the second to fifth

respondents took personal advantage of information or an opportunity, contrary to

section 76(2)(a) of the 2008 Companies Act. Nothing more need therefore be said

about the import of sub-paragraph (ii).

[16] Sub-paragraph (iii) is somewhat clumsily worded, more particularly by reason

of its equation of the concept of ‘intentionally’ or ‘by gross negligence’ inflicting

harm on the company with that of ‘knowingly causing harm’ in s 76(2)(a).

14 Section 77(3)(a) – (c) of the Act provides:

Liability of directors and prescribed officers (1) … (2) … (3) A director of a company is liable for any loss, damages or costs sustained by the company as a

direct or indirect consequence of the director having- (a) acted in the name of the company, signed anything on behalf of the company, or purported

to bind the company or authorise the taking of any action by or on behalf of the company, despite knowing that the director lacked the authority to do so;

(b) acquiesced in the carrying on of the company's business despite knowing that it was being conducted in a manner prohibited by section 22 (1);

(c) been a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose; …

15 In Ex parte Gore and others NNO 2013 (3) SA 382 (WCC), at para 34, I referred to the expression ‘gross abuse’ used in s 65 of the Close Corporations Act 69 of 1984 as ‘having a more extreme connotation’ than that of ‘unconscionable abuse’ in s 20(9) of the Companies Act 71 of 2008.

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‘Knowingly’ is readily reconcilable with ‘intentionally’, but not so with ‘negligently’,

even grossly so. Nevertheless, it is clear enough, I think, that what is required is

conduct intended to harm the company, alternatively an attitude of recklessness by the

director in the face of an appreciation that his or her conduct could cause the company

harm. While acknowledging that ‘gross negligence’ is a concept that defies precise

definition, Scott JA proceeded, in MV Stella Tingas: Transnet Ltd v Owners of the

MV. Stella Tingas and Another 2003 (2) SA 473 (SCA), at para 7, to state ‘…to

qualify as gross negligence the conduct in question, although falling short of dolus

eventualis, must involve a departure from the standard of the reasonable person to

such an extent that it may properly be categorized as extreme; it must demonstrate,

where there is found to be conscious risk-taking, a complete obtuseness of mind or,

where there is no conscious risk-taking, a total failure to take care. If something less

were required, the distinction between ordinary and gross negligence would lose its

validity’. Woollam has not alleged that the second to fifth respondents conducted

themselves with the intention of harming the company. Sub-paragraph (iii) is

therefore also not applicable in respect of Woollam’s complaints.

[17] Sub-paragraph (iv) covers a range of grounds. As will become apparent when

consideration is given later in this judgment to Woollam’s grounds of complaint, the

only ones that could on any approach merit consideration for present purposes are the

carrying on of the company’s business recklessly, with gross negligence, with intent

to defraud any person, or for any fraudulent purpose, or acquiescence in the conduct

of company’s business in that manner.

[18] It follows that for a company or any of its shareholders to succeed in obtaining

a declaration of delinquency in respect of any of the company’s directors or former

directors they must demonstrate very serious misconduct by the person concerned.

The relevant causes of delinquency entail either dishonesty, wilful misconduct or

gross negligence. Establishing so-called ‘ordinary’ negligence, poor business

decision-making, or misguided reliance by a director on incorrect professional advice

will not be enough. In treating of the equivalent remedy under s 295 of the

Companies Act, 1985 (a predecessor of the Company Directors Disqualification Act)

Sir Nicolas Browne-Wilkinson V-C remarked in Re Lo-Line Electric Motors Ltd.,

[1988] 1 Ch. 477 at 486 ‘[o]rdinary commercial misjudgment is in itself not sufficient

to justify disqualification. In the normal case, the conduct complained of must display

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a lack of commercial probity, although I have no doubt that in an extreme case of

gross negligence or total incompetence disqualification could be appropriate’. In Re

Sevenoaks Stationers (Retail) Ltd. [1991] Ch. 164 (C.A.), a case in which a director

concerned had been completely remiss in respect of his duties, although not dishonest,

Dillon LJ held (at p. 184) that ‘incompetence or negligence in a very marked degree

... is enough to render him unfit; I do not think it is necessary for incompetence to

“total”, as suggested by the Vice-Chancellor in [Re Lo-Line Electric Motors], to

render a director unfit to take part in the management of a company’. An

illuminating review of the considerations that the English courts have regarded as

relevant in this regard is to be found in Secretary of State for Trade and Industry v.

Goldberg (No. 2) [2003] EWHC 2843 (Ch.), [2004] 1 BCLC 597.

[19] Whether the grounds of complaint, considered in the context of the evidence

in the current proceedings, make out a sustainable case worthy of investigation in

terms of s 165(4), or capable of supporting an application in terms of s 165(5) of the

2008 Companies Act for leave to proceed derivatively will be considered presently to

the extent necessary. A preliminary question, however, is whether a person is able to

proceed derivatively for the given relief when that person is given standing under the

Act to proceed for such relief personally.

[20] Despite his ownership of 3010 of the 98 057 959 issued shares in the applicant

company, Woollam is not a ‘shareholder’ within the defined meaning of the word. A

‘shareholder’ is defined in s 1 of the Act to mean, insofar as currently relevant,

‘… the holder of a share issued by a company and who is entered as such in the

certificated or uncertificated securities register, as the case may be’. The applicant’s

counsel submitted, however, that Woollam could very easily qualify himself as a

shareholder (as defined) of the applicant company simply by obtaining the registration

into his name of one or more of the shares beneficially owned by him. The first

respondent’s counsel, reasonably, did not take issue with that submission. I consider

that it would be justified in the circumstances, to the extent that the determination of

the application requires taking the contextual import of s 162 of the 2008 Companies

Act into account, to regard Woollam for that purpose as if he were in fact a

shareholder of the applicant.

[21] Pointing to the right afforded by s 162 to shareholders directly to institute

proceedings for a declaration that a director or former director of the company in

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which they hold shares is a delinquent person, the applicant’s counsel argued,

consistently with a contention to that effect in the founding affidavit, that as a matter

of principle there is no proper basis for Woollam to be afforded standing on the

exceptional basis implicit in a derivative action. The applicant’s counsel submitted

that Woollam’s demand on the company under the derivative actions provisions of the

2008 Companies Act was plainly vexatious because he could seek the relief

personally.

[22] Mr De Wet, who took the main argument for the first respondent, conceded,

correctly in my view, that if, upon a proper construction of the Act, a shareholder

were not entitled to avail of s 165 of the new Companies Act for the institution of

proceedings for the remedy he could seek personally in terms of s 162, the demand

would indeed have been vexatious. The first respondent’s counsel argued, however,

that Woolam’s claims to standing under ss 165 and s 162, respectively, were not

mutually exclusive, and that he was therefore entitled to elect to proceed derivatively

for relief that he could also seek personally.

[23] Section 165 of the 2008 Companies Act expressly abolishes our common law

in respect of derivative actions in respect of the exercise or protection of the rights or

legal interests of companies16 and puts its own provisions in the place of the abolished

law. The act of abolition is contained in subsection (1); that of substitution in the

other fifteen subsections of the provision. 17

16 The abolition is limited in extent; see note 20, below. 17 Section 165 of the 2008 Companies Act is a lengthy provision. The parts that are most relevant for current purposes go as follows: (1) Any right at common law of a person other than a company to bring or prosecute any legal

proceedings on behalf of that company is abolished, and the rights in this section are in substitution for any such abolished right.

(2) A person may serve a demand upon a company to commence or continue legal proceedings, or take related steps, to protect the legal interests of the company if the person- (a) is a shareholder or a person entitled to be registered as a shareholder, of the company or of

a related company; (b) is a director or prescribed officer of the company or of a related company; (c) is a registered trade union that represents employees of the company, or another

representative of employees of the company; or (d) has been granted leave of the court to do so, which may be granted only if the court is

satisfied that it is necessary or expedient to do so to protect a legal right of that other person.

(3) A company that has been served with a demand in terms of subsection (2) may apply within 15 business days to a court to set aside the demand only on the grounds that it is frivolous, vexatious or without merit.

(4) If a company does not make an application contemplated in subsection (3), or the court does not set aside the demand in terms of that subsection, the company must-

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(a) appoint an independent and impartial person or committee to investigate the demand, and

report to the board on- (i) any facts or circumstances-

(aa) that may gave rise to a cause of action contemplated in the demand; or (bb) that may relate to any proceedings contemplated in the demand;

(ii) the probable costs that would be incurred if the company pursued any such cause of action or continued any such proceedings; and

(iii) whether it appears to be in the best interests of the company to pursue any such cause of action or continue any such proceedings; and

(b) within 60 business days after being served with the demand, or within a longer time as a court, on application by the company, may allow, either- (i) initiate or continue legal proceedings, or take related legal steps to protect the legal

interests of the company, as contemplated in the demand; or (ii) serve a notice on the person who made the demand, refusing to comply with it.

(5) A person who has made a demand in terms of subsection (2) may apply to a court for leave to bring or continue proceedings in the name and on behalf of the company, and the court may grant leave only if- (a) the company-

(i) has failed to take any particular step required by subsection (4); (ii) appointed an investigator or committee who was not independent and impartial; (iii) accepted a report that was inadequate in its preparation, or was irrational or

unreasonable in its conclusions or recommendations; (iv) acted in a manner that was inconsistent with the reasonable report of an independent,

impartial investigator or committee; or (v) has served a notice refusing to comply with the demand, as contemplated in subsection

(4) (b) (ii); and (b) the court is satisfied that-

(i) the applicant is acting in good faith; (ii) the proposed or continuing proceedings involve the trial of a serious question of

material consequence to the company; and (iii) it is in the best interests of the company that the applicant be granted leave to

commence the proposed proceedings or continue the proceedings, as the case may be. (6) In exceptional circumstances, a person contemplated in subsection (2) may apply to a court for

leave to bring proceedings in the name and on behalf of the company without making a demand as contemplated in that subsection, or without affording the company time to respond to the demand in accordance with subsection (4), and the court may grant leave only if the court is satisfied that- (a) the delay required for the procedures contemplated in subsections (3) to (5) to be completed

may result in- (i) irreparable harm to the company; or (ii) substantial prejudice to the interests of the applicant or another person;

(b) there is a reasonable probability that the company may not act to prevent that harm or prejudice, or act to protect the company's interests that the applicant seeks to protect; and

(c) that the requirements of subsection (5) (b) are satisfied. (7) A rebuttable presumption that granting leave is not in the best interests of the company arises if it

is established that- (a) the proposed or continuing proceedings are by-

(i) the company against a third party; or (ii) a third party against the company;

(b) the company has decided- (i) not to bring the proceedings; (ii) not to defend the proceedings; or (iii) to discontinue, settle or compromise the proceedings; and

(c) all of the directors who participated in that decision- (i) acted in good faith for a proper purpose; (ii) did not have a personal financial interest in the decision, and were not related to a

person who had a personal financial interest in the decision; (iii) informed themselves about the subject matter of the decision to the extent they

reasonably believed to be appropriate; and

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[24] Subsection (1) was probably worded in the manner that it is cognisant of the

experience in Canada, where provincial enactments codifying the law in respect of

derivative actions were introduced without any provision therein for the abolition of

the common law. 18 The failure to include an express provision abolishing the

common law remedy gave rise to contentions by some litigants that the common law

continued in force alongside the new statutory regimes. The contentions were

advanced by litigants who sought to avoid the requirement of having to obtain the

leave of the courts to proceed derivatively that had been introduced in the Canadian

statutory regimes – as it also has been in terms of s 165 of our Act. It took decisions

by the courts in cases like Farnham v Fingold [1973] 2 OR 132 (CA), 1973 CanLII

523 (ON CA) and Shield Development Co v Snyder et al and Western Mines Ltd

[1976] 3 WWR 44 (BCSC) to conclusively confirm that the common law had been

codified by the new statutory regimes and that derivative action proceedings

thenceforth could be prosecuted solely in conformance with the statutory provisions.

[25] It is evident that s 165 manifests the comprehensive codification of the

relevant law insofar as it concerns companies (as defined in s 1 of the Act). The

import of ‘abolition’ in the context of subsection (1) should be understood

accordingly; it does not denote a doing away with the established legal concept of

derivative proceedings, but rather the creation of a slate for its statutory restatement

(iv) reasonably believed that the decision was in the best interests of the company. (8) For the purposes of subsection (7)-

(a) a person is a third party if the company and that person are not related or inter-related; and (b) proceedings by or against the company include any appeal from a decision made in

proceedings by or against the company. (9) … (13) … (14) If the shareholders of a company have ratified or approved any particular conduct of the

company- (a) the ratification or approval-

(i) does not prevent a person from making a demand, applying for leave, or bringing or intervening in proceedings with leave under this section; and

(ii) does not prejudice the outcome of any application for leave, or proceedings brought or intervened in with leave under this section; or

(b) the court may take that ratification or approval into account in making any judgment or order. (15) Proceedings brought or intervened in with leave under this section must not be discontinued,

compromised or settled without the leave of the court. (16) For greater certainty, the right of a person in terms of this section to serve a demand on a

company, or apply to a court for leave, may be exercised by that person directly, or by the Commission or Panel, or another person on behalf of that first person, in the manner permitted by section 157.

18 Section 99 of the Ontario Business Corporations Act, 1970 and s 222 of the British Columbia Companies Act 1972 are cited as examples in Oliver Schreiner’s paper The Shareholders’ Derivative Action – A Comparative Study of Procedures (1979) 96 SALJ 203.

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and reform. The restatement and reform is manifest in the content of subsections (2)

– (16). Derivative actions at common law were directed at obtaining redress for the

company in respect of wrongs done to the company or to recover the property of the

company or to enforce its rights. The codified provisions in s 165 reiterate the

principle that it is in respect of the ‘legal interests’ of the company, as distinct from

those of the person applying to institute it, that a derivative action may be permitted.

[26] It bears noting at once that it has already been remarked in a judgment of the

appeal court that the abolition of the common law in terms of s 165(1) has left

unaffected the standing of shareholders to litigate directly in respect of matters

affecting their personal, as distinct from their corporate, rights as shareholders; see

Communicare and Others v Khan and Another 2013 (4) SA 482 (SCA) at para 20.

This serves to underscore the enduring distinction between the nature of the derivative

action and that of the personal action. The former is a remedy to be exercised in the

defence or advancement of the company’s rights or interests, and not the personal

rights of the plaintiff.19

[27] The term ‘derivative action’ comes from the English law. In the corporate

context, it relates to proceedings instituted by persons given standing to litigate in

their own names for and behalf of the corporation in respect of wrongs done to the

corporation.20 Such proceedings were entertained in the limited circumstances that

gave rise to the recognised exceptions to the rule in Foss v Harbottle 21 (often also

called ‘the proper plaintiff rule’). The label ‘derivative’ was applied because although

the litigation was instituted and prosecuted in A’s name, the right of action concerned

was derived from B.22 Moreover, the benefits of any judgment obtained in favour of

A in such an action, accrue to B, not A. In the current case it is evident that a

19 The position is aptly expressed by Schreiner op cit supra, at p. 209, ‘Where a legal wrong is done to a shareholder, i.e. his rights qua shareholder are invaded, a personal action will lie. A derivative action, by contrast, is one brought by a member on behalf of the company, and has as its cause of action an alleged wrong done to the company.’ 20 The procedural remedy is not confined to matters pertaining to companies. It would be available in respect of any corporate body. The salient English authority of Edwards and Another v Halliwell and Others [1950] 2 All ER 1064 (CA), for example, concerned the affairs of a trade union. Section 165(1) of the 2008 Companies Act abolishes the common law on derivative actions only insofar as companies (as defined) are affected. It is therefore not an act of general abolition. 21 Foss v Harbottle (1843) 2 Hare 461; 67 ER 189. Although it is common to speak of ‘the exceptions to the rule in Foss v Harbottle’, the expression can be somewhat misleading because the so-called ‘exceptions’ in point of fact are part of its embodiment. 22 MF Cassim The New Derivative Action under the Companies Act (Juta 2016) at pp.13-14.

14

shareholder’s right to seek a declaration against a director or former director in terms

of s 162 of the 2008 Companies Act does not derive from the company. It is invested

directly and personally in the shareholder by the section itself. The shareholder’s

right co-exists with the identical right separately invested in the company by the very

same provision.

[28] Hoexter JA gave the following exposition of the derivative action in Francis

George Hill Family Trust v South African Reserve Bank and Others 1992 (3) SA 91

(A), at 97B-G:

It is trite that a company with limited liability is an independent legal person and separate

from its shareholders or directors. In general, therefore, when a wrong is alleged to have been

done to a company the proper plaintiff to sue the wrongdoer is the company itself. In English

law a derivative action constitutes an exception to that general rule. The exception is

recognised when (1) the wrong complained of involves conduct which is either fraudulent or

ultra vires and (2) the wrong has been perpetrated by directors or shareholders who are in the

majority and so control the company. See, for example: Burland and Others v Earle and

Others [1902] AC 83 (PC); Edwards and Another v Halliwell and Others [1950] 2 All ER

1064 (CA) at 1066-7; Prudential Assurance Co Ltd v Newman Industries Ltd and Others (No

2) [1982] 1 All ER 354 (CA). The principle underlying the exception to the general rule is

expounded thus by Lord Denning MR in Wallersteiner v Moir (No 2); Moir v Wallersteiner

and Others (No 2) [1975] 1 All ER 849 (CA) at 857d-f:

'If it is defrauded by a wrongdoer, the company itself is the one person to sue for the

damage. Such is the rule in Foss v Harbottle. The rule is easy enough to apply when

the company is defrauded by outsiders. The company itself is the only person who

can sue. Likewise, when it is defrauded by insiders of a minor kind, once again the

company is the only person who can sue. But suppose it is defrauded by insiders who

control its affairs - by directors who hold a majority of shares - who can then sue for

damages? Those directors are themselves the wrongdoers. If a board meeting is held,

they will not authorise proceedings to be taken by the company against themselves. If

a general meeting is called, they will vote down any suggestion that the company

should sue them themselves. Yet the company is the one person who is damnified. In

one way or another some means must be found for the company to sue. Otherwise

the law would fail in its purpose. Injustice would be done without redress.' (It is worthy of note that in Prudential Assurance v Newman Industries (2) supra,23

the Court of Appeal, without finding it necessary to decide the point, showed a

notable lack of enthusiasm about adopting the broader view that had been expressed

23 Also reported at [1982] Ch. 204.

15

by Vinelott J in the court of first instance ([1981] Ch. 257 at p. 327) that a shareholder

was entitled to prosecute an action on behalf of the company if ‘the interests of justice

do require that a minority action should be permitted’.24 Thus, while it has always

been acknowledged that the rule in Foss v Harbottle is not inflexible, the judicial

approach to entertaining derivative proceedings in circumstances not falling within

the recognised exceptions to it has been restrained.)

[29] The question of whether the English law in respect of derivative actions had

been adopted as part of our common law was left open by the Appellate Division in

Hill Family Trust supra. Having concluded that the proceedings in that matter did not

on the facts of the case fall ‘within the exception in English law to the rule in Foss v

Harbottle’, the Court (at p.98B) held it to have been ‘unnecessary to consider the

further point … whether (apart from the statutory remedy provided by s 266 of the

Companies Act 61 of 1973) the common law exception to the rule in Foss v Harbottle

forms part of South African law’.25

[30] Subsequent decisions of the Supreme Court of Appeal appear, however, to

have accepted, without discussion, that the common law exception did form part of

our law.26 I think it is fair to infer in the circumstances that the rule in Foss v

24 At pp. 222-223 of the Chancery Division Report. See also in this regard the remarks of Danckwerts J in Pavlides v Jensen and Others [1956] Ch. 565, at 574-5. 25 A positive finding that the rule in Foss v Harbottle and its exceptions form part of our common law was made in TWK Agriculture Ltd v Forestry Co-operative Ltd 2006 (6) SA 20 (N). Theron J cited Gundelfinger v African Textile Manufacturers Ltd and Others 1939 AD 314 at 324-5 in support of her finding. The remarks made there were obiter, however. Moreover, Stratford CJ appears to have conceived of the remedy available to the minority shareholder in the face of a fraud by the majority as the actio doli, which suggests that he actually had in mind a personal, not a derivative action. The learned Chief Justice went further and stated that the remedy that he conceived would be available would be limited to a matter in which ‘the majority should use its voting power to obtain for itself a benefit at the expense of the minority’. The judgment of Tindall AJP in Moti v Moti and Hassim Moti Ltd 1934 TPD 428, to which Theron J also referred, gives a clearer indication of an acceptance by a South African court of the rule (there identified by reference to Burland v Earle supra and Palmer, Company Precedents 13th ed. vol 1 at 1246) and its exceptions as part of our common law. McClelland v Hullett and Others 1992 (1) SA 456 (D), also cited in TWK Agriculture concerned an action that the court determined was personal in nature and thus did not implicate the rule, although it is evident from the judgment that Booysen J considered it to be part of our law, as did Cloete J in Fedsure Life Assurance Co Ltd v Worldwide African Investment Holdings (Pty) Ltd and Others 2003 (3) SA 268 (W) at para 55. The judgment in McClelland v Hullett was subsequently disapproved in Itzikowitz v Absa Bank Ltd 2016 (4) SA 432 (SCA), at para. 13; see note 26, below. 26 See Wimbledon Lodge (Pty) Ltd v Gore NO and Others 2003 (5) SA 315 (SCA) ([2003] 2 All SA 179) at para 18, Trinity Asset Management (Pty) Ltd and Others v Investec Bank Ltd and Others 2009 (4) SA 89 (SCA) Letseng Diamonds Ltd v JCI Ltd and Others 2009 (4) SA 58 (SCA), Cassim and Another v Voyager Property Management and Others 2011 (6) SA 544 (SCA) at para 16, Communicare supra, Gihwala and Others v Grancy Property Ltd and Others [2016] ZASCA 35; [2016] 2 All SA 649 (SCA) at paras. 107-111 and Itzikowitz v Absa Bank Ltd 2016 (4) SA 432 (SCA).

16

Harbottle and the exceptions to it recognised in the English jurisprudence represent

our common law on derivative actions. Section 165 of the 2008 therefore falls to be

construed as abolishing the exceptions to the rule in Foss v Harbottle imported into

our law in the form they exist in the English common law and substituting them in

codified form.

[31] The following passage in the judgment of Jenkins LJ in Edwards v Halliwell

supra, at 1067 (All ER) appears to command universal respect in the English

jurisprudence as an accurate statement of the scope of the exceptions to the rule in

Foss v Harbottle:

The cases falling within the general ambit of the rule are subject to certain exceptions. It has

been noted in the course of argument that in cases where the act complained of is wholly ultra

vires the company or association the rule has no application because there is no question of

the transaction being confirmed by any majority. It has been further pointed out that where

what has been done amounts to what is generally called in these cases a fraud on the minority

and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of

the aggrieved minority who are allowed to bring what is known as 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. Those exceptions are not directly in

point in this case, but they show, especially the last one, that the rule is not an inflexible rule

and it will be relaxed where necessary in the interests of justice.

There is a further exception which seems to me to touch this case directly. That is the

exception noted by Romer J in Cotter v National Union of Seamen [[1929] 2 Ch. 58]. He

pointed out that the rule did not prevent an individual member from suing if the matter in

respect of which he was suing was one which could validly be done or sanctioned, not by a

simple majority of the members of the company or association, but only by some special

majority, as, for instance, in the case of a limited company under the Companies Act, a special

In Trinity Asset Management, Letseng Diamonds and Communicare, it was found on the facts that the rule in Foss v Harbottle was of no application. This was because the relief sought in those cases arose from rights that were personal to the litigants. The proceedings in those cases were not being prosecuted derivatively. It is clear, however, that the question of standing that was disputatious in each of those cases was considered in the context of an ex hypothesi acceptance by the court that an objection to standing on the basis of the rule in Foss v Harbottle was cognisable in our law. In Itzikowitz, the Supreme Court of Appeal quoted Lord Bingham’s exposition of the rule in Johnson v Gore Wood & Co (a firm) [2001] 1 All ER 481 (HL) and that of the English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd and Others (No 2) supra, at pp 222-223 (Chancery Division Reports) in support of the its conclusion that certain judgments of the High Court that had been relied upon in argument (McLelland v Hulett and Others 1992 (1) SA 456 (D), Kalinko v Nisbet and Others 2002 (5) SA 766 (W) and McCrae v Absa Bank Limited [2009] ZAGPJHC 7 (7 April 2009)) had been wrongly decided, essentially on the basis that the decisions had gone against the rule.

17

resolution duly passed as such. As Romer J pointed out, the reason for that exception is clear,

because otherwise, if the rule were applied in its full rigour, a company which, by its directors,

had broken its own regulations by doing something without a special resolution which could

only be done validly by a special resolution could assert that it alone was the proper plaintiff

in any consequent action and the effect would be to allow a company acting in breach of its

articles to do de facto by ordinary resolution that which according to its own regulations could

only be done by special resolution.

In Prudential Assurance supra, at p. 211b (Chancery Report), the Court of Appeal

(Cumming-Bruce, Templeman and Brightman LJJ writing jointly) remarked on the

reason for existence of the derivative action as a relaxation of the rule in Foss v

Harbottle as being that if the aggrieved minority shareholders were denied the right to

approach the court ‘on behalf of themselves and all others’ ‘their grievance could

never reach the court because the wrongdoers themselves, being in control, would not

allow the company to sue’. There is nothing to be found in s 165 of the 2008

Companies Act that alters the essential rationale for derivative proceedings. It

permits the institution or continuance of proceedings in a company’s best interests in

circumstances in which the company is refraining from acting on its own initiative,

and which would, for that reason, otherwise not reach the court.

[32] Section 165 of the 2008 Companies Act also serves to replace the statutory

supplement to the common law that used to be afforded in terms of s 266 of the

Companies Act 61 of 1973.27 In certain respects the new provision reintroduces, as

27 Section 266 of the 1973 Act provided for a derivative action at the instance of any member of a company when the company had suffered damages or loss or been deprived of a benefit as a result of any wrong, breach of trust or breach of faith committed by any director or officer of the company while such person held office as such. The action might be instituted notwithstanding that the company might have ratified or condoned the wrong. Its institution had to be preceded by notice to the company affording it one month’s notice to institute proceedings itself; whereafter, failing the institution of the proceedings by the company, the member could apply to court for the appointment of a curator ad litem to institute the proceedings in the company’s name. The member had to satisfy the court of the existence of prima facie grounds for the contemplated proceedings and that an investigation into such grounds and the desirability of the institution of the proceedings was justified. If the court were so satisfied, a provisional curator ad litem would be appointed to conduct the investigation and report his findings to the court upon a given return day. If the court were persuaded by the report that the institution of proceedings was appropriate, it would confirm the appointment of the curator ad litem and issue such directions for the institution and conduct of the contemplated proceedings as it might think necessary. A curator ad litem appointed in terms of s 266 of the 1973 Companies Act, whether appointed provisionally or finally, was invested with the powers given in terms of s 260 of that Act to an inspector appointed in terms of s 257 to investigate the affairs of a company (s 267 of A61/1973). Wide powers were thereby afforded to such curators ad litem to interrogate relevant persons under oath and to obtain and examine books and documents. The court might order any applicant for the appointment of a curator ad litem in terms of these provisions to provide security for the costs of the company in opposing any such application and for the costs of a provisional curator before making a provisional order.

18

generally applicable to derivative actions, various procedural aspects that were special

to the statutory provision under the earlier Act. For example, (i) that derivative

proceedings were preceded by an independent investigation, (ii) that the derivative

proceedings could only be prosecuted with the leave of the court, (iii) that the

proceedings were conducted in the company’s name, not that of the litigant who

instituted them and (iv) that, once commenced, the proceedings could only be settled

or withdrawn with the leave of the court. In all these respects the statutory regime

under both Acts differs from the position obtaining under the common law. All of

these aspects introduced by the statutory regime serve to emphasise and confirm that

the modern derivative action is effectively litigation conducted for a company by a

representative litigant under the court’s authority. It is not a vehicle for a litigant to

assert or protect his or her own legal interests using the company’s name and legal

personality.

[33] One of the most obviously reformative aspects of s 165 of the 2008

Companies Act is that standing to bring derivative actions is afforded more widely

than it appears to have been under the common law. Standing is afforded under s 165

also to directors, employee representatives and any other person who might obtain the

court’s leave to proceed derivatively. The provisions which give standing to directors

and employee representatives are no doubt reflective of the modern recognition that

persons other than shareholders have a legitimate and cognisable interest in the

assertion or defence of a company’s legal interests in its best interests. Thus, for

example, whilst the majority of shareholders might be prepared to condone loss

occasioned to a company due to the negligent conduct of its directors, employees

faced with resultant redundancy or wage cuts might have a different view and be able

to persuade a court that objectively it would be in the company’s best interests to seek

redress against the negligent directors.

[34] The common law requirement that a person seeking to litigate derivatively

show that the wrongdoers’ control of the company was being exercised to thwart the

company taking action itself (Pavlides v Jensen [1956] Ch 565) is significantly

watered down in the codified version of the law substituted in terms of s 165.

Section 165 of the 2008 Companies Act requires no more than that the company has

been given the opportunity to institute the action itself. It is not necessary to show

that the wrongdoers control the company’s decision-making mechanism. But that

19

effect is materially counterbalanced by the provisions of s 165(5), which has

introduced a generally applicable requirement that a derivative action may be

instituted only with the court’s leave, and also by the presumption created in s 165(7).

Before it can grant leave for the institution or continuation of proceedings

derivatively, a court must be satisfied, amongst other things, that it would be in the

best interests of the company.28

[35] The continued significance in the context of the new statutory regime of the

‘majority rule’ concept in corporate governance (cf. Sammel and Others v President

Brand Gold Mining Co Ltd 1969 (3) SA 629 (A) at 678H-679C) is evident in

s 165(7),29 which, if various things are established, including that the company has

decided not to bring or defend the proceedings, raises a rebuttable presumption

against any person applying for leave to institute or defend an action derivatively in

which a ‘third party’ is the defendant or plaintiff, as the case might be, that the

proceedings would not be in the best interests of the company.

[36] A ‘third party’ is anyone who is not related or inter-related to the company.

What is meant by a relationship or inter-relationship in this context is determined by

s 2 of the Act. A natural person is related to a company if he or she is in a position to

control it. Control is determined essentially with reference to the exercise of majority

voting rights associated with the securities of a company.

[37] The definition of ‘third parties’ (see s 165(8)30 and s 2(1)(b)31 of the 2008

Companies Act) would appear to include the four directors Woollam contends should

28 Section 165(5)(b)(iii) of the 2008 Companies Act. 29 See note 17, above. 30 See note 17, above. 31 Section 2(1)(b) provides:

‘For all purposes of this Act- an individual is related to a juristic person if the individual directly or indirectly controls the juristic person, as determined in accordance with subsection (2)’.

Subsection (2) provides, insofar as relevant to natural persons in control of companies:

For the purpose of subsection (1), a person controls a juristic person, or its business, if- (a) in the case of a juristic person that is a company- (i) …; or (ii) that first person together with any related or inter-related person, is-

(aa) directly or indirectly able to exercise or control the exercise of a majority of the voting rights associated with securities of that company, whether pursuant to a shareholder agreement or otherwise; or

(bb) has the right to appoint or elect, or control the appointment or election of, directors of that company who control a majority of the votes at a meeting of the board;

20

be declared delinquent in the current case. This is so because it is evident that they

are not able, individually or collectively, to control the exercise of a majority of the

voting rights associated with securities of the company, or control the appointment or

election of its directors.32

[38] Professor Cassim argues (op. cit. supra, at pp. 107-109 33 ) that the

aforementioned effect of sub-secs 165(7) and (8) is a ‘most disturbing’ weakness in

the Act ‘as it overlooks the cardinal point that derivative actions in the majority of

cases are brought to protect the company against its own errant directors’.34 In my

view, the effect of the provisions amounts to no than a reiteration, albeit in a notably

diluted form, of the common law requirement that control of the company by the

alleged wrongdoers had to be established by the person who chose to litigate

derivatively. It is but one of several indicators in s 165 of an intention by the

legislature to keep the codified derivative action remedy within recognisably similar

bounds to those that delimit its availability under the common law. In other words,

unless it is shown that those in control of the company are for reasons to their own

advantage but adverse to the company’s best interests thwarting action being taken by

the company, there is a presumption that leave to proceed derivatively should not be

granted when the company elects not to proceed against a ‘third party’.

[39] In considering the preliminary question it is striking to note the absence of any

express provision in s 165 affording standing to bring derivative proceedings to

certain parties who are afforded standing to apply for declarations of delinquency

(b) …; (c) ; or (d) that first person has the ability to materially influence the policy of the juristic person in a

manner comparable to a person who, in ordinary commercial practice, would be able to exercise an element of control referred to in paragraph (a), (b) or (c).

32 The unqualified statement in Mbethe v United Manganese of Kalihari (Pty) Ltd 2016 (5) SA 414 (GJ) at para. 90 that derivative proceedings against the directors of the company do not implicate the presumption in terms of s 165(7) is incorrect, with respect. If the directors are not in control of the company in the relevant sense, they are ‘third parties’ for the purpose of the presumption. 33 Note 22, above. 34 The wording of s 165(7)(c) of the 2008 Companies Act replicates that of s 237(3) of the Australian Corporations Act, 2001. In copying the Australian provision the local statutory draftsperson may have overlooked that the definition of ‘related party’ in the Australian statute (provided in s 228) includes the directors of a public company. Whether intended or not, it is nevertheless clear that s 165(7) of our statute consequently can give rise to a quite different effect to its identically worded Australian equivalent.

21

under s 162, namely the Companies and Intellectual Property Commission, 35 the

Takeover Regulation Panel 36 and other organs of state responsible for the

administration of any legislation.37 In my view, the discrete and distinctive standing

provisions under the two sections are indicative of a conscious distinction by the

legislature between the concept of the legal interests of a particular company, to

which proceedings in terms of s 165 relate, and that of the protection of the public

interest that is the acknowledged object of s 162.38 So, for example, repeated and

serious infractions by a company of the National Credit Act or of the accounting

standard requirements of the Companies Act – matters which lie at the heart of

Woollam’s allegations – might make the National Credit Regulator or the Companies

Commission institute proceedings in terms of s 162 against the responsible directors.

They would have standing under that provision, but they could not purport to use

s 165. This serves to illustrate that in proceedings in terms of s 162, it is not the ‘legal

interests’ of the company in the sense comprehended by s 165(2) that are engaged.

[40] It is significant that the evident object of s 162 goes essentially to the

provision of a protective remedy in the public interest, and it is only incidentally that

the provision can in some circumstances operate arising out of a wrong done to an

individual company.39 In Gihwala supra, at para 142, the purpose of the provision

35 Section 162(3) of the 2008 Companies Act. 36 Ibid. 37 Section 162(4) of the 2008 Companies Act. 38 I have not overlooked the provisions of s 157. 39 This view is supported by judicial comment on equivalent legislation in other countries. So, in Official Receiver v Wadge Rapps & Hunt (a firm) & Anor [2003] UKHL 49, [2003] 4 All ER 18 (HL), at para 15, Lord Hope of Craighead remarked of the Company Directors Disqualification Act, 1986, ‘The overriding purpose of the disqualification regime is to protect the public interest’; and, at para 79, Lord Walker of Gestingthorpe (in the context of considering the information gathering powers of an official receiver in the course of winding-up proceedings) stated of the disqualification procedure, the institution of criminal prosecutions and summary proceedings in respect of misfeasance in the course of a winding-up, ‘… these procedures exist for the protection of the general public, not in the interests of the creditors or shareholders of the particular company which is in liquidation. Indeed it may be contrary to the financial interests of the creditors and shareholders for these procedures to be invoked’ (emphasis supplied). In what McHugh J described (in Rich v Australian Securities and Investments Commission [2004] HCA 42; 220 CLR 129; 209 ALR 271; 78 ALJR 1354 at para 48) as ‘the leading [Australian] authority on the reasons for a court exercising its powers … to order the disqualification of a person from managing corporations’, Re HIH Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80 (also cited as Asic v Adler and 4 Ors), Santow J, identified (at para 56) a number of objects to which disqualification orders were directed. These included: ‘(i) Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards …

22

was described as being ‘to protect the investing public, whether sophisticated or

unsophisticated, against the type of conduct that leads to an order of delinquency, and

to protect those who deal with companies against the misconduct of delinquent

directors’.40 Its protective object was given as ‘…to ensure that those who invest in

companies, big or small, are protected against directors who engage in serious

misconduct of the type described in these sections. That is conduct that breaches the

bond of trust that shareholders have in the people they appoint to the board of

directors. Directors who show themselves unworthy of that trust are declared

delinquent and excluded from the office of director. It protects those who deal with

companies by seeking to ensure that the management of those companies is in fit

hands. And it is required in the public interest that those who enjoy the benefits of

incorporation and limited liability should not abuse their position’.41

[41] The remedy bears on the public law status of the allegedly delinquent person

rather than the assertion of a company’s individual rights, and the purpose, as

Wallis JA observed in Gihwala, is the protection, in the public interest, of those who

deal with companies. Indeed, tellingly, the experience in Britain appears to be that

disqualification proceedings often arise out of the conduct of the affected director in

relation to more than one company; see Wadge Rapps & Hunt supra, at para. 71. That

the remedy goes to the affected director’s status is supported by the observations

about disqualification orders by Kirby J in his minority judgment in Rich v ASIC

supra, at paras. 104-105: (ii) The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office … (iii) Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors … (iv) The banning order is protective against present and future misuse of the corporate structure …’. 40 Per Wallis JA. The learned judge of appeal stated that s 162 is not a penal provision. From what follows at para 148 of the judgment it is clear that by ‘penal’ the judge intended to convey that the operation of the provision does not have a character akin to a criminal sanction. The statement was made in the context of addressing an argument by the appellant’s counsel that the provisions of s 162(5)(c) and 162(6)(b)(ii) were unconstitutional because there was no discretion vested in the court either to refuse to make a delinquency order if the requirements of s 162(5)(c) were satisfied, or to moderate the period of such order to a period of less than seven years. The argument appears to have advanced with reliance on judgments such as S v Dodo 2001 (3) SA 382 (CC), which, as is well known, bore on the constitutionality of the minimum sentence regime created in terms of the Criminal Law Amendment Act 105 of 1997. For an interesting comparative debate, in the context of determining a claim by the appellant directors to privilege against having to make discovery on the grounds that it might expose them to penalties, on whether the equivalent Australian provisions fall to be characterised as ‘punitive’, in the sense of imposing a ‘civil penalty’, or as ‘protective’, see Rich v Australian Securities and Investments Commission supra. 41 At para 144.

23

Disqualification from corporate management was a quid pro quo for the trust essential to the

enjoyment of the powers and privileges of that position. Because corporations are creatures of

statute, as are their officers, the entitlement of corporate governance is a statutory privilege.

It is inherently susceptible to variation or withdrawal upon demonstrated unfitness to enjoy

that privilege. An impact of that withdrawal on the person affected is inescapable. However,

that impact does not give the disqualification order its character. That character derives from

the regulation of corporations and of the officers whom the community permits to hold

themselves out to the world as fit managers of shareholders' funds, entitled as such to the

confidence of investors, employees, traders and the community generally.

People such as the appellants (or anyone else for that matter) have no right to be involved in

company management. It is a statutory privilege to be earned each day. That privilege may be

withdrawn for misconduct but also for incompetent, improper or lax activities in the functions

of corporate management. Given the critical importance of the good management of

corporations for investors, employees, traders, the nation and the wider world, the [Australian

Corporations] Act, like its 1928 predecessor in Britain, has provided for the removal from

corporate management of persons guilty of repeated contraventions of the Act.’ (Emphasis

in the original.)

[42] Section 162 is directed at ensuring that persons guilty of specified serious

misconduct or serial non-compliers with applicable regulatory legislation are

disqualified from holding office as directors of any companies, or, if the court

considers it appropriate to limit the extent of the declaration, specified categories of

companies.42 Thus, in the case of the fourth respondent, the declaration that Woollam

contends should be sought would have the effect of terminating his appointment not

only as a director of the applicant company and one of its subsidiaries, but also of

nine other companies, some of which are listed and none of which appear to be

related to the applicant. It would also disqualify him from assuming office as a

director of any company whatsoever for at least seven years from the date of the

order. There is nothing peculiarly in the applicant company’s legal interests about

that, which would not equally be in the interests of any other member of the public

exposed to dealing with any company of which the fourth respondent currently is a

director, or might in the future become one. The right given to the company to make

42 Wallis JA offered the following illustration: ‘In addition the court may restrict the operation of the declaration of delinquency to one or more particular categories of company. A director declared delinquent in relation to a financial services company may be permitted to be a director of an engineering firm.’ (Gihwala supra, at para 144). One can readily imagine how a restriction of the declaration by category might be appropriate in cases in which the cause for the declaration has been the repeated infraction of some or other legislation that is applicable in respect of certain categories of company, but not others.

24

an application in terms of s 162 is therefore not to act in its own legal interests (which

it is able to address in terms of s 71 of the Act), but in the public interest. This is

demonstrated by the fact that a company may remove a director in terms of s 71, and

thereafter proceed for a declaration of delinquency against the person concerned

notwithstanding that he or she would by then no longer be involved in the

administration of the company. The proceedings under s 162 are discrete from the

remedies that the company might also seek to exact against the delinquent in respect

of its own legal interests by seeking compensation for any harm inflicted on the

company. It is in respect of the latter remedies that a shareholder might obtain leave

to act derivatively, if appropriate.

[43] The right of the shareholder that is afforded protection in terms of s 162 is not

a right of the company; it is the separate and personal right that each and every

shareholder enjoys individually as an investor to take action to ensure that the

management of companies in general is kept in fit hands. The personal nature of the

right, which falls to be exercised by a shareholder when there has been a serious

breach of what Wallis JA called the ‘bond of trust’ between a shareholder and the

company’s directors, 43 is demonstrated by the consideration that a declaration of

delinquency obtained by a shareholder in company A will also ordinarily result in the

disqualification of the director concerned as a director of companies B and C, even

though it might be practically impossible for those others companies to continue in

business without him. Indeed, even the best interests of company A would not stand

in the way of a ability of shareholder of that company to have a director of the

company declared delinquent if the shareholder were able to prove misconduct by the

director in respect of the management of company A that showed that it would be in

the public interest to have the director declared delinquent. In other words,

considerations that are pivotal in any application for leave to act derivatively in terms

of s 165 do not bear at all on proceedings in terms of s 162.

[44] A shareholder proceeding personally in terms of s 162 is also not required to

satisfy the court that a declaration of delinquency of the director concerned entailed ‘a

serious question of material consequence to the company’. Nor is he or she required

to serve a demand in terms of s 165(2) on any of the other companies of which the

43 See Gihwala supra, at para 144; in the passage quoted in para. [40], above.

25

director concerned also serves as a director, notwithstanding that in the context of

egregious misconduct by the director necessitating the protection of persons dealing

with companies in general being the rationale for the remedy, the legal interests of

such other companies in the obtaining of a protective order would be

indistinguishable from that of the company on which a demand would have to be

served.

[45] Moreover, the investigation procedure contemplated in s 165(4) would be

likely to give rise to an intractable conflict of interest situation when it is not the

interests of the company, but the personal status of the directors themselves that is in

issue. The directors, who might constitute a number required to make up that needed

for a quorate meeting of the board, 44 would probably be required to recuse

themselves, thus putting the company in a position in which it was not able to decide

whether to proceed itself or not. A decision by the company that it will not proceed is

a sine qua non to the institution of a derivative action. The preliminary procedures in

terms of s 165 are just not well suited to proceedings by shareholders for the

declaration of the directors as delinquent.

[46] There would also be something paradoxical in the notion that a shareholder

could put a company to the trouble and expense of commissioning an investigation

and thereafter be refused leave by a court in terms of s 165(5) to proceed derivatively,

only to be able to proceed personally for the relief regardless. The antinomy that is

inherent in the construction of the legislation contended for by the first respondent’s

counsel is unlikely to have been intended by the legislature.

[47] The purpose of the demand and the contemplated ensuing investigation is to

provide a filter. The leave that a person seeking to litigate derivatively must obtain in

terms of s 165(5) serves a similar purpose. I think it is important in this respect to

acknowledge that the evident purpose of the demand and investigation is to give the

company the opportunity to make a properly informed decision whether to litigate

itself. It is significant in this respect that the investigator’s report falls to be submitted

to the company’s board of directors, not to the complainant. The statutorily mandated

investigation is not intended to provide a mechanism for disgruntled parties to launch

44 It is not apparent in the evidence, but it would not surprise me if the three directors in the applicant company’s seven member board who are not targeted in Woollam’s demand would not on their own comprise a quorate number.

26

a fishing expedition for facts to found an action. On the contrary a complainant who is

unable in its demand to set forth with cogency, albeit not necessarily with the

precision required for pleading it, a basis for the company to institute or continue with

the contemplated proceedings would be acting vexatiously. The inbuilt filtering

process, with its attendant impositions on the company and the court, is an entirely

redundant exercise, however, if the intending litigant is able to proceed for the relief

sought regardless of its outcome. There is no inbuilt filtering process for proceedings

in terms of s 162.

[48] The right given by s 162(2) to shareholders to apply personally for a

declaration of delinquency is exactly co-extensive with the standing afforded to

companies under the same provision. Treating of a situation in which the same

wrongful act was both a wrong to the company and a wrong to each individual

shareholder the Ontario Court of Appeal stated, in Goldex Mines Ltd. v. Revill (1974)

1974 CanLII 433 (ON CA), 7 O.R. (2d) 216:

In one sense every injury to a company is indirectly an injury to its shareholders. On the other

hand, if one applies the test:

“Is this wrongful act one in respect of which the company could sue?", a shareholder who is

personally and directly injured must surely be entitled to say, as a matter of logic, "the

company cannot sue for my injury; it can only sue for its own”. The corollary must surely be that when both the company and the shareholder have

the same standing to sue for the same relief on the basis of the same facts the

company must be entitled to say the shareholder has no need in the interests of justice

to litigate in the corporation’s name when he can do so in his own. In Goldex Mines

the court answered the question ‘Where the same acts of directors or of shareholders

cause damage to the company and also to shareholders or a class of them, is a

shareholder's cause of action for the wrong done to him derivative?’ in the

negative.45

[49] A delinquency declaration being the remedy ultimately sought by Woollam, it

bears remembering that the duty of company directors to act honestly and in 45 Professor MF Cassim argues (op. cit. supra, at pp.84-5) that a ‘central factor in determining whether a proposed derivative action is in the best interests of the company [a requirement for leave in terms of s 165(5)] is the availability of an alternative remedy … If there are alternative measures to address the grievance of the applicant that would produce substantially the same redress, the court should refuse to to grant leave to the applicant to institute derivative proceedings’; a fortiori where it is not an alternative, but the very same measure that is personally available to produce precisely the same redress.

27

accordance with their fiduciary duties to the company is owed not only to the

company, but also to the shareholders personally. 46 That is borne out by the

provisions of s 218(2) of the Act (accepting, of course, that a shareholder could not

claim under that provision for so-called ‘reflective loss’ because that would expose

the directors to double jeopardy); cf. also Grancy Property Limited and Another v

Gihwala and Others; In Re: Grancy Property Limited and Another v Gihwala and

Others [2014] ZAWCHC 97, at para. 104. These considerations afford further

indications that it is not within the scheme of the Act that shareholders should

ordinarily seek to proceed derivatively to obtain the remedy available in terms of

s 162. The rationale for derivative proceedings, whether under the common law or in

terms of s 165 of the 2008 Companies Act, is to afford a means, in the interest of

justice, for redress to be obtained where ‘the proper (corporate) plaintiff’ declines to

seek it. The rationale for derivative proceedings is absent when the person who

would otherwise be done an injustice by reason of ‘the proper plaintiff’s’ failure to act

has personal standing to seek the indicated relief.47

[50] The qualification ‘ordinarily’ was inserted in the preceding paragraph because,

notwithstanding the reasons I have given for finding that standing to litigate

derivatively is generally not indicated when the litigant has standing to obtain its

remedy by litigating personally, the language of ss 162 and 165 read together does not

expressly exclude the use of the derivative action procedure in s 162 proceedings. It

is not inconceivable that, exceptionally, it might be appropriate in certain

circumstances. It would be appropriate, in construing the Act in accordance with the

precepts of ss 5 and 7 thereof, to recognise as much.

46 The notion, following the decision in Percival v. Wright [1902] 2 Ch. 421, that a director’s fiduciary duty is exclusively to the company, and not to its shareholders, appears to be still entrenched in our law (see, for example, the commentary in P. Delport et al. Henochsberg on the Companies Act 71 of 2008 (as updated to May 2016) at p. 298(4) and LAWSA vol. 4(2) at para. 132). A more flexible characterisation of the ambit of the fiduciary nature of directors’ duties is evident in other jurisdictions; see, for example Coleman v. Myers [1977] 2 NZLR at 297 (CA), which was endorsed in Dusik v. Newton 1985 CanLII 406 (BC CA), at para 35-39. In my view the effect of s 218(2) of the 2008 Companies Act renders any debate on the subject largely academic. As mentioned, the Supreme Court of Appeal acknowledged in Gihwala supra, at para 144, that the relationship between shareholders and the directors they have put into office involves a ‘bond of trust’. 47 There is no merit in the contention by the first respondent’s counsel that certain procedural advantages available to a litigant proceeding derivatively support the notion that where a litigant wishes to pursue a claim for a remedy that the company could equally pursue derivative proceedings should be permitted. Counsel referred in this regard to the provisions of s 165(9)(e), which allows for access to the company’s books. The argument overlooks that the advantages are available only to a person who has satisfied the requirements for obtaining leave to proceed derivatively. Their promise plays no role in the determination of whether leave should be granted.

28

[51] An example that suggests itself as a possibility is a case in which the company

has already instituted proceedings for a declaration of delinquency, but for reasons

that do bear scrutiny has failed to prosecute them to conclusion. In those

circumstances the best interests of the company might be served by the continuation

of the proceedings derivatively. The costs incurred by the company in taking the case

to the stage that had been reached when proceedings had stalled would be squandered

were the complainant shareholder to initiate proceedings afresh for the same relief on

the same facts in its own name. A sensible basis in the company’s best interests for

the granting of derivative standing to a shareholder could conceivably be

demonstrable in the postulated example.

[52] There is nothing, however, in the nature of Woollam’s complaints or the

content of his demand to indicate why he should be allowed to proceed derivatively

for relief that he is able to claim personally. In my judgement, for the reasons

discussed, that shows that his resort to s 165 of the 2008 Companies Act is vexatious

in the circumstances.

[53] But even were I wrong in that conclusion, it is also clear that there is no merit

in Woollam’s demand to have the second to fifth respondents declared as delinquent

persons at the instance of the company. As mentioned, to succeed in showing that the

company had the makings of a cognisable claim to declarations of delinquency

against its directors Woollam would have to qualify the complaints against them set

out in his demand as falling within the ambit of s 162(5)(c). To determine whether he

has succeeded in doing that, the court has to assess the content of his demand in the

context of the evidence adduced in the proceedings in terms of s 165(3) to have it set

aside; see Amdocs SA Joint Enterprise (Pty) Ltd v Kwezi Technologies (Pty) Ltd 2014

(5) SA 532 (GJ), at para. 15. It bears noting, however, that making out a cognisable

claim does not require of the complainant to demonstrate in his demand that the claim

enjoys good prospects of success.

[54] At para. 15 of Amdocs SA, GS Myburgh AJ remarked that the ‘applicant bears

the onus in this regard and the absence of merit must be clearly shown’ and at

para. 17 he added, ‘[t]he threshold which a complainant has to cross is a low one.

Conversely, the onus and burden of persuasion which an applicant for relief in terms

of s 165(3) bears is a rather heavy one’. With respect, I consider that, to an extent,

these statements might conduce to the wrong approach.

29

[55] It is correct that the onus in an application in terms of s 165(3) is on the

company. The nature of the onus is that which ordinarily applies in civil litigation.

The company must prove on a balance of probability that the demand is frivolous,

vexatious or without merit. ‘Heaviness’ does not enter the equation; there is no

presumption in favour of the complainant that its demand is not frivolous, vexatious

or without merit, anymore than there is one in favour of the company that it is. The

statutory provisions do not give rise to any inherent probability one way or the other.

It is usually only in situations where there is an inherent probability in favour of, or

against, some proposition that the courts pronounce that ‘clear’ evidence is required to

displace the effect. Consider in this regard the observations of Watermeyer JA in

Gates v Gates 1939 AD 150, at p. 155:

It is true that in certain cases[,] more especially in those in which charges of criminal or immoral

conduct are made, it has repeatedly been said that such charges must be proved by the “clearest”

evidence or “clear and satisfactory” evidence or “clear and convincing” evidence, or some similar

phrase. There is not, however, in truth any variation in the standard of proof required in such cases. The

requirement is still proof sufficient to carry conviction to a reasonable mind, but the reasonable mind is

not so easily convinced in such cases because in a civilised community there are moral and legal

sanctions against immoral and criminal conduct and consequently probabilities against such conduct

are stronger than they are against conduct which is not immoral or criminal.

[56] Similarly, there is no special dispensation in favour of complainants - as the

reference to ‘a low threshold’ might suggest - when it comes to considering the

cogency of a demand in terms of s 165(2). I agree with the learned acting judge’s

statement (at para. 17) that the court will not expect a demand to necessarily comply

with the formal requirements of a pleading, but if it is to withstand a challenge based

on an allegation that it is without merit, it will have to make out the basis of a

cognisable claim (or defence) by the company in respect of the matter that the

complainant would wish to pursue derivatively should the company not do so directly.

Section 165 does not expressly prescribe the requirements a demand must meet, but

the implication that it must coherently make out a cognisable case is evident in the

provision that the demand constitutes the framework for the (conceivably costly)

independent investigation that the company is expected to commission upon its

receipt. The investigation is not intended to ascertain whether a case might be found;

30

it is to investigate the merits of the case alleged by the complainant and the viability

of the company pursuing that case. 48

[57] Turning then to consider the demand.

First ground of complaint

[58] As to the first complaint in Woollam’s demand: It is common ground that loss

of employment insurance was sold to some customers of Lewis Stores (Pty) Ltd who

were pensioners or self-employed persons and thus had no insurable interest. It is

also not in dispute that the resulting revenue, which should not have been generated,

had been reflected in the applicant’s group consolidated financial statements.

Woollam identified the problem in a paper, entitled Lewis Group – Fact or Fiction,

that he circulated to the media and to the applicant’s major shareholders in July 2015.

The report and attendant complaint by Woollam’s company, Summit Financial

Partners (Pty) Ltd (‘Summit’), to the National Credit Regulator prompted an

investigation by the applicant company, which confirmed the existence of the

problem and led to the institution of remedial measures, including the repayment of

the premiums together with interest. Capital repayments in this respect amounted to

less than one per cent of the premiums that the company had received over the

relevant period.

[59] Woollam is unable to controvert the evidence that the applicant has adduced

on oath by one of its directors - whose fitness to hold the office he has not sought to

impugn - that this has happened because of erroneous data capturing by personnel in

the shops where the transactions concerned were processed. If the data had been

correctly captured, the computer program used for the processing of the proposals for

insurance would automatically have excluded their acceptance. Consequent upon the

identification of the problem, the applicant has, according to the deponent to the

founding affidavit, commissioned improvements to its information technology system

and put in place measures to enhance staff training. It has also established a call

centre that interviews applicants for credit and verifies the particulars about them

captured on the electronic data base.

48 I do not agree with the submission by the first respondent’s counsel that the investigation is intended to provide ‘incidental benefits’ by turning up possible bases of claim not adumbrated in the demand. The argument goes against the language of s 165(4), which expressly relates the scope of investigation and consequent report to the cause of action and proceedings ‘contemplated in the demand’.

31

[60] Whether the applicant or its subsidiary should be sanctioned for what has

happened is a question that has been under consideration by the relevant statutory

authorities in terms of the National Credit Act 34 of 2005. Woollam is critical of the

content of the response given by the third respondent, who is an executive director of

Lewis Stores (Pty) Ltd, in the answering affidavit before the National Credit Tribunal.

He says it concentrated on technical reasons why the Tribunal should not consider the

complaint, rather than giving answers to questions such as whether the employees

concerned in the transactions had been identified and disciplined, and how much of

the amount falling to be repaid to customers had been settled. He was equally critical

of the failure of the second, fourth and fifth respondents to furnish that information.

There is no suggestion that regulator has considered proceedings against any of the

applicant’s directors. It was the subsidiary company - and not any of the applicant’s

directors – that was referred by the National Credit Regulator to the National Credit

Tribunal.

[61] Most pertinently, there is nothing in the body of Woollam’s demand, or the

evidence before court in the current proceedings to connect any of the four directors

singled out in the demand with the incidents of insurance being sold by the subsidiary

company to persons who did not qualify for it. The fourth and fifth respondents are

not even directors of Lewis Stores (Pty) Ltd. Woollam’s demand does not make out a

prima facie case of dishonest or grossly negligent conduct by the directors concerned.

It does not show that any of them was guilty of wilful misconduct. On the contrary,

the evidence shows that upon being alerted to the issue, the applicant’s board acted

quickly and responsibly to address it. Pertinently, there is nothing in the demand to

explain why certain non-executive directors on the applicant’s board have been

targeted in the demand, and the others not. On its face that is indicative of

vexatiousness, but I do not find it necessary to make a determination in that regard.

[62] In short, Woollam has not qualified his complaint against the second to fifth

respondents as falling within the categories of conduct described in s 162(5)(c) of the

2008 Companies Act.49 That means it is without merit.

49 See para. [13] - [18], above.

32

Second ground of complaint

[63] It is not in dispute that in the majority of transactions concluded by Lewis

Stores (Pty) Ltd the customer purchases an extended product warranty. The applicant

has adduced evidence that this is not compulsory, however. This is borne out by the

evidence, which Woollam has not been able to controvert, that the extended product

warranty has not been purchased in more than a quarter of the millions of transactions

concluded by the company. Woollam contends that the practice of selling the

extended product warranty is unconscionable in many cases because the manufacturer

in any event often provides a product warranty that extends for longer than the

standard one-year warranty that Lewis Stores stipulates must be provided by all its

suppliers. The applicant has countered that the extended warranty operates from the

expiry of the warranty provided by the supplier.

[64] Woollam’s complaint is that the Lewis Stores (Pty) Ltd’s conduct in respect of

the sale of extended product warranties contravenes s 102 of the National Credit Act.

Despite the attention drawn to it, this issue does not, however, appear to have been

referred to the National Credit Tribunal by the National Credit Regulator.

[65] For the purposes of the present matter no more need be said than that none of

the matters raised in Woollam’s second ground of complaint implicates conduct by

any of the directors falling within the scope of s 162(5)(c) of the 2008 Companies

Act. His allegations do not merit an investigation by the company into the question

whether it should apply for declarations of delinquency against the second to fifth

respondents.

Third Ground of complaint

[66] It is common ground that Lewis Stores (Pty) Ltd charges first-time purchasers

on credit a delivery (or ‘handling’) fee, even in respect of goods in respect of which

delivery would not ordinarily be required because the goods are of a type that could

easily be carried out of the store by the customer. The evidence adduced by the

applicant is that this is done because it is considered necessary to confirm the physical

address given by the first-time credit customer. Having regard to the notice-to-

consumer requirements imposed on credit providers in terms of the National Credit

Act before they are able to prosecute enforcement proceedings in the event of default,

the concern of Lewis Stores (Pty) Ltd to verify the addresses of its credit customers is

33

understandable. Whether its means of doing so entails making a prohibited charge

within the meaning of s 100 of the National Credit Act, as alleged by Woollam in his

demand, does not fall for determination in these proceedings. The matter was referred

by Woollam’s company, Summit, to the National Credit Regulator, which reportedly

has not seen fit to refer the practice to the National Credit Tribunal. It suffices for

present purposes to hold that even if it did, that would not make out a case of fraud

against the subsidiary company. Even less, would it follow that the four directors of

the holding company singled out by Woollam for the purposes of proceedings in

terms of s 162 of the 2008 Companies Act were thereby guilty of the sort of conduct

referred to in s 162(5)(c) of that Act.

Fourth ground of complaint

[67] It will be recalled that the fourth ground of complaint stated in Woollam’s

demand was that the company’s accounts had for many years appeared to overstate

revenue from the sale of credit protection insurance policies. I do not find it

necessary for present purposes to provide the detail of Woollam’s complaint in this

respect. Suffice it to say that it arose from the accounting implications of the manner

in which the Lewis Group had responded to the introduction of the requirement in

terms of the National Credit Act that credit protection insurance policies must provide

for the monthly payment of premiums by credit receivers. Prior to the

commencement of the Act, Lewis had debited the customer’s account upfront for the

insurance cover for the entire executory period of the instalment transaction, and

capitalised the one-off premium as part of the principal debt. Lewis’s response to the

requirement introduced by s 106(4)(b) of the National Credit Act had been to

structure the financial aspects of the group’s credit protection insurance business

through a system of inter-company transactions between Lewis Stores and Monarch

Insurance.

[68] Woollam described the structure of the inter-company transactions as follows

in the first of his aforementioned reports, written on 22 June 2015:

Lewis Stores pays a single upfront “premium” to Monarch Insurance on behalf of the

customer on day 1 of the transaction, without the explicit knowledge or approval of the

customer. It records this transaction in the books of Lewis Stores in an “Insurance Prepaid

Suspense A/C”, since it could not charge this premium to the actual debtor’s account.

Monarch Insurance would record this as a premium received.

34

Monarch Insurance then pays Lewis Stores a broker commission of 20% on this single

insurance premium, which is recorded as an expense in Monarch and income in Lewis Stores.

Monarch also pays Lewis Stores a binder fee of a further 25% of the premiums received as

compensation for administering the policy.

Monarch reinsures 40% of the policy risks with Constantia Insurance Company Ltd. under a

proportional reinsurance treaty and pays 40% of the premiums received from Lewis Stores to

the reinsurer.

The reinsurer pays Monarch a commission on these premiums of 35%.

In terms of the reinsurance treaty, the reinsurer pays a “profit commission” on the balance of

the premiums received after deducting proportional claims paid and a small margin (estimated

to be around 2,5%). Monarch records this “profit commission” as income in its books.

Monarch creates an unearned premium reserve and it would appear that this reserve is based

on the net premiums received from Lewis Stores net of reinsurance.

Lewis Stores then collects the monthly premiums from the customer and credits the Insurance

Prepaid Suspense A/C.

Woollam directed a number of criticisms at this business arrangement, including at

what he considered to be its commercial and tax inefficiency. For present purposes

the essence of his complaint was that the practice resulted in the recognition of a

portion of the profits earned on the premiums upfront rather than evenly over the

period that the customer paid them

[69] Woollam raised this issue with the third respondent and in the two reports he

wrote, titled Lewis Group – Fact or Fiction? and Lewis Group – The Emperor’s New

Clothes, and made available to the investing public in the lead-up to the applicant’s

annual general meeting in August 2015. (Woollam actually purchased his first few

shares in the applicant company on 26 June 2015 after he had written the first of his

aforementioned reports, dated 22 June 2015.)

[70] The applicant responded to the first report, which appeared to impact

adversely on the applicant’s share price, in a SENS statement issued on 7 August

2015. The statement assured investors that the directors were satisfied that the

consolidated financial statements of the group fairly represented the group’s financial

position and performance and had been prepared in compliance with the International

Financial Reporting Standards, as required by the Companies Act. The relevant part

of the SENS statement went as follows:

Following consideration of allegations regarding certain of the group’s accounting treatments,

particularly re-insurance profit commission and ancillary services, the directors are of the

35

view that the consolidated financial statements present fairly in all material respects, the

consolidated financial position and performance of the Lewis Group in accordance with

International Financial Reporting Standards (“IFRS”).

The consolidated financial statements of Lewis Group Ltd. in respect of the 2015 financial

year have been audited by PricewaterhouseCoopers Inc., the group’s auditors, who have

expressed an opinion that the consolidated financial statements present fairly, in all material

respects, the consolidated financial position of Lewis Group Ltd. as at 31 March 2015 and its

consolidated financial performance for the year then ended in accordance with IFRS and the

requirements of the Companies Act of South Africa.

These audited financial statements have not been amended subsequent to the aforementioned

allegations being made.

[71] Woollam wrote the second of his aforementioned reports, dated 9 August

2015, in response to the publication of the SENS statement. In it, amongst other

things, he set out 11 questions that he indicated he intended to pose about credit

protection insurance at the upcoming annual general meeting.

[72] The SENS statement was issued after the applicant’s board of directors had

specially considered Woollam’s allegations and sought advice from the company’s

external auditors, PricewaterhouseCoopers (‘PwC’). It went further and obtained

confirmation of the advice that it had been given from PwC’s technical committee. It

was on the basis of the professional advice that the board had obtained that the

financial statements were submitted to the company’s annual general meeting on 14

August 2015.

[73] Nevertheless, after the annual general meeting, which Woollam attended and

at which he vocally persisted with his criticisms, the applicant’s board appointed a

sub-committee charged with reviewing the company’s accounting policies. The

review was undertaken in conjunction with PwC. Certain flaws were identified and

remedial revisions to the company’s accounting policies were implemented. This

gave rise to the restatement of certain aspects of the company’s 2015 results and those

of preceding years. These were reported as part of the unaudited half year results

published on 9 November 2015. The effect of the adjustments was that the

company’s reported earnings per share for the year ended 31 March 2015 were

reduced from 944.8c per share to 907.5c per share and headline earnings per share

from 882.7c per share to 845.3c per share.

36

[74] The Johannesburg Securities Exchange enquired into the circumstances of the

adjustment of the group’s results and appears to have been satisfied with the

explanations provided by the applicant.

[75] The revisions to the applicant’s accounting policies in a sense vindicated some

of the concerns voiced by Woollam in the reports he published before the annual

general meeting and at the meeting itself, although the effect on the restated figures

was of a much lesser extent than he had propounded . That the board defended itself

against Woollam’s allegations at the annual general meeting, whilst subsequently

effectively conceding that he had in fact been making some valid points, does not,

however, make out a case for delinquency.

[76] The unrebutted evidence is that the board’s position - articulated at the

meeting by the fourth respondent in his capacity as non-executive chairman - was

premised on advice specially obtained for the purpose from the company’s external

auditors. It bears emphasis in this connection that the 2008 Companies Act expressly

contemplates that directors are entitled to rely in good faith on any information,

opinions, recommendations, reports or statements, including financial statements and

other financial data, prepared or presented by qualified employees of the company

and legal counsel, accountants, or other professional persons retained by the

company, the board or a committee as to matters involving skills or expertise that the

directors reasonably believe are matters within the particular person’s professional or

expert competence.50 Indeed, I would find it surprising if non-executive directors of a

public company carrying on business on the scale that the applicant’s subsidiary

operating companies do would find it possible to discharge their duties other than

with material reliance on such inputs and advice.

[77] That the board should, after the annual general meeting, have commissioned a

special investigation into the appropriateness of the company’s accounting policies,

adopted its recommendations and consequently published adjusted financial results is

completely irreconcilable with fraudulent or grossly negligent behaviour on the

directors’ part.

50 Section 76 of the Act generally, and subsections (3)-(5), in particular.

37

Fifth ground of complaint

[78] Woollam’s fifth ground of complaint was related to a matter he raised with the

third respondent at the annual general meeting. It related to his allegation that the

company had inappropriate revenue recognition policies with regard to extended

product warranties, which resulted in the on-going overstatement of reported revenue.

[79] Woollam had asked whether the income generated from the sale of extended

product warranties was amortised to the group’s income statement from the date of

sale or from the date of expiry of the manufacturer’s warranty. The third respondent

informed him that it was the latter. When the third respondent gave the answer at the

meeting he had sought and received confirmation from the PwC audit partner who

was present that he was answering correctly. The answer was, however, subsequently

discovered to have been incorrect, and the true position was made apparent when the

adjusted results were published in November 2015. Indeed, one of the changes in

accounting policy instituted after the aforementioned review was to amortise the

income from the date of the expiry of the manufacturer’s warranty instead of from the

date of sale of the dealer’s extended warranty. The effect was to slightly reduce the

group’s reported income for the periods in question. The reduction in reported

income did not, however, have a material effect on the company’s financial position

as reported at the meeting.

[80] Woollam has accused the third respondent and the unnamed partner of PwC

who supported him at the meeting of lying. The allegation has been denied. It was

explained that the incorrect answer was given in error. The probabilities support the

truth of the denial. The third respondent would have nothing to gain by deliberately

giving an incorrect answer. His action in seeking confirmation from the PwC partner

suggests that he was not absolutely certain of the correctness of the answer when he

gave it. In my view that would have been apparent to anyone present at the meeting.

[81] The mistake was unfortunate, especially emanating, as it did, from the

financial director of Lewis Stores (Pty) Ltd. But making it fell far short of the serious

misconduct or dereliction of duty required to qualify Woollam’s complaint in terms of

s 162(5)(c) of the Act.

38

Sixth ground of complaint

[82] Woollam’s demand did not expand on the sixth ground of complaint as

worded in paragraph [4], above. It is thus not apparent to what extent, if any, it added

to what has already been treated of under his fourth and fifth grounds of complaint.

Conclusion

[83] In the result Woollam’s demand failed to demonstrate that the company had

the makings of a cognisable case for the relief that he insisted the company should

pursue against the second to fifth respondents.

Absence of good faith

[84] The applicant has alleged that Woollam’s resort to s 165 of the 2008

Companies Act was motivated by a collateral purpose and is not in good faith. It

contends on this basis too that the demand is vexatious. The applicant relies in this

connection on the fact that in the period from 2013 Woollam has taken short positions

in Lewis Group shares and also on his acquisition of an insignificant holding in the

shares only after he had caused Summit to report the company to the National Credit

Regulator and published his first paper. Woollam’s acquisition of the shares had

therefore occurred in circumstances in which he might expect the share price to go

down and was therefore not a genuine investment, but merely a means to further his

collateral purpose.

[85] Simply put, taking a short position in stock is an investment strategy whereby

the investor ‘borrows’ shares from a holder thereof, normally at an agreed fee, and

sells them into the market at a time when he expects the price to drop. The investor

then purchases an equivalent number of shares at the lower price to which they have

fallen to be able to return them to the ‘lender’ (usually a brokerage firm). His profit is

the difference between the price at which he sold the shares and that at which he

purchased replacements to return to the ‘lender’, less, of course, the costs of the

transactions.

[86] The bad publicity given to the applicant company as a result of Woollam’s

actions had a demonstrably adverse effect on its share price. The applicant alleges

that Woollam’s conduct was directed at engineering movements in the share price to

benefit his short-selling activities. The applicant regards the demand as yet another

device in Woollam’s allegedly self-serving activities. It has alleged that Woollam’s

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acquisition of a relatively infinitesimal number of shares in the company 51 – his

business partner in Summit has acquired a single share – was opportunistic and

undertaken only to enable him to initiate proceedings in terms of s 165. It argues that

Woollam has no genuine interest in the protection of the company’s legal interests

and that his initiation of proceedings in terms of s 165 is not in good faith.

[87] Woollam admits having held short positions on the applicant’s securities at

various times, but has declined the invitation issued to him in the applicant’s founding

affidavit to make a full disclosure of his trading activities in this regard. Woollam

maintains that there was nothing out of the ordinary about his short-selling of shares

in the Lewis Group as they are allegedly one of the most widely short-traded stocks in

the market. It is noteworthy, however, that Woollam failed to disclose his short-

trading activities when involved in publicising his adverse opinions on the applicant’s

business activities. That does seem to me to raise an ethical question. I understand

that the question forms part of the matters concerning Woollam’s alleged conduct that

has been referred by the applicant to the Financial Services Board for investigation.

For the reasons given below I not find it necessary to determine the question in these

proceedings.

[88] Woollam would have to satisfy the court that he was acting in good faith were

he subsequently to apply in terms of s 165(5) for leave to proceed derivatively.52 The

questions concerning his conduct raised by the applicant would certainly be germane

in that connection. And, in addressing them, Woollam would bear the onus of proof.

[89] I understood the first respondent’s counsel to have submitted that issues

concerning good faith were not relevant at this stage because the process in terms of

s 165(5) was wholly discrete from that in terms of s 165(3) with which the current

proceedings are concerned. To the extent that it purported to state a general

proposition, I would be hesitant to accept that argument. The purpose of an

application by the company in terms of s 165(3) is to pre-empt the multi-stage process

that can follow when a person signals their intention to proceed derivatively by

serving a demand. That a company might have an interest in doing so could arise

from the prejudicial consequences of the publicity that might attend the more drawn

51 Woollam acquired 10 shares in the applicant company on 26 June 2015 and then a further 3000 shares on 8 July 2016,when his answering papers in the current application were due. 52 See s 165(5)(b)(i) of the 2008 Companies Act.

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out process, not to mention the expense and inconvenience of an independent

investigation in terms of s 165(4). While the focus in any enquiry into whether the

demand is without merit will be on whether a prima facie case has been made out for

the company to pursue, matters that might be pertinent to demonstrating that it is

frivolous or vexatious within the meaning of s 165(3) could overlap with those that

would relevant to any enquiry into good faith and the best interests of the company in

terms of s 165(5).

[90] Nevertheless, it is clear that the arguments that the applicant’s counsel

advanced on the bases that the demand should be set aside because Woollam was

acting for an ulterior motive and because he had acquired his nominal holding in the

applicant company with prior knowledge of the matters that are the subject matter of

his demand fall more appropriately for consideration in the enquiry that is enjoined in

any application that Woollam might bring in terms of s 165(5) of the Act. Indeed, the

Australian authority53 with which Mr Hodes SC supported this leg of the argument for

the applicant was concerned with applications in terms of s 237 of the Australian

Corporations Act, 2001, which is the equivalent of s 165(5) of the 2008 Companies

Act.

[91] The demand procedure, and the attendant opportunity given to the company to

have the demand set aside, do not feature in the statutory regimes that regulate the

bringing of derivative proceedings in Australia, the United Kingdom, New Zealand or

Canada. The local provision seems to be a carry-over in modified form of an aspect

of the regime that used to apply in terms of s 266 of the 1973 Companies Act. The

provisions of s 165(3) of the 2008 Companies Act afford the company essentially the

same basis for warding off derivative proceedings at an early stage as it used to enjoy

when opposing an application brought by a shareholder in terms of s 266(3) of the

1973 Act.

[92] Logically, one would have expected that a company could oppose the

initiation of the process to commence derivative proceedings, not only on the grounds

provided in terms of s 165(3), but also on the basis of showing, if were able to, that

the intending litigant would not be able to satisfy all of the requirements of s 165(5).

The provisions of s 165(3), which expressly and emphatically limit the bases upon

53 Swansson v Pratt [2002] NSWSC 583, (2002) 42 ACSR 313 and Maher v Honeysett and Maher Electrical Contractors [2005] NSWSC 859; see also

41

which a company can have a demand set aside, appear to have been inspired by the

jurisprudence in respect of s 266(3) of the 1973 Act, in which it was held that an

application for the appointment of a provisional curator ad litem to investigate a

demand made in terms of s 266(2) would be refused if the company showed that the

demand was without merit, or frivolous and vexatious; see Van Zyl v Loucol (Pty) Ltd

1985 (2) SA 680 (NC), at 685G-I, and Thurgood v Dirk Kruger Traders (Pty) Ltd

1990 (2) SA 44 (E), at 49H-50. The anomaly that a company will often be unable in

an application in terms of s 165(3) to see off derivative proceedings on the basis that

the complainant will not be able to satisfy the requirements of s 165(5) appears to be

the result of an awkward cobbling together in s 165 of the 2008 Companies Act of

various concepts and procedures lifted from quite disparate preceding local and

foreign legislation.

Application by the first respondent to introduce fourth set affidavit

[93] Lastly, it remains to provide reasons for the orders I made on 29 August 2016

admitting certain parts of an affidavit by Woollam deposed to on 22 August 2016.

The first respondent had made application for the admission of the deposition as a

fourth set affidavit. The application was opposed by the company. I indicated that

reasons for the orders would be provided in this judgment.

[94] The affidavit was directed at two issues. Firstly, it sought to supplement the

demand by introducing an additional ground; and secondly, it set out Woollam’s

answers to new matter in the applicant’s replying papers. I considered it just and

appropriate to admit those parts of the affidavit that constituted an answer to the new

matter. As for the rest, I was of view that the applicant’s objection was well made that

it was not within the statutory scheme that additional grounds for a demand be

introduced in medias res in a pending application in terms of s 165(3), and that the

company was entitled to fifteen days’ notice to consider the newly added ground of

demand and, if so advised, to within that time bring separate proceedings to have

what amounted to a fresh demand set aside. It has subsequently been brought to my

notice by the parties that such separate proceedings have indeed been instituted.

[95] Mr Katz SC, who argued the application for the first respondent, submitted

that the affidavit should be admitted and the proceedings postponed to enable the

applicant to respond to the additional matter. I was not persuaded to exercise my

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discretion in favour of that course. The matter had had a rather drawn out run-up to a

hearing and the first respondent had failed to comply with the timetable provided in

an order taken by agreement between the parties from Magona AJ on 15 June 2016.

This weighed against the grant of any indulgence. The papers were relatively

voluminous and the applicant had incurred the expense of preparing for a hearing on

29 August 2016. It was anxious to obtain a determination of its extant application.

Costs

[96] A preliminary hearing was arranged to take place on 18 August 2016. The

purpose was to dispose of an application by the first respondent to strike out the

applicant’s replying affidavit in its entirety. At a late stage the first respondent

indicated that he was abandoning that application and electing to apply instead for the

admission of the aforementioned fourth set affidavit. The first respondent will be

ordered to pay the applicant’s costs in the striking out application, including the

wasted costs in respect of the reservation of 18 August 2016 for the purposes of the

hearing of the application, such costs to include the costs of two counsel.

[97] The first respondent achieved partial success in its application for the

admission of his fourth set affidavit. The issue that was primarily in contention in

that application, however, was whether the first respondent could introduce an

additional ground for his statutory demand. On that issue he was unsuccessful. He

was nevertheless entitled to have a further affidavit admitted owing to the new matter

contained in the applicant’s replying affidavit. I have decided that fairness will be

served if each party has to bear its own costs in respect of the application for the

admission of the fourth set affidavit. (For the information of the taxing master it is

recorded that proceedings on 29 August 2016 were taken up until 14h45 with this

interlocutory application.)

[98] The applicant has been successful in its application to set aside the demand,

dated 20 May 2016 and there is no reason why costs should not follow the result. The

applicant sought costs against the first respondent on a punitive scale on account of

what it alleged had been the first respondent’s lack of good faith. For the reasons

given above I have found it inappropriate to determine that aspect of the matter in

these proceedings and accordingly the costs will be allowed on the scale as between

party and party.

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Orders

[99] The following orders are made:

(a) The demand, dated 20 May 2016, served on the applicant by the first

respondent in terms of s 165(2) of the Companies Act 71 of 2008 is hereby set

aside in terms of s 165(3) of the said Act.

(b) The first respondent is ordered to pay the applicant’s costs of suit in the

application in terms of s 165(3) of the Act, including the costs attendant on the

application to strike out the applicant’s replying affidavit that was set down

for hearing on 18 August 2016. The costs so awarded shall include the costs

of two counsel.

(c) The applicant and the first respondent shall bear their own costs in respect of

the application by the first respondent for the admission of his affidavit

deposed to on 22 August 2016.

A.G. BINNS-WARD

Judge of the High Court

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APPEARANCES

Applicant’s counsel: P.B. Hodes SC

D. Goldberg

Applicant’s attorneys: Edward Nathan Sonnenbergs

Cape Town

First Respondent’s counsel: A. Katz SC

H.N. De Wet

D. Lubbe

First Respondent’s attorneys: Marcusse Law Firm

Observatory

Cape Town