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  • 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 companys 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 companys 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 Woollams 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.

  • 3

    4. That the groups 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

    Woollams 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 ASICs 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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