Lewis Group Ltd v Woollam (9900/2016) [2016] ZAWCHC 130 [2016] JOL 36741 (HC) (11 October 2016 per A Binns-Ward J.

The high court granted an application ito s 165(3) of the 2008 Companies Act and set aside the demand made by a shareholder because it was ‘frivolous, vexatious or without merit’.

“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.[1]

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 Excerpts without footnotes

[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 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 standing[2] 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.

. . . . .

[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;[1] see s 69(8)(a) of the 2008 Companies Act.[2]

[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 reference in the field of company law,[3] 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.

. . . . .

[10]     The critical difference between the statutory disqualification of directors regimes in the foreign jurisdictions 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 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.

. . . . .

[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.[1]

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.

. . . . .

[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 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.

. . . . .

[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 companies[1] 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.[2]

. . . . .

[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.[1]

[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.[2]  Such proceedings were entertained in the limited circumstances that gave rise to the recognised exceptions to the rule in Foss v Harbottle [3] (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.[4]  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 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.