A discussion of the requirements of a trial of a serious question of consequence and the best interests of the company as contemplated in section 165(5)(b) of the Companies Act 71 of 2008

• Jurisdiction: South Africa
• Date: 28 October 2020
• Pages: 1-23
• Author: Subramanien, D.
• Published date: 28 October 2020

1

A DISCUSSION OF THE

REQUIREMENTS OF A TRIAL

OF A SERIOUS QUESTION OF

CONSEQUENCE AND THE BEST

INTERESTS OF THE COMPANY AS

CONTEMPLATED IN SECTION 165(5)

(b) OF THE COMPANIES ACT 71 OF

2008*

DARREN SUBRAMANIEN†

Lecturer School of Law (PMB), University of KwaZulu Natal

ABSTRACT

The requirements for judicial discretion to grant leave for a derivative

action are located in s 165(5)(b) of the Companies Act 71 of 2008. The

discretion of the court must be exercised to prevent time-consuming

and costly actions that are deemed to be frivolous, vexatious or

without merit. In terms of s 165(5)(b) the court must be satisfied that

the applicant is acting in good faith, that the proceedings involve the

trial of a serious question of material consequence to the company,

and that it is in the best interests of the company that the applicant

be granted leave. It would therefore be open to the courts to provide

an interpretation of the words in s 165(5)(b) regarding the good faith

requirement, to find that the proceedings involve a serious question

of material consequence to the company, and to find that it is in the

best interests of the company that the applicant be granted leave.

This article discusses the requirements of ‘a trial of a serious question

of consequence’ and the ‘best interests of the company’ in s 165(5)(b)

of the Act. The interpretation of these words and phrases in s 165(5)(b)

will ultimately determine the success or failure of the new statutory

derivative action as an adequate remedy for aggrieved applicants

who seek redress on the company’s behalf if the company or those in

control of it improperly fail or refuse to do so. This article will refer

to the relevant sections in the law of the United Kingdom to provide

* This article is based on sections of the author’s PhD thesis.

† LLB, LLM (UKZN), PhD (UKZN).

(2020) 6(1) JCCL&P 1

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2(2020) 6 (1) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

further clarity about the interpretation of the relevant provisions in

s 165(5)(b) of the Companies Act 71 of 2008.

Keywords:

I INTRODUCTION

In terms of s 165(5)(b) of the Companies Act 71 of 2008 (hereinafter

‘the 2008 Act’), the court must be satisfied that the applicant is

acting in good faith, that the proceedings involve the ‘trial of a

serious question of material consequence to the company’, and

that it is ‘in the best interests of the company’ that the applicant

be granted leave. The legislature has chosen to provide guiding

criteria that are vague and general rather than detailed legal steps

for the exercising of judicial discretion. It is therefore be open to the

courts to provide an interpretation of the words in s 165(5)(b). The

interpretation and application of these requirements in s 165(5)(b)

will ultimately determine the success or failure of the new statutory

derivative action as an adequate remedy for aggrieved applicants

who seek redress on the company’s behalf if the company or those in

control of it improperly fail or refuse to do so. This article discusses

the requirements of ‘a trial of a serious question of consequence’ and

the ‘best interests of the company’ in s 165(5)(b) of the 2008 Act. The

article concludes with a recommendation in the form of proposed

amendments to s 165 in its current form to ensure that there is

greater clarity and effectiveness in the application of s 165 and,

more specifically, the requirements of ‘a trial of a serious question of

consequence’ and the ‘best interests of the company’ in the section.

II SECTION 165(5)(b)(ii) OF THE COMPANIES ACT

71 OF 2008: A TRIAL OF A SERIOUS QUESTION OF

CONSEQUENCE

A court may grant an applicant leave to institute or to continue

derivative proceedings on behalf of the company only if the court

is satisfied that the matter involves a ‘serious question of material

consequence to the company’.1 The 2008 Act does not provide any

clarity on the precise meaning of these words and it will ultimately

be left to the courts to provide clarity and to define these words.2

The words ‘a trial of a serious question or a serious question to be

tried’ have been used in various Constitutional Court cases in order

1 Section 165(5)(b)(ii) of the Companies Act 71 of 2008 (hereinafter ‘the 2008 Act’).

2 Maleka F Cassim ‘Judicial discretion in derivative actions under the Companies

Act 2008’ (2013) 4 SALJ 780.

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