Lewis Group Ltd v Woollam and Others

• Jurisdiction: South Africa
• Judge: Binns-Ward J
• Judgment Date: 11 October 2016
• Citation: 2017 (2) SA 547 (WCC)
• Docket Number: 9900/2016
• Hearing Date: 11 October 2016
• Counsel: PB Hodes SC (with D Goldberg) for the applicant. Anton Katz SC (with HN de Wet and D Lubbe) for the first respondent.
• Court: Western Cape Division, Cape Town

Binns-Ward J:

[1] Lewis Group Ltd, the applicant in this case, is a public company F 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 G 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'.

H [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 I 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

Binns-Ward J

company'. The service of such a demand is the first step that any person A 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.

[4] The demand, dated 20 May 2016, calls upon the applicant company 'to B 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 C 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. D

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. E

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 ongoing overstatement of reported revenue. F

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 G 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 H a director of any company: [4] see s 69(8)(a) of the 2008 Companies Act. [5]

Binns-Ward J

A [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, B 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 C make most frequent comparative 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 D in terms of the Company Directors Disqualification Act, 1986. [7] Under the UK legislation, courts can make disqualification orders mero motu in certain circumstances [8] 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 E 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 F 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.

Binns-Ward J

[8] In Australia disqualification orders are obtained at the instance of the A 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 B 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.

[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 — C (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 D NZD 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, E 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 Assignee, [12] 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 F 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. G

[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. H

[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 I

Binns-Ward J

A the 2008 Companies Act gives standing to a number of categories of person, 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 B 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.

C [12] Subsection (2) goes as follows, insofar...