Obstacles and barriers to the derivative action: Costs orders under section 165 of the Companies Act of 2008 (Part 2)
| Jurisdiction | South Africa |
| Published date | 25 May 2019 |
| Pages | 228-246 |
| Citation | (2014) 26 SA Merc LJ 228 |
| Author | Maleka Femida Cassim |
| Date | 25 May 2019 |
OBSTACLES AND BARRIERS TO THE
DERIVATIVE ACTION: COSTS ORDERS
UNDER SECTION 165 OF THE COMPANIES
ACT OF 2008 (PART 2)
MALEKA FEMIDA CASSIM*
Senior Lecturer, Department of Mercantile Law, University of Pretoria
[The first part of this article appeared in (2014) 21 SA Merc LJ 1–17.]
III LESSONS FROM COMPARABLE JURISDICTIONS
(a) Support for a right of indemnification
The submission is made in paragraph II above that the South African
courts should extend the principled approach to costs orders pro-
pounded in Wallersteiner v Moir (No 2)
91
to costs orders under
section 165 of the Act, so as to grant to shareholders, who have already
obtained leave for a derivative action, a mandatory right to an indemnity
from the company (save in exceptional circumstances). This proposal is
bolstered by substantial authority in comparable jurisdictions. Other
Commonwealth jurisdictions have also espoused the Wallersteiner
approach to costs orders, whether directly in legislation or through
decisions of the courts.
In this regard, New Zealand law has effectively codified the indemnity
order in the Companies Act
92
itself. By contrast, in Canadian law it has been
implemented by the courts. The well-known case Turner v Mailhot
93
relied
on the conditions laid down in Wallersteiner v Moir to rule that an applicant
who obtains leave for a statutory derivative action establishes a prima facie
right to an indemnity or order of costs from the company.
In the United Kingdom, the discretionary power of the court to award
pre-emptive costs orders or indemnity orders in favour of derivative
claimants is now codified in rule 19.9.E of the Civil Procedure Rules
2000.
94
It was found in Wishart v Castlecroft Securities Ltd
95
that courts
*MBBCh (cum laude) LLB (cum laude) LLM (cum laude) (Wits). Senior Lecturer,
Department of Mercantile Law, University of Pretoria. Attorney and Notary Public of the
High Court of South Africa.
91
[1975] QB 373 (CA); see para II(c) above.
92
New Zealand Companies Act 1993, s 166; see para II(b) above.
93
[1985] OJ No 251; 50 OR (2d) 561; 28 BLR 222 (HCJ).
94
Previously rule 19.9(7) of the 1998 Rules.
95
228
(2014) 26 SA Merc LJ 228
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have the power to make declaratory conditional orders in leave proceed-
ings as to the costs of the main derivative litigation. The approach in
Wallersteiner was applied in Stainer v Lee
96
in the context of the new
statutory derivative action in the UK, pursuant to which the court
decided that the claimant was entitled to be indemnified for his
reasonable costs.
Likewise, the Federal Court of Australia in Wood v Links Golf
Tasmania Pty Ltd
97
referred with approval to Wallersteiner v Moir (No 2)
and proceeded to adopt the common-law principle that if the sharehold-
er’s action ‘is bona fide to protect the [company] and the [company] will
receive the benefit of success, there is no good reason why the expenses
should be met out of the private resources of [the shareholder]’.
98
The
court qualified this dictum by stating that costs orders may be refused in
certain countervailing circumstances. In Wood’s case
99
Finkelstein J
plainly declared that:
‘The purpose of permitting a person to bring an action in the name of
the company is to prevent conduct which involves some element
of harm. In most cases the wrongdoer will be in control of the
company. That will be the reason the company itself is not bringing
the action. The purpose of [the derivative action] is to increase the
likelihood that someone brings a claim which the company ought to
have commenced. In those circumstances, I can think of no good
reason why the company should not bear the costs.’
It was consequently ordered in Wood’s case that the company must meet
the fair and reasonable costs of the action.
100
There thus is ample (though not consistent or unwavering)
101
sup-
port for the proposal (made in paragraph II above) that the South
African courts, when granting permission to an applicant to pursue a
derivative action, should effectively implement a presumption in favour
of company funding. This may be done by means of a judicially
recognised right to an indemnity from the company, except where it
would be unjust or inequitable in the circumstances.
96
[2010] EWHC 1539 (Ch); [2011] BCC 134. This was subject to a limit of £40 000 since
the amount of likely recovery was uncertain.
97
Supra note 56 para 5.
98
Farrow v Registrar of Building Societies [1991] 2 VR 589 at 595 in Wood v Links Golf
Tasmania Pty Ltd supra note 97 para 5.
99
Wood supra note 56 para 9.
100
The court also noted that the order could be recalled at a later stage if the claim
subsequently turned out to be unmeritorious; in this regard, see para III(c) below.
101
See further para III(b) below.
DERIVATIVE ACTION 229
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