Section 165(5)(b) of the Companies Act 71 of 2008: A discussion of the requirement of good faith

• Jurisdiction: South Africa
• Citation: (2020) 6(2) JCCL&P 212
• DOI: https://doi.org/10.47348/JCCL/V6/i2a8
• Pages: 212-231
• Date: 31 March 2021
• Published date: 31 March 2021

https://doi.org/10.47348/JCCL/V6/i2a8 212

SECTION 165(5)(b) OF THE

COMPANIES ACT 71 OF 2008: A

DISCUSSION OF THE REQUIREMENT

OF GOOD FAITH

DARREN SUBRAMANIEN*

Senior Lecturer School of Law (PMB) University of Kwa-Zulu Natal

ABSTRACT

In terms of s 165(5)(b) of the Companies Act 71 of 2008, ‘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(s) 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 would therefore be open to the courts to provide an interpretation

of the words found in s 165(5)(b) especially regarding the good faith

requirement. This article discusses the requirement of good faith.

The interpretation and application of the good faith requirement

found 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 may seek redress on the company’s behalf,

if the company or those in control of it improperly fail or refuse to do

so. The comparable sections in the law of the United Kingdom will

be evaluated in order to determine whether it is feasible to transplant

selected rules and principles into South African law.

Keywords: good faith; trial of a serious question; remedy; derivative

action.

I INTRODUCTION

In order for an applicant to succeed in an application under s 165

of the Companies Act 71 of 2008 (the 2008 Act), the applicant must

satisfy the substantive requirements set out in s165(5)(b) of the 2008

Act. These requirements are conjunctive, all of which must be met.

* LLB LLM PhD (UKZN). This article is based on sections of the author’s PhD thesis.

(2020) 6(2) JCCL&P 212

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213

SECTION 165(5)(b) OF THE COMPANIES ACT 71 OF 2008: A DISCUSSION OF

THE REQUIREMENT OF GOOD FAITH

https://doi.org/10.47348/JCCL/V6/i2a8

To succeed with his or her application, it is incumbent upon the

applicant to satisfy the court that:1

(a) the applicant is acting in good faith;2 and

(b) the proposed proceedings demanded:

(i) involves a trial of a serious question of material consequence

to the company;3 and

(ii) are in the best interests of the company.4

These criteria are designed to serve as checks and balances to prevent

frivolous or vexatious claims and the abuse of the derivative action

by minority shareholders and other applicants. This article discusses

the criterion of good faith only. The court may grant leave only if

it is satisfied that the applicant who applied for leave is acting in

good faith. It would therefore be open to the courts to provide an

interpretation regarding the good faith requirement. This article

discusses the good faith requirement in the light of recent judgments.

The article also discusses relevant comparative law in the United

Kingdom in order to provide greater clarity as to what factors the

courts in South Africa may need to consider when applying the good

faith requirement in s 165.

The article will conclude with a recommendation in the form of a

proposed amendment to s 165 in its current form to ensure that there

is greater clarity and certainty in the application of s 165 and more

specifically the good faith requirement contained in the section.

II THE REQUIREMENT OF GOOD FAITH

In terms of s 165(5)(b)(i) of the 2008 Act, an applicant who seeks to

institute derivative proceedings must satisfy the court that he or she

is acting in good faith. The South African statutory derivative action

has been substantially influenced by those in Australia, Canada and

England. It is difficult to provide a precise definition of the term

‘good faith’.

Under the Australian equivalent, found in s 237 of the Corporations

Act 2001(Cth) the term ‘good faith’ has been interpreted with

reference to two interrelated factors.5

1 Mbethe v United Manganese of Kalahari (Pty) Ltd 2016 (5) SA 414 (GJ) para 53 (High

Court judgment).

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

3 Section 165(5)(b)(ii) of the 2008 Act.

4 Section 165(5)(b)(iii) of the 2008 Act.

5 Piet Delport Henochsberg on the Companies Act 2008 (2018) 595.

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