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[2016] ZAWCHC 162
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Lewis Group Limited v Woollam and Others (17199/2016) [2016] ZAWCHC 162; [2017] 1 All SA 231 (WCC) (15 November 2016)
Republic of South Africa
IN THE HIGH COURT OF SOUTH AFRICA
(WESTERN CAPE DIVISION, CAPE TOWN)
Case
No: 17199/2016
Before: The Hon. Mr Justice Binns-Ward
Hearing: 10 November 2016
Judgment: 15 November 2016
In
the matter between:
LEWIS
GROUP
LIMITED
Applicant
and
DAVID
FARRING
WOOLLAM
First
Respondent
JOHAN
ENSLIN
Second
Respondent
LESLIE
ALAN
DAVIES
Third
Respondent
DAVID
MORRIS
NUREK
Fourth
Respondent
HILTON
SAVEN
Fifth
Respondent
(This judgment should be cited as
Lewis Group Limited v Woollam
and Others
(2) to distinguish it from the judgment in
Lewis
Group Limited v Woollam and Others
[2016] ZAWCHC 130
(11 October
2016.)
JUDGMENT
BINNS-WARD J:
[1]
The matters for determination at this stage
arise from two interlocutory applications that are incidental to the
principal proceedings
in which Lewis Group Limited (‘Lewis’)
has applied in terms of
s 165(3)
of the
Companies Act 71 of 2008
for an order setting aside a demand made on it by one David Woollam
(‘Woollam’) in terms of
s 165(2)
to institute
proceedings in terms of
s 162
of the Act to have four of the
company’s directors declared to be delinquent directors.
[2]
Woollam has applied in the first of the
aforementioned interlocutory applications for an order:
1.
That
the rules pertaining to discovery shall apply in the principal
application insofar as the court might direct in terms of rule
35(13)
of the Uniform Rules of Court;
2.
That
Lewis be ordered to make discovery within 20 days of the report
titled ‘
Report description:
Accounts Cancelled / Re-invoiced
’
for each of the 760 branches of the company’s trading
subsidiary (Lewis Stores (Pty) Ltd.) for the period 15 January
to 30 March 2016;
3.
That
Woollam be allowed to deliver his answering affidavit 15 days after
‘receipt’ of the reports discovered in terms
of para. 2;
4.
Costs
only in the event of the interlocutory application being opposed,
otherwise that costs be costs in the principal application.
[3]
In the second interlocutory application,
Lewis has applied by way of a counter-application for an order
directing Woollam to deliver
his answering papers in the principal
application within five days. In argument, however, Lewis’s
counsel moderated
that demand to afford Woollam 10 days’ grace
in order to accommodate the reported exigencies of Woollam’s
counsel’s
other commitments. It is undisputed that Lewis
would be entitled to an order in terms of its counter-application in
the event
of Woollam’s application for discovery not being
granted.
[4]
Rule 35, which regulates the discovery
procedure in general civil litigation, is primarily applicable in
action proceedings.
Rule 35(13) provides, however, that ‘
The
provisions of this rule relating to discovery shall
mutatis
mutandis
apply, in so far as the
court may direct, to applications
’.
The fact that, differently to the position in respect of actions, a
party seeking discovery in motion proceedings
is able to obtain it
only insofar as the court might direct points to the availability of
the procedure in applications as being
out of the ordinary, and, to
that extent, exceptional. Indeed, in
Moulded
Components and Rotomoulding South Africa (Pty) Ltd v Coucourakis
1979 (2) SA 457
(W) at 470D-E, Botha J remarked ‘
In
application proceedings we know that discovery is a very, very rare
and unusual procedure to be used and I have no doubt that
that is a
sound practice and it is only in exceptional circumstances, in my
view, that discovery should be ordered in application
proceedings
’.
[5]
In
Moulded
Components
the learned judge declined
the request to make the procedure applicable for a number of reasons,
including the failure of the party
seeking discovery to have sought
the documents concerned earlier, the danger that acceding to the
request could lead to an unwholesome
widening of the ambit of the
proceedings, the limited relevance of the documents sought, the wide
form in which the relief was
sought and the court’s perception
that the contemplated exercise would be something of a ‘fishing
expedition’.
The court’s reasoning confirms that
the determination of an application for discovery in motion
proceedings proceeds upon
an examination of the request with
reference to its particular content
[1]
assessed in the context of the peculiar characteristics of the
litigation and mindful of the premise that the request should, as
a
matter of policy, be granted only exceptionally.
[6]
The pertinent principles have been
rehearsed in a number of other reported judgments, notably
Saunders
Valve Co Ltd v Insamcor (Pty) Ltd
1985
(1) SA 146
(T),
Premier Freight (Pty)
Ltd v Breathetex Corporation (Pty) Ltd
2003 (6) SA 190
(SE),
STT Sales (Pty)
Ltd v Fourie
2010
(6) SA 272
(GSJ)
and
FirstRand Bank Ltd t/a Wesbank v
Manhattan Operations (Pty) Ltd
2013 (5)
SA 238
(GSJ). It seems to me that the essential criterion is
whether discovery would be material to the proper conduct and fair
determination of the case.
[7]
Consistently with the very existence of the
sub-rule, the jurisprudence recognises that in appropriate
circumstances there is scope
for discovery to be directed in motion
proceedings; see e.g.
Premier Freight
and
Saunders Valve
supra. In the peculiar context of the case in
Saunders
Valve
, for example, the court
considered that the applicant’s election to proceed on motion
for relief that ordinarily would have
been sought in action
proceedings had prejudiced the respondent’s ability to properly
advance the evidential aspects of its
defence, as it would have been
able to do in a trial after discovery had been made, and therefore
directed the applicant to make
discovery before the respondent
delivered its answering papers. Broadly similar considerations
led the court to make a comparable
order in
Premier
Freight
. Those considerations
plainly find no application in the current matter in which the use of
motion proceedings in the principal
case are prescribed by the Act.
In
The MV Urgup: Owners of the MV Urgup
v Western Bulk Carriers (Australia) (Pty) Ltd and Others
1999 (3) SA 500
(C), by contrast, an application for discovery in
motion proceedings was dismissed, amongst various reasons because it
was sought
in proceedings that were only incidental to the principal
proceedings between the parties. Thring J made the
following
observations in that respect (at p.513H-I) ‘
Discovery
has been said to rank with cross-examination as one of the two
mightiest engines for the exposure of the truth ever to
have been
devised in the Anglo-Saxon family of legal systems. Properly employed
where its use is called for it can be, and often
is, a devastating
tool. But it must not be abused or called in aid lightly in
situations for which it was not designed or it will
lose its edge and
become debased. It seems to me that, generally speaking, its
employment should be confined to cases where parties
are properly
before the Court and are litigating at full stretch, so to speak. It
is not intended to be used as a sniping weapon
in preliminary
skirmishes, such as the main application in this matter is, unless
there are exceptional circumstances present
’
.
[8]
Turning then on the basis of those
principles to consider whether discovery as requested by Woollam
should be directed in the circumstances
of the principal application
in the current matter. The demand served on Lewis was based in
material part on the allegation
by Woollam that Lewis was
artificially improving ‘the quality of its debtors book
experience’ by use of a practice
whereby executory credit
transactions were cancelled and re-invoiced as cash transactions.
Woollam maintains that the practice
enables Lewis to put up a
misleading basis for its bad debt provisions and expected future cash
flows and alleges that ‘it
is nothing other than accounting
fraud’. He claims that the directors he wants the company
to have declared delinquent
were privy to the allegedly fraudulent
conduct. His allegations were founded on information relayed to
him by an employee
of Lewis Stores (Pty) Ltd, one Leon Mocke.
Mocke confirmed the content of his report to Woollam in an affidavit
dated 15
August 2016. Mocke testified that each branch prepared
reports titled ‘
Report
description: Accounts Cancelled / Re-invoiced
’,
which were submitted to the group head office to be processed there
in the context of a biennial writing-off exercise routinely
conducted
as part of the group’s accounting management.
[9]
An example of such a report in respect of
the Saldanha branch that was in the papers was considered during the
course of argument.
It sets out on an itemised basis the
accounts at the branch that were cancelled during a given period and
the amounts involved.
It bears out that some cancelled credit
transactions were converted to cash transactions at given values.
[10]
In its founding papers in the principal
application Lewis has admitted the practice referred to by Woollam
and set out an explanation
of its operation and effect. The
imputation of accounting fraud was rejected as unfounded. Lewis
has also put in a
report from an independent firm of accountants and
auditors, KPMG, in which, predicated on a limited sampling exercise,
the practice
was evaluated and commented upon, more particularly,
whether the process of cancellation and re-invoicing of one account
impacts
on the projected cash flows for other accounts. KPMG’s
report is highly technical, and subject to a number of possibly
material qualifications, but insofar as I have been able to
understand it, appears to opine that the system of cancellation and
re-invoicing used by Lewis for preparing its consolidated financial
statements is applied logically and consistently with the system
explained in the affidavit of Morné Mostert, General Manager:
Finance for Lewis Stores (Pty) Ltd, jurat 12 September 2016.
Mostert has dealt in summary with the effect of the practice at
paragraphs 14 and 15 of his affidavit. It does not seem to
me
that Woollam would require access to all the branch reports to answer
Mostert’s explanation. Whether the system
is technically
good or bad, insofar as it affect’s Lewis’s reporting in
respect of bad debt provision and future cash
flows, is not really
relevant to the enquiry whether Woollam’s demand is without
merit. The central enquiry in that
regard has to be whether
Woollam’s demand, assessed in the context of the evidence in
the application in terms of s 165(3),
has made out a cognisable
claim for a declaration of delinquency on the grounds set forth in
s 162(5)(c)
of the
Companies Act; viz
. that the directors in
question grossly abused their position as directors, took personal
advantage of information or an opportunity,
contrary to
section
76(2)
(
a)
of the Act, intentionally or by gross negligence inflicted harm on
the company contrary to
s 76(2)(a)
or
acted in a manner
that amounted to gross negligence, wilful misconduct or breach of
trust in relation to the performance of the
director's functions
within, and duties to, the company; or contemplated in
section 77
(3
)
(a)(b) or (c) of the Act.
[11]
Lewis has admitted that certain of its
employees had made themselves guilty of misconduct by abusing the
cancellation and re-invoicing
policy. It pointed to
disciplinary action that had been taken against some employees in
this respect prior to Woollam first
having raised any concerns on the
point. The only possible relevance of that evidence appears to
be to support an argument
that it shows conduct by the company
inconsistent with any fraudulent complicity by any of its directors
in the abuses. The
content of the reports does not appear to
bear on this aspect either.
[12]
Woollam avers that if all the branch
reports were made available they would either provide ‘a full
and compelling answer to
[his] allegations’ or confirm that
there was indeed widespread abuse. He maintains that this
requires that he must
be afforded access to all the reports to
consider his position before filing his answering papers. He
says that they ‘may
prove to be fatal to [his] demand in terms
of
Section 165(2)
or these reports may provide such demand with
additional impetus’.
[13]
Regard being had to the principles
rehearsed earlier, it is important to categorise the character of the
proceedings in the principal
case, which, it will be recalled, is an
application in terms of
s 165(3)
of the
Companies Act. The
subsection provides: ‘
A company
that has been served with a demand in terms of subsection (2) may
apply within 15 business days to a court to set aside
the demand only
on the grounds that it is frivolous, vexatious or without merit
’.
It is clear that the bases upon which a company can impugn a demand
made on it in terms
s 165(2)
are strictly limited. The
only one that could possibly be relevant in respect of Woollam’s
request for discovery would
that pertaining to the question of the
demand being ‘without merit’. Indeed, it is evident
from the extracts
from his supporting affidavit in the interlocutory
application quoted earlier that the object that Woollam seeks to
achieve through
discovery is to establish, at least in his own mind,
whether his demand is factually well founded or not, and in
particular whether
the practice gives rise to a material misstatement
of Lewis’s financial condition. But that is not what the
principal
proceedings are concerned with. Woollam’s
objective is therefore quite irrelevant for the purposes of the
principal
proceedings.
[14]
When a court considers, for the purposes of
deciding an application in terms of
s 165(3)
, whether a demand
is without merit, it does not pre-empt the determination of the claim
that the demander is intending to prosecute
derivatively if the
company does not comply with the demand, nor is it concerned with the
prospects of success of that claim; cf.
Amdocs
SA Joint Enterprise (Pty) Ltd v Kwezi
Technologies (Pty) Ltd
2014 (5) SA 532
(GJ), at para.s 14-17, and
Lewis Group
Limited v Woollam and Others
[2016]
ZAWCHC 130
(11 October 2016), at para.s 53-56. When a
court assesses the demand in the context of the evidence adduced in
the application,
it does so merely to ascertain whether the demand
has made out a cognisable basis for the contemplated derivative
action.
In a sense the exercise is akin in material respects
(but not identical) to that which a court adopts when determining an
exception
to a pleading. The evidence that the court takes into
account in an application in terms of
s 165(3)
is relevant only
to the extent that it enables the court to assess whether or not the
subject matter of the demand can be sustained
in the contemplated
derivative action. The demand will not be found to be without
merit if, assessed in the context of the
evidence, its content makes
out a cognisable claim that on its face would be triable. The
prospects of success of the remedy
contended for in the demand on the
other hand, and the viability of pursuing it, as well as whether it
would be in the best interests
of the company to do so, are the
subject matter of the investigation contemplated in terms of
s 165(4)
and any subsequent application that might be brought in terms of
s 165(5).
Those steps in the statutory derivative action
process are discrete from that provided for in terms of
s 165(3)
;
cf.
Lewis Group
supra,
at para.s 89-92.
[15]
In the principal case, Lewis has to show
that Woollam’s demand, assessed in the context of the evidence
taken on its face,
does not make out a prima facie case of conduct by
the allegedly delinquent directors of the sort described in
s 162(5)(c)
of the
Companies Act;
[2
]
alternatively, if it does, that it is able to unanswerably rebut it.
In other words, it must show that there is nothing in
the demand that
merits being the subject of the prescribed investigation or the
proposed derivative action. The declared
object of the
discovery sought by Woollam goes rather towards demonstrating the
prospects of success, alternatively the lack thereof,
of establishing
the allegations he has made of accounting fraud to found the
derivative action he would wish to pursue if the company
does not do
so on its own initiative. That is an irrelevant question for
the purposes of determining the application by Lewis
in terms of
s 165(3)
of the
Companies Act. He
is not prejudiced for
present purposes by not having the other reports. If Lewis
chooses not to make them available, it does
not stop Woollam from
extrapolating the information he has in the reports that are
available to him for the purpose of explaining
the basis for his
demand. Lewis has not suggested that the report in respect of
the Saldanha branch is conceptually distinguishable
from the reports
it would have received from the other branches. If Woollam
considered that access to all the reports was
necessary to determine
whether he could make out a cognisable case for the company to pursue
proceedings in terms of
s 162
against the four directors (as to
which I express no opinion), he could and should have sought it
before making the demand.
[16]
Woollam has therefore failed to make out a
case for the court to exercise its discretion in favour of making an
order in terms of
rule 35(13)
that there should be discovery in the
application in terms of
s 165(3)
, at least at this stage.
[17]
It follows that Woollam’s
interlocutory application must be dismissed and Lewis’s
counter-application granted.
[18]
The following orders are made:
1.
The
application by the first respondent (Woollam) for a direction in
terms of
rule 35(13)
is dismissed.
2.
The
first respondent is directed to deliver his answering papers in the
principal case within 10 days of the date of this order,
failing
which the applicant (Lewis) may enrol the application in terms of
s 165(3)
of the
Companies Act 71 of 2008
for hearing as an
unopposed application.
3.
The
first respondent shall pay the applicant’s costs of suit in the
interlocutory applications, including the costs of two
counsel.
A.G. BINNS-WARD
Judge
of the High Court
APPEARANCES
Applicant’s counsel:
P.B. Hodes SC
D. Goldberg
Applicant’s attorneys:
Edward Nathan Sonnenbergs
Cape Town
First Respondent’s counsel:
H.N. De Wet
D. Lubbe
First Respondent’s attorneys:
Marcusse Law Firm
Observatory
Cape Town
[1]
The request might be wide-ranging as
in a general request for discovery of the nature made in the
ordinary course in action proceedings
in terms of
rule 35(1)
, or
more confined, and directed at making the provisions of the rule
applicable only in respect of particularised material, as
in the
current case.
[2]
Section 162(5)(c)
provides:
A
court must make an order declaring a person to be a delinquent
director if the person-
(c) while a director-
(i) grossly abused the position of director;
(ii) took personal advantage of information or an
opportunity, contrary to
section 76
(2) (a);
(iii) intentionally, or by gross negligence,
inflicted harm upon the company or a subsidiary of the company,
contrary to
section 76
(2) (a);
(iv) acted in a manner-
(aa) that amounted to gross negligence, wilful
misconduct or breach of trust in relation to the performance of the
director's
functions within, and duties to, the company; or
(bb) contemplated in
section 77
(3) (a), (b) or (c)
.