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[2017] ZAWCHC 15
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Lewis Group Limited v Woollam and Others (17199/2016) [2017] ZAWCHC 15 (1 March 2017)

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: 27 February 2017
Judgment: 1 March 2017
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
(3) to distinguish it from the judgments in
Lewis Group Limited v Woollam and Others
[2016] ZAWCHC 130
(11 October 2016 and
Lewis Group Limited v Woollam and Others
[2016] ZAWCHC 162
(15 November 2016.))
JUDGMENT
BINNS-WARD J:
[1]
The applicant company applied in terms of
s 165(3)
of the
Companies Act, 71 of 2008
, to set aside a
demand served on it by the first respondent in terms of
s 165(2)
of the Act.  The first respondent sought a direction that
discovery be made by the applicant of certain documentation before
he
delivered his answering papers.  His application to that end was
unsuccessful.  The circumstances in which the demand
was made
and the context of the institution by the applicant of the litigation
to have it set aside, as well as the aforementioned
application by
the first respondent for discovery, are apparent from the reported
judgments in
Lewis Group Ltd v Woollam
and others
(1)
[2016] ZAWCHC 130
,
[2017] 1 All SA 192
(WCC) (especially at para. 94) and
Lewis
Group Ltd v Woollam and others (2)
[2016] ZAWCHC 162
,
[2017] 1 All SA 231
(WCC).  The demand that
is in issue in the current proceedings is that which the first
respondent sought to advance in the
fourth set of affidavits that the
court in large part refused to admit in
Woolam
(1)
.  The import of the demand was
described in general terms in
Woollam
(2)
.  There is no need to rehearse
the history.
[2]
After
the first respondent failed to obtain a direction that the applicant
should make discovery (see
Woollam (2)
),
he purported to respond to the applicant’s founding papers by
means of a notice in
rule 6(5)(d)(iii)
, in which he recorded that he
had withdrawn his demand and tendered to pay the applicant’s
wasted costs.  The applicant
gave notice in terms of
rule 30
that it considered the aforementioned notice to be irregular.
As the notice was not withdrawn, arrangements were made for
the
hearing, on 27 February 2017, of an application for it to be set
aside.  The parties thereafter eventually agreed
that the
question to be determined at the hearing on 27 February was
whether the first respondent was legally able to withdraw
his demand
without the applicant’s consent, or the leave of the court.
It seemed to follow from that agreement that
should the court find
that the demand could not be withdrawn that the application to have
it set aside should be determined on
its merits and that if, on the
other hand, it were held that the demand could be withdrawn, only
costs would fall for determination.
[3]
The applicant does not consent to the
withdrawal of the demand.  It is keen to have its application to
set aside the demand
determined on its merits.  It considers
that such a determination would assist in addressing the harm that it
says that it
has suffered as a consequence of the adverse publicity
engendered by the demand.  It is also concerned that the
withdrawal
of the demand is just a tactical move by the first
respondent.  It suspects that the first respondent’s
intention is
to reissue the demand after he has obtained additional
information to support it.  It contends that the first
respondent is
not permitted to withdraw the demand, thereby putting
an end to the proceedings in terms of
s 165(3)
(save as to
costs).
[4]
Section 165
provides that a person
qualified in terms of subsection (2) ‘
may
serve a demand upon a company to commence or continue legal
proceedings, or take related steps, to protect the legal interests
of
the company
’.  The service
of a demand is directed at requiring the company to procure an
independent investigation into the issue
raised by the demand and,
after receipt of the resultant report, to consider instituting the
proceedings that the demander alleges
should be commenced or
continued to protect the company’s legal interests.  If
the company fails to procure the independent
investigation
contemplated by
s 165(4)
, or, having considered the
investigator’s report, it informs the demander that it refuses
to comply with the demand, the
demander may apply to court in terms
of
s 165(5)
for leave to proceed derivatively with the
contemplated proceedings in the company’s name.  Serving a
demand in terms
of
s 165(2)
is therefore the first step that
anyone contemplating pursuing proceedings derivatively on the
company’s behalf is required
to take in order to qualify to do
so.
[5]
The legislature was obviously mindful of
the potentially adverse effect on a company of the cost of funding
investigations in terms
of
s 165(4)
and thereafter possibly
becoming involved in opposed proceedings in terms of
s 165(5).
Depending on the issues involved, these could quite conceivably be
considerable.  Provision was therefore made in
s 165(3)
for
companies that are the recipients of demands that are frivolous,
vexatious or without merit to apply to court for them to be
set
aside.  The setting aside of a demand in terms of
s 165(3)
obviates the need for the company to procure the independent
investigation.  It also puts an end to the demander’s
aspirations to litigate derivatively because (unless he is able to
make out an exceptional case within the meaning of
s 165(6))
it
deprives him of the basis to bring an application for the court’s
leave to do so.
[6]
The remedy of setting aside a demand has to
be seen in the context of
s 165
as a whole, which is directed at
the comprehensive statutory regulation of derivative actions and
doing away in that respect with
the previously applicable common
law.  An incidental effect of successfully setting aside a
demand might well be that any
adverse publicity that might have
attended the demand could be redressed.  But that is not the
purpose of the provision, which
is directed only at putting an early
and summary end to contemplated derivative proceedings in a confined
category of cases in
which it is clearly appropriate to do so.
[7]
Section 165
does not provide in terms that
a demander may withdraw his demand.  But, equally, it does not
prescribe that he may not.
The Act, as seems to have become
common in recent years, contains provisions enjoining how it must be
interpreted.  Section
5(1) prescribes that it ‘
must
be interpreted and applied in a manner that gives effect to the
purposes set out in section 7
’.
Section 7 sets out the purposes of the Act in very general terms.
Those purposes include ‘
encouraging
transparency and high standards of corporate governance as
appropriate
’,
[1]
‘
balanc
[ing]
the rights and obligations of
shareholders and directors within companies
’
[2]
and ‘
encourag
[ing]
the efficient and responsible management
of companies
’.
[3]
These are all purposes to which s 165 is recognisably
directed to a greater or lesser degree and its provisions must

accordingly be interpreted in a manner that gives effect to them.
Section 7, however, contains nothing that I can identify
as
being particularly instructive on the manner in which the question in
the current matter should be answered.  The answer
to the
question of whether a demander may withdraw his demand must therefore
be sought in the conventional way; that is upon a
contextual
consideration of the role of a demand in terms of the provision
having regard to its place in the regulatory scheme
concerning
derivative actions that is the manifest purpose of the section read
as a whole.
[8]
A demand is the first of a series of
requirements that must be satisfied before a person may institute
derivative proceedings in
the company’s name.  The purpose
of setting up the requirements is to try to ensure that derivative
proceedings will
be permitted only when demonstrably justifiable in
the company’s interests.  Any person wishing to proceed
derivatively
must obtain the court’s leave to do so.  That
was not a requirement under the common law.  If a person who has
made a demand in terms of s 165(2) concludes that he no longer
wishes to seek to proceed derivatively, or that his prospects
of
obtaining leave to do so are so weak as to render his having
triggered the procedural process in terms of the section purposeless,

there does not appear to be anything in the provisions of s 165
to indicate that he should not be allowed to abort the process
by
withdrawing the demand.  All the practical considerations point
in favour of the conclusion that a demand should be capable
of
withdrawal.
[9]
The withdrawal of a demand would have the
effect of rendering the institution or continuance of proceedings in
terms of s 165(3)
unnecessary with resultant costs savings for
the company.  To similar effect, it would render the procurement
or continuance
of an independent investigation in terms of s 165(4)
unnecessary.  If, however, the demand raised questions that the
directors considered should be investigated, the withdrawal of the
demand would not affect the company’s ability to proceed
with
an investigation regardless, or even institute the contemplated
proceedings directly, without an investigation.  Another
factor
weighing against the notion that it is not competent to withdraw a
demand is that there is nothing in the Act that compels
a person who
has made a demand to proceed with an application for leave to proceed
derivatively even if the investigation report
rendered in terms of
s 165(4) indicates that the institution of proceedings would be
in the best interests of the company
and the board nevertheless
refrains from acting in accordance with the recommendation.  The
position is sharply distinguishable
from that which obtains after a
person who has obtained leave from the court to proceed derivatively
wishes to discontinue, settle
or withdraw such proceedings.  In
the latter case permission must be obtained from the court in terms
of s 165(15).
A basis for the distinction is
understandable.  By the time a court grants leave to proceed
derivatively it has necessarily
engaged with the merits of the idea
that proceedings are merited and in a sense placed its imprimatur on
their institution.
Once a court has engaged in the matter to
that extent, it is not difficult to appreciate that it should have a
say on any subsequent
proposal not to take the proceedings that it
has authorised to final judgment.
[10]
The ability of a demander to withdraw his
demand would not thwart or frustrate any of the purposes to which
s 165 is particularly
directed, or the broader statutory
purposes set out in s 7 which the provision serves.
[11]
In the circumstances it seems to me that a
demander may withdraw his demand if he elects to do so.
[12]
If the demand is withdrawn in the face of a
pending application in terms of s 165(3) to have it set aside,
the effect is to
render those proceedings moot, apart from the
question of costs.  I find no reason to distinguish the position
from that which
obtains in comparable situations; for example, where
a company faced with an application for winding-up on account of an
alleged
inability to pay its debts settles the applicant’s
claim, or when a respondent faced with an application to perform some
or other act renders performance before the matter comes to hearing.
A court will not deal with the substantive issues in
such cases
because they have become moot.  So, in
President,
Ordinary Court Martial, and Others v Freedom of Expression Institute
and Others
[1999] ZACC 10
;
1999 (4) SA 682
(CC), at
para. 15, it was noted that the Constitutional Court is not
bound to confirm a High Court order declaring a statutory
provision
unconstitutional when the provision has in the meantime been
repealed, and will do so only if it is persuaded that a
confirmatory
order would be germane to the determination of underlying live issues
remaining between the parties.
[13]
When a demand is withdrawn, nothing remains
to be set aside.  The notion that the company should
nevertheless still be entitled
in the pending proceedings in terms of
s 165(3) to a declaration that the demand had been vexatious,
frivolous or without
merit falls to be considered on the basis of the
generally applicable principles in respect of declaratory relief.
If a case
no longer presents an existing or live controversy, it is
moot and no longer justiciable.  Declaring how it should have
been
decided raises the prospect of the court giving an advisory
opinion on a matter that has become abstract; something it should
generally
avoid, cf.
National
Coalition for Gay and Lesbian Equality and Others v Minister of Home
Affairs and Others
[1999] ZACC 17
,
2000
(2) SA 1
(CC),
2000 (1) BCLR 39
, at para. 21, footnote 18.  I am
not persuaded that the prospect that the first respondent might serve
a fresh amplified demand
affords any reason in the circumstances to
engage with the merits of the now redundant application in terms of s
165(3) for the
purpose of being able to declare that the demand he
has withdrawn was frivolous, vexatious or without merit.  Any
fresh demand
that may ensue will have to be considered on its own
terms; firstly, by the applicant, and subsequently, only if the
applicant
seeks to have it set aside, by a court.
[14]
The applicant’s counsel conceded that
rule 41(1)
[4]
is not applicable because the application in terms of s 165(3)
had not yet been set down for hearing when the demand was withdrawn,

and the service of a demand in terms of s 165(2) in any event
does not constitute the institution of proceedings within the
meaning
of the rule.  But Mr
Hodes
SC
nevertheless sought support for his argument that the demand could
not be withdrawn other than by consent or with the leave of
the court
in the judgment in
Karoo Meat Exchange
Ltd v Mtwazi
1967 (3) SA 356
(C).
The judgment is not on point in my view.  It dealt with a
situation in which a plaintiff purported, without the
defendant’s
consent or the court’s leave, to withdraw proceedings that had
been set down for hearing.  The court
found that that was not
permissible because of the effect of the relevant rules of the
Magistrates’ Court and the position
under the common law once
there was
litis contestatio
.
None of those considerations is applicable in the current case,
either directly or by analogy.  In any event, as subsequently

pointed out by Kumleben JA in
Levy
v Levy
[1991] ZASCA 81
;
1991 (3) SA 614
(A), a matter in
which the court of first instance’s refusal of leave to
withdraw an action was overturned on appeal:
It is after all not ordinarily the function of the Court
to force a person to institute or proceed with an action against his
or
her will or to investigate the reasons for abandoning or wishing
to abandon one. An exception, though one difficult to visualise,

would no doubt be where the withdrawal of an action amounts to an
abuse of the Court's process. In
Hudson v Hudson and Another
1927 AD 259
De Villiers JA held at 268 that:
'Where... the Court finds an attempt made to use for
ulterior purposes machinery devised for the better administration of
justice
it is the duty of the Court to prevent such abuse. But it is
a power to be exercised with great caution, and only in a clear
case.'
Cf. also
Berman & Fialkov v Lumb
2003 (2) SA 674
(C), at
para 10.
[15]
The appropriate remedy for any damage to
the reputation of the applicant or the second to fifth respondents
[5]
that may have been caused unlawfully as a result of the demand (as to
which I express no view) falls to be sought in proceedings
in
delict.  Section 165(3) is not there to serve that purpose.
The applicant’s concern that the first respondent
might
resubmit the demand at a later stage also does not afford a
sufficient basis for the court to make a declaratory order.
If
a demand were to be resubmitted by the first respondent in the same
form as that which has been withdrawn, that might, depending
on the
context, afford grounds by itself, for the demand to be characterised
as vexatious.  But that would be a question to
be addressed if
and when the eventuality occurred, not now.
[16]
Turning now to consider the question of the
costs of the application in terms of s 165(3).  The
applicant contends that
it is entitled to its costs up to and
including the hearing on 27 February 2017, with the fees of two
counsel where such were
engaged.  The first respondent, on the
other hand, argues that he should be liable for the applicant’s
costs only up
to 24 November 2016 and that the applicant should
pay his costs in the matter incurred after that date, including the
costs
of two counsel where such were engaged.
[17]
Notice of the withdrawal of the demand was
given on 24 November 2016 by way of a letter addressed by the first
respondent’s
attorneys to those of the applicant.  The
relevant sentence advised ‘
Accordingly,
our client hereby withdraws his demand in terms of
Section 165
of the
Companies Act served
on your client on 22 August 2016, and
tenders your client’s wasted costs on a party and party
scale
’.  The notice elicited
the following response: ‘…
bearing
in mind that it is impermissible to withdraw a demand made in terms
of
section 165(2)
of the
Companies Act &hellip
;, at least at a stage
when
section 165(3)
proceedings are pending in relation thereto, our
client will enroll
(sic)
its
application in terms of
section 165(3)
for hearing … on the
basis that it is unopposed, as envisaged in paragraph 2 of the order
[in
Woollam
(2)
]
dated
15 November 2016
’.  The
abovementioned notice purportedly in terms of
rule 6(5)(iii)
followed
on 29 November 2016.
[18]
The applicant’s counsel argued that
even were it to be held, as it has been, that the first respondent
was permitted to withdraw
the demand, the tender of wasted costs
incorporated in the notice given on 24 November 2016 was inadequate
and that the applicant
had been entitled to come to court on
27 February 2017, if only to get its costs.  Mr
Hodes
submitted that an arguably adequate
tender was made for the first time in the first respondent’s
counsel’s heads of
argument, dated 21 February 2017, in which
it was stated that ‘
an appropriate
costs order consequent upon the withdrawal of the demand would be
costs on a party and party scale (including the
costs of two counsel
where employed) only up and until the date of the Notice of
Withdrawal
’.  Mr
Hodes
emphasised that by that stage most of the costs in respect of the
hearing on 27 February had already been incurred, as counsel
had
been reserved for the day and had filed heads of argument.  Mr
De Wet
for
the first respondent countered, however, that the first respondent
had been entitled to come to court, if only to resist the
claim for a
punitive costs order that the applicant’s attorney had
indicated would be sought.  In this respect it should
be
mentioned that in the applicant’s counsel’s heads of
argument, dated 20 February 2017, it was indicated that
costs
were sought on the ordinary party and party scale.
[19]
Mr
Hodes
was correct that the tender was technically inadequate.  In the
circumstances of the matter, in which at least two counsel
had been
engaged by each side from the outset and in which orders had been
made allowing the costs of two counsel at every stage
of the
proceedings since the judgment in
Woollam
(1)
, the tender of costs should have
incorporated the costs of two counsel.  The use of the
expression ‘wasted costs’
in the tender was also
inappropriate; cf.
Mbekeni v Jika
1995 (1) SA 423 (Tk GD), where Pickering J
explained (at 424F) that ‘
Wasted
costs are additional costs incurred by a party through the fault of
his opponent or costs previously incurred which have
become useless
by reason of his opponent’s fault
’.
I am of the view, however, that the inadequacies in the first
respondent’s tender were matters that could readily
have been
resolved had the applicant’s attorney made it clear that the
tender was required to cover the costs of two counsel
and that the
applicant required payment of its costs (not just its wasted costs)
in the application up to the date of an adequate
tender.  In my
view this matter proceeded beyond 1 December 2016, not because
of the inadequacy of the tender, but principally
because of the
position adopted by the applicant that the demand could not be
withdrawn and its pursuit of the object that the
application in terms
of
s 165(3)
should be determined on its merits notwithstanding
the withdrawal of the demand.  The conduct of the matter was
complicated
by the misdirected filing by the first respondent of a
notice in terms of
rule 6(5)(d)(iii)
and the applicant’s
response thereto in terms of
rule 30.
Reliance on
rule 30
was
dropped on 30 January 2017 after the parties had reached the
agreement mentioned in paragraph [2]
above
and when, on the basis of such agreement, the applicant delivered an
affidavit by its attorney setting out the case advanced
by it at the
hearing on 27 February 2017.  The first respondent could
also have assisted his position if he had clarified
the content of
his costs tender before the filing of his counsel’s heads of
argument on 21 February.
[20]
In all the circumstances I consider that it
would be fair if the first respondent were directed to pay the
applicant’s costs
in the application in terms of
s 165(3)
up to 30 January 2017 (excluding the costs attendant on drafting
the affidavit of Kaanit Abarder,
jurat
30 January 2017), and if the applicant were directed to pay one half
of the first respondent’s costs of suit of suit incurred
from
that date (including the costs of the perusal and consideration of
the aforementioned affidavit of Mr Abarder).
[21]
The
following order is made:
1.
The
withdrawal by the first respondent of his demand in terms of
s 165(2)
of the
Companies Act 71 of 2008
that was served on the applicant on
22 August 2016 is noted.
2.
The
first respondent shall be liable for the applicant’s costs of
suit in the application to have the demand set aside in
terms of
s 165(3)
of the
Companies Act incurred
up to 30 January 2017
(excluding the costs attendant on drafting the affidavit of Kaanit
Abarder,
jurat
30 January 2017), such costs to include the fees of two counsel where
such were engaged.
3.
The
applicant shall be liable for one half of the first respondent’s
costs of suit incurred from 30 January 2017 (including
the costs
of perusing and considering the aforementioned affidavit of Kaanit
Abarder) up to and including the hearing on 27 February
2017, such
costs to include the fees of two counsel where such were engaged.
A.G. BINNS-WARD
Judge
of the High Court
APPEARANCES
Applicant’s counsel:

P.B. Hodes SC
Applicant’s attorneys:

Edward Nathan Sonnenbergs
Cape Town
First
Respondent’s counsel:
H.N. De Wet
First Respondent’s attorneys:
Marcusse Law Firm
Observatory
Cape Town
(Applicant’s heads of argument were drafted by P.B. Hodes SC,
assisted by D. Goldberg.
First respondent’s heads of argument were drafted by H.N. De
Wet, assisted by D.M. Lubbe.)
[1]
Section 7(b)(iii).
[2]
Section 7(i).
[3]
Section 7(j).
[4]
Rule 41(1)(a)
provides:
‘
A
person instituting any proceedings may at any time before the matter
has been set down and thereafter by consent of the parties
or leave
of the court withdraw such proceedings, in any of which events he
shall deliver a notice of withdrawal and may embody
in such notice a
consent to pay costs; and the taxing master shall tax such costs on
the request of the other party
’.
[5]
The second to fourth respondents,
who did not play an active role in the current matter, are directors
of the applicant company.
The demand by the first respondent
called upon the applicant to institute proceedings in terms of
s 162
of the
Companies Act, 2008
, to have them declared delinquent.
It has already been held (in
Woollam
(1)
) that a
shareholder who seeks to have a director declared delinquent would
ordinarily not have standing to seek to proceed for
such relief
derivatively because he is able to do so directly.