If the board of directors of a company refuses or is unable to institute legal proceedings to recover any loss suffered by the company from a third party, an aggrieved shareholder or director should not rely on Section 163 of the Companies Act to obtain permission from a court to institute or continue legal proceedings on behalf of the company. Instead, the procedure set out in Section 165 of the Companies Act ought to be followed in order to pursue a derivative action.
In one of the first High Court judgments dealing with the interplay between Section 163 and Section 165 of the Companies Act, 2008, the East London High Court held that Section 163 of the Companies Act is designed to deal with internal strife amongst shareholders and/or directors of a company and is not designed to deal with the company’s relationship with external parties. Section 163 of the Companies Act does not give a court the power to authorise shareholders to institute action in the name of the company. Section 165 of the Companies Act provides a statutory derivative action.
In Larrett v Coega Development Corporation and two others, a company which had two directors allegedly suffered a loss because the one director had perpetrated a fraud. The other director instructed attorneys to institute an action on behalf of the company to recover losses allegedly suffered. The point was taken that no directors’ meeting was held to authorise the institution of the action and the director who instructed the attorneys conceded that she did not have the authority on her own to institute such action on behalf of the company. She, however, contended that the court had the power in terms of Section 163 of the Companies Act to authorise her to continue with such legal action.