Cape Town - An independent third party should investigate the affairs at Lewis, Lewis Stores and Monarch Insurance to determine whether certain directors of Lewis should be declared delinquent in terms of the Companies Act.
This is what Dave Woollam, a director of Summit Financial Partners, asks the Western Cape High Court to do in his answering affidavit in an application brought by Lewis regarding the demand to have certain directors declared delinquent.
In his answering affidavit Woollam provides what he deems to be proof of mismanagement by certain directors of Lewis over the past few years. In Woollam's view, if these directors are not declared delinquent, Lewis will continue what he regards to be a course to becoming a failed company.
At the beginning of June this year the directors of Lewis Group received a letter of demand from Woollam to declare four of its directors, including the CEO, delinquent.
In the letter Woollam, who holds shares in Lewis, demanded that the furniture retailer commences with proceedings to declare CEO Johan Enslin, chief financial officer Les Davies, chair David Nurek and non-executive director Hilton Saven delinquent directors in accordance with the provisions of Section 165, as read with Section 162, of the Companies Act.
The demand related, among others to Lewis charging customers a cost of loss of employment insurance, which the company claimed was mistakenly sold to them.
In the letter Woollam claimed that over the last 18 months he has raised a number of issues relating to the lack of corporate governance, multiple breaches of the National Credit Act (NCA) and the issuance of consolidated annual financial statements that, in his view, do not conform to International Financial Reporting Standards at Lewis.
Damage to reputation
In Woollam's view, the actions had a damaging effect on the reputation, share price and profits of Lewis.
Lewis in turn, after taking advice from an independent sub-committee of the board, applied to the High Court to have the demands set aside in terms of Section 165 (3) of the Companies Act and on the grounds that they are "frivolous, vexatious and without merit".
"The company regards Woollam’s demand in terms of Section 165 as the latest in a lengthy list of actions by him calculated to damage the company’s reputation, operations and business," Lewis said in a statement at the time of filing the court application in June.
"As the company has fully articulated in its court papers, Woollam held a long standing short position on Lewis’ shares at the time of his campaign against Lewis."
Lewis stated that it believes that Woollam’s "ongoing campaign" against the company is a concerted attempt by him to drive down the price of Lewis’s shares to opportunistically benefit financially by taking short positions in Lewis’ shares.
Lewis has also filed a complaint in respect of what it regards to be Woollam’s "short position" with the Financial Services Board (FSB), an allegation denied by Woollam. He states in his answering affidavit that he has actually bought another 3 000 shares in Lewis in the belief that the share price should increase if the directors named in the case are dismissed.
In his answering affidavit Woollam points out that he is a chartered accountant with 25 years’ experience both in SA and in the UK in the financial services industry. He has worked for, among others, African Bank Investments in the past.
"I am certainly an industry insider and I am commonly acknowledged as one of the foremost experts in the consumer credit industry. I am regularly sought out for my advice and opinions by asset managers, analysts and investors in general," Woollam says in his affidavit.
"Since leaving Abil, I have been campaigning for reform in the SA unsecured lending industry, an industry which I spent many years developing. A lack of regulatory enforcement in this sector has allowed many participants to develop and get away with unethical and illegal practices in order to exploit consumers and boost short term profits."
Mystery shopping trips
In 2013 he conducted several mystery shopping trips which uncovered a number of "troubling issues", in his view.
A perusal of Lewis’ annual statements in 2015 prompted him to investigate its affairs further, concentrating mainly on its financial disclosure and NCA compliance.
He emphasises in his affidavit that "calling him names or attacking his integrity" only strengthens his resolve.
According to Woollam, thanks to his interactions with Lewis, the company implemented what he deems to be a number of positive steps. These include an acknowledgement that it had miss-sold loss of employment insurance to self-employed clients and pensioners. This resulted in Lewis repaying R67m in premiums and interest to these clients.
According to Woollam, Lewis also changed the manner in which it accounts for income received from extended maintenance contracts and changed the manner in which commissions, received from Monarch, are recognised in its financial statements as well as the manner in which income from credit insurance is recognised in its financial statements.
Woollam acknowledges in his affidavit that the retail furniture industry is under pressure as a result of slowing economic growth and lower demand for durable goods. Further regulatory steps would further depress margins. He admits it is a particularly difficult business environment for a company like Lewis which sells furniture mostly on credit in a market which is already over-extended.
In Woollam's view Lewis’ debtors book is under provisioned, for instance. He is also of the opinion that, in the current situation, the board and management should not be rewarded bonuses, which he regards as "exorbitant".
Woollam also claims in his affidavit that the importance of the contribution to income from financial services, including the selling of insurance and the charging of fees and interest, cannot be overestimated for Lewis. According to the 2016 results the split in revenue was gross profit from sale of goods (25%); interest and loan fee income (34%); credit life insurance (22%) and delivery fees, extended warranties and club fees (19%).
"It is the reliance on the income earned from the provision of financial services for its survival, rather than its traditional business of selling furniture, which causes the biggest concern over whether the current business model of Lewis is sustainable. Unfortunately, the importance of fees, interest and insurance may also serve as a powerful motivation to ignore the prescriptions of the NCA," claims Woollam.
"This is not a frivolous or vexatious matter. It enjoys obvious merits and it is necessary that an independent third party properly investigates the extent of the charging of these fees."
Summit CEO Clark Gardner told Fin24 on Monday that the proposed court date for the hearing of Lewis' application is mid-August.
Lewis' share price ended Monday down 2.20% at R44.11.