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The art of law - can a defendant require a resident plaintiff company to provide security for the costs of the litigation?

The puzzling silence of the Companies Act 2008 on whether a resident plaintiff company can be required to provide security for the defendant's legal costs

It is notorious that the legal costs incurred in litigation, particularly in the High Court, are extremely high. At the conclusion of the litigation, a court will usually make an order that the unsuccessful party must pay the legal costs of the successful party. The prospect of such a costs order is a significant consolation for a defendant who finds himself, against his wishes, embroiled in litigation.

Since a company is a legal persona in its own right, the company itself is liable for any debts incurred by it (including a debt arising out of such a costs order) and no liability for those debts attaches to the shareholders or directors.

Consequently, where a company is the plaintiff in legal proceedings, the defendant may fear, from the outset, that if judgment and a costs order is ultimately given in his favour, the company will not have the financial resources to pay those costs.

The question whether as a matter of law, a defendant has an enforceable right to require a plaintiff company to provide him, at the outset of the litigation, with security for his prospective legal costs, is of great importance in our legal system.

The provisions of the Companies Act 1973 in this regard

It is a general principle of our common law that where a plaintiff (whether a natural person or a company) in legal proceedings is a resident of the Republic of South Africa, that plaintiff cannot be required to provide the defendant with security, in advance, for the latter's legal costs in the litigation.

Section 13 of the now-repealed Companies Act of 1973 created an exception to that rule.

That section gave the court a discretion to order a plaintiff company to furnish security for the defendant's costs if there was reason to believe, on the basis of facts established to the satisfaction of the court, that the plaintiff company would be unable to pay the defendant's costs if ordered to do so.

If the court ordered a plaintiff company to provide such security to a stipulated amount in a prescribed form, the legal proceedings would be stayed (that is to say, all further steps in the litigation would be suspended) until the plaintiff had complied with the order.

This provision was frequently invoked in legal proceedings in our courts. The Constitutional Court said (see Giddey NO v JC Barnard and Partners [2006] ZACC 13; 2007 (5) SA 525 (CC) at para [7]) that -

"the main purpose of section 13 is to ensure that companies, who are unlikely to be able to pay costs and therefore not effectively at risk of an adverse costs order if unsuccessful, do not institute litigation vexatiously or in circumstances where they have no prospects of success thus causing their opponents unnecessary and irrecoverable legal expense."

The constitutionality of section 13 of the Companies Act 1973

After the Constitution came into force, there was some doubt as to whether section 13 of the Companies Act 1973 was constitutional in that it (arguably) limited a plaintiff company's fundamental right of access to the courts. Such a limitation was arguably in breach of section 34 of the Bill of Rights which states that -

"Everyone has the right to have any dispute that can be resolved by the application of law decided in a fair public hearing before a court . . ."

There was, however, authority for the view that the discretion vested in the court to decline to order a plaintiff company to furnish security for the defendant's costs saved this provision from unconstitutionality.

The inference to be drawn from the omission of a similar provision in the new Companies Act 2008

The new Companies Act of 2008 contains no provision similar to section 13 of the old Companies Act of 1973, entitling a defendant, in certain circumstances, to require a plaintiff company to provide security for his legal costs.

The inference to be drawn from this omission in the new Companies Act has been widely debated, for there are several conflicting possibilities.

The various possibilities raised by recent High Court judgments in this regard

Various High Court judgments in the past few years have raised the question as to which of the following possibilities correctly reflects the law now that the new Companies Act 2008 is silent on the question of the provision of security for costs by a plaintiff company -

  • a plaintiff company need never provide security for the defendant's costs, regardless of the circumstances;
  • the common law principles in regard to the circumstances in which such security must be furnished remain applicable;
  • security should be required only in exceptional circumstances, such as where the litigation is vexatious or reckless;
  • the issue is governed by the inherent power of the High Court (affirmed in section 173 of the Constitution) to regulate its own process.

In Hennie Lambrechts Architects v Bombenero Investments (Pty) Ltd [2014] ZAFSHC 15 - the most recent High Court judgment in this regard - the court traversed the series of sometimes conflicting prior judgments.

Having done so, the court took the view (see para [34] of the judgment) that it is now necessary for the courts to develop the common law so as to ensure that no general rule takes root that a plaintiff company, regardless of facts that seem to call for the provision of security, cannot be required to provide security for the defendant's costs.

The court expressed the view that such a general rule would be inconsistent with the spirit of the Constitution which is designed to ensure the equality of all before the law. The court said that such a general rule -

"would mean that a party, who would be gravely prejudiced by another's refusal to furnish security because of the unfortunate absence of the equivalent of s 13, would be without remedy and, thus, left to suffer considerable financial consequences of such an absence which eventuality would, in turn, offend against the principles of equality and of 'just and equitable decisions'".

The court said further that the proper approach in this regard was that, where the plaintiff or applicant was a resident company -

" the respondent should put all the evidence [sic] which will convince the court that it has sufficient funds to pay costs in the event costs are granted against it. Courts should insist on more details and not [rely on the] say so of the [resident] company."

The court also expressed the view that the new Companies Act 2008 should have retained the provisions of section 13 of the Companies Act 1973, perhaps hinting that an amendment ought to reintroduce such a provision.

When will there be certainty on this issue?

Whether the approach of the High Court decision in Hennie Lambrechts Architects, discussed above, will ultimately prevail remains to be seen.

There will be no certainty in this regard until the Supreme Court of Appeal speaks on the issue and resolves the conflicting judgments, or until the Companies Act 2008 is amended in a way that puts the matter beyond doubt.

Until then, a defendant in legal proceedings instituted by a company will not know whether or not he will succeed in an application for an order that the company give security for his legal costs. The result is that his legal costs will be swelled still further if he makes an unsuccessful application to court in this regard and, to compound his woes, is ordered to pay the plaintiff's costs in respect of that application.

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