What are the legal implications of the enactment and implementation of the Companies Act 71 of 2008 in relation to a security for costs order against a close corporation?
In its recent judgment in Fusion Properties 233 cc v Stellenbosch Municipality (932/2019)  ZASCA 10 (29 January 2021), the Supreme Court of Appeal (SCA) resolved the legal uncertainty surrounding this issue. To give context to the significance of this judgment, it is important to consider the common law principles applicable to security for costs.
In the South African law of civil procedure, the process allowed by the uniform rules of court of requesting a plaintiff to furnish security for costs, was initially limited to a foreign peregrinus (non-resident) plaintiff who did not own any immovable property in South Africa. The aim of this process was to protect
incola (local) defendants from the increased price tag, uncertainty and inconvenience linked with recovering costs in a foreign country. In common law, an incola of the Republic cannot be ordered to provide security for costs. However, over the years, the scope of this has been extended and some provisions regarding security for costs have been enacted in legislation.
One such provision was s13 of the Companies Act 61 of 1973 (Old Companies Act), which stated that where an incola company or body corporate is sued as a plaintiff or applicant, a court could, in its discretion, order such a company or body corporate to furnish security for the defendant’s costs in certain circumstances.
Such circumstances, as seen in notable decisions referred to below, include instances whereby the main action in question is vexatious, reckless or otherwise amounts to an abuse of the court’s process.
This section was later repealed by the Companies Act 71 of 2008. This omission, however, opened a floodgate for litigation, highlighting conflicting court decisions.
In the case of Boost Sports Africa (Pty) Ltd v South African Breweries (Pty) Ltd, (Boost Sports), the SCA brought much-needed clarity as to when a court can require an incola to provide security. It places the onus on the party seeking security for costs to go beyond merely showing that an incola is unable to meet an adverse costs order, and held that the applicant must satisfy the court that the main action is vexatious, reckless or otherwise amounts to an abuse.
Close Corporations Act 69 of 1984
The Close Corporations Act 69 of 1984 (Close Corporations Act) provides for security for costs in Section 8. This provision prescribes that when a close corporation institutes any legal proceedings and it appears to the court that it will be unable to pay the costs of the defendant/respondent if the latter is successful in its defence, security for costs may then be awarded. It is important to highlight that although section 8 of the Close Corporations Act and Section 13 of the old Companies Act are very similar, s13 of the old Companies Act was repealed, and s8 of the Close Corporations Act was not. This indicates an asymmetry in the treatment of the various legal entities.
In the Fusion Properties 233 CC v Stellenbosch Municipality case, Fusion Properties 233 CC (Fusion) sought to appeal against an order of the Western Cape Division of the High Court, in terms of which it was directed to furnish security for costs to the sum of R2 626 431.06. The High Court further ordered to stay Fusion’s pending action until Fusion complied with the order for security.
Fusion contested its obligation to give security for costs in the amount required or any portion thereof. On appeal, the SCA held that from the outset, none of Fusions contentions were sustainable. In deciding the appeal, the SCA considered the following relevant legal principles:
- While it may be desirable that a party entitled to demand security for costs must do so as soon as is reasonably practicable, a delay in doing do so is not necessarily fatal. Whether a delay should constitute a bar to the demand entails a fact-based enquiry in the light of the facts of a given case. Thus, a court faced with an application to compel will, in exercising its discretion can undoubtedly give regard to this factor and weigh it up together with other relevant factors. However, a delay in itself will rarely be an overriding and decisive consideration.
- Insofar as s34 of the Constitution is concerned, it must not be lost from sight that in this case, the constitutional validity of s8 was not challenged – be it frontally or otherwise as required by the jurisprudence of our courts. Nevertheless, cognisant of the fact that s8 implicates the constitutional right of access to court, it must be interpreted in the manner decreed by the limitation clause of the Constitution.
- Fusion’s contention that s8 should, in effect, be treated as pro non scriptor (not intended to have any validity) simply because its former counterpart in s13 of the Companies Act was repealed by the 2008 Companies Act of 2008, offends two fundamental principles of our law. The first is that it pays no regard to the enduring principle of statutory interpretation that the legislature is presumed to be aware of the existing law when it passes new legislation. Thus, if the legislature was minded to bring about parity amongst corporate plaintiffs, whether companies or close corporations, as contended by Fusion, undoubtedly the legislature would have also repealed s8. Yet, it elected not to do so.
- Lastly, the SCA held that Fusion failed to demonstrate that the order directing it to furnish security dealt a death blow to its action. In any event, that an order for security might or will put an end to the litigation is not in itself an overriding consideration or even a sufficient reason to refuse an application for security.
In making its judgment, the SCA concurred with the judgment in the court a quo insofar as the court exercised its discretion judicially. Consequently, it held that the prospects of success did not favour Fusion on the pleadings as they then stood, and the application for leave to appeal was accordingly dismissed with costs, including costs of two counsel.
This case is a useful account of the principles surrounding the provision of security for costs and will assist litigants that are sued by close corporations in obtaining an order for security. Likewise, those close corporations that are devoid of assets and are considering litigation, should be cautious of a request for security, as it may have to be fulfilled.
Written by Thuli Buthelezi, Candidate Attorney
Overseen by: Dean Joubert de Villiers, Partner