Can an Incola Company be compelled to furnish security for costs?

The Companies Act 71 of 2008 leaves a huge question mark in our statutory provisions as to whether an incola company that instituted legal proceedings can be compelled to furnish costs. In the recent judgment of Boost Sport Africa (Pty) ltd vs The South African Breweries (Pty) Ltd [2015] 3 or SA 255 (SCA), the SCA gave much needed clarity as to when a court can require an incola company to furnish security for costs. To broaden our understanding of this judgment we will look at our common law and previous legislation leading up to the enactment of the Companies Act 71 of 2008.

Common law

In common law a local or foreign peregrinus can be requested to furnish security for costs if they institute legal proceedings in order to protect an incola from not being able to recover costs. The court has shown lea way to peregrinus that own immovable property within the jurisdiction of the court they don’t have to provide security for costs. The courts treat every case differently and with caution, therefore the mere fact that a peregrinus does not possess immovable property in the republic does not mean that the peregrinus will be requested to furnish security for costs.

The common law treats an incola differently to a peregrinus, and as general rule does not require an incola to furnish security for costs, an incola may in the exercise of the court’s discretion, be ordered to provide security for costs in circumstances where the main action in question is vexatious, reckless or otherwise amounts to an abuse of the court’s process.

Legislation

The Companies Act 25 of 1892 was passed in the Cape and Section 128 of that Act provided:

Where a limited company is plaintiff in any action, suit, or other legal proceeding, any Judge having jurisdiction in the matter may, if it appears by any credible testimony that there is reason to believe that if the defendant be successful in his defence the assets of the company will be insufficient to pay his costs, require sufficient security to be given for such costs, and may stay all proceedings until security is given.

After the Union and before the issue could be settled by our courts, the first South African Companies Act was enacted in 1926. It provided in s 216:

Where a limited company is plaintiff in any legal proceedings, the Court having jurisdiction in the matter may at any stage, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence require sufficient security to be given for those costs and may stay all proceedings till the security is given.

Section 13 of the Companies Act 61 of 1973 read as follows:

Where a company or other body corporate is plaintiff in any legal proceedings, the Court may at any stage, if it appears by credible testimony that there is reason to believe that the company or body corporate or if it is being wound up, the liquidator thereof, will be unable to pay the costs of the defendant or respondent if successful in his defence, require sufficient security to be given for those costs and may stay all proceedings till the security is give.[1]

[1] Companies Act 61 of 1973, section 13

The 1973 Companies Act has been repealed and replaced by the Companies Act 71 of 2008. Our most recent Companies Act, which ‘is a complete reinvention of our corporate law does not contain an equivalent provision to s 13. There has been several decisions in which our high courts have recently had occasion to consider whether, absent a counterpart to section 13 in our new Act, an incola company can be ordered to furnish security for costs.

Accordingly, in terms of the common law mere inability by an incola to satisfy a potential costs order is insufficient to justify an order for security, something more is required and has been variously described in a number of decisions. The courts ordered that; it was said that the basis of granting an order for security was that the action was ‘reckless and vexatious’. The courts further said that a Court of law had inherent jurisdiction to stop or prevent a vexatious action as being an abuse of the process of the Court; one of the ways of doing so is by ordering the vexatious litigant to give security for the costs of the other side.

In Boost Sports Africa (Pty) Ltd v The South Africa Breweries (Pty) Ltd (20156/2014) [2015] ZASCA, the SCA was called upon to decide if an incola could be compelled to furnish security for costs in the absence of section 13 of the Old Act.

An action was instituted on 21 October 2011 the appellant, Boost Sports Africa (Pty) Limited (the plaintiff), in the High Court of South Africa, Gauteng Division, Pretoria against the respondent, the South Africa Breweries (Pty) Limited (the defendant).

The plaintiff’s cause of action was based on an alleged breach of contract by the defendant. It alleges that it disclosed a particular advertising concept referred to as the ‘fans challenge concept’ to the defendant under an agreed confidentiality regime between them and that the defendant later used the concept to conduct an event called ‘be the coach’ in breach of the said agreement.

South Africa Breweries defense

  • The defendant denied that there was any confidentiality agreement between the parties in relation to the concept
  • And averred that the information pertaining to the concept was already in the public domain when it was first disclosed to the defendant.

After the plaintiff had made available to the defendant its discovered documents, the latter became concerned that the plaintiff would not be able to meet an adverse costs order should it fail in the contemplated action. When the plaintiff refused to furnish evidence of its ability to pay the defendant’s costs in the event of its claim being dismissed, the defendant launched an application against the plaintiff on 1 August 2013 for security for its costs.

In an effort to avoid the said application, the defendant wrote to the plaintiff asking it to disclose its financial statements to the defendant and to show that it has sufficient income or assets to cover any adverse costs order against it. The plaintiff refused to provide evidence of its ability to pay any such order.

The response to those allegations on behalf of the plaintiff was that the plaintiff has four shareholders who are funding the plaintiff’s costs. However, none of its shareholders have sufficient assets to fund the plaintiff’s costs and to put up the quantum for security for costs demanded by the defendant.

The plaintiff claims that the demand by the defendant to provide security for costs will, effectively, destroy the plaintiff’s ability to prosecute its claim.

The defendant’s application succeeded before Hassim AJ and was the plaintiff ordered to furnish security for the defendant’s legal costs in the action.

Leave to appeal was granted and the matter was heard in the supreme court of appeal and the following was held:

In terms of the common law mere inability by an incola to satisfy a potential costs order is insufficient to justify an order for security, something more is required and has been variously described in a number of decisions. The courts ordered that; it was said that the basis of granting an order for security was that the action was ‘reckless and vexatious. The courts further said that a Court of law had inherent jurisdiction to stop or prevent a vexatious action as being an abuse of the process of the Court; one of the ways of doing so is by ordering the vexatious litigant to give security for the costs of the other side.

There is no legislation that will differentiate between an incola company and an incola natural person. It must follow that the former can at common law be compelled to furnish security for costs. Accordingly, even though there may be poor prospects of recovering costs, a court, in its discretion should only order the furnishing of security for such costs by an incola company if it is satisfied that the contemplated main is vexatious or reckless or otherwise amounts to an abuse.

The plaintiff has failed to show that it cannot raise the funds for security for costs and further that such an order will be detrimental to its case as such funds are not available. The shareholders funding these proceedings claim not to have the resources to furnish any security (irrespective of the amount) for costs. Even though the shareholders are funding the litigation, they are doing so in a manner that allows them to hide behind the corporate veil of the plaintiff. No evidence has been adduced by them that there has been an attempt to raise funds to put up security for the respondent’s costs, but that they have been unable to do so.

The appeal was in this regard dismissed with costs.

By
Kony Tshivase
konanani@dyason.co.za