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[2011] ZAGPJHC 217
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Ngwenda Gold (Pty) Ltd and Another v Precious Prospect Trading 80 (Pty) Ltd and Another (2011/31664) [2011] ZAGPJHC 217 (14 December 2011)
REPORTABLE
IN THE SOUTH GAUTENG HIGH COURT, JOHANNESBURG
CASE NO: 2011/31664
Date:14/12/2011
In the
matter between:
NGWENDA
GOLD (PTY)
LTD
........................................................
First
Applicant
NGWENDA
GOLD CORPORATION
(PTY) LTD (formerly
ALL-TECH
LOGISTICS (PTY) LTD)
...........................................
Second
Applicant
and
PRECIOUS
PROSPECT TRADING 80
(PTY) LTD
....................
First
Respondent
ATOMAER
HOLDINGS (MAURITIUS) (PTY) LTD
................
Second
Respondent
JUDGEMENT
LJ VAN DER MERWE, AJ
The respondents seek an order directing the applicants to provide
security for costs in the amount of R250,000. The application
is
opposed by the applicants. Whilst the respondents in the main
application are the applicants in the application for security,
I
shall, for ease of reference, nevertheless refer to them as "the
respondents" in this judgement.
The litigation arose out of a memorandum of understanding entered
into between the parties, in terms whereof the respondents
undertook
to
inter alia
provide the applicants with investment capital
as well as development and operational assistance in order enable
the applicants
to exploit the valuable prospecting rights, granted
to the first applicant in terms of the
Mineral and Petroleum
Resources Development Act, 28 of 2002
, in respect of certain farms
situated in the Free State Province. The second applicant is the
holding company of the first applicant.
Although the full value of
the prospecting rights are in dispute, the parties are in agreement
that the value of such prospecting
rights runs into hundreds of
millions of Rands.
The memorandum of understanding was implemented between the parties
and the respondents advanced in excess of R2 million to the
applicants. In exchange, certain subscription shares amounting to
50% of the shareholding in the first applicant were transferred
to
the first respondent and three representatives of the respondents
were appointed as directors to the first applicant's board
of
directors. The applicants contend that the respondents breached
their obligation to advance a total of R20 million in loans
and that
the conditions precedent to the implementation of the memorandum of
understanding had not been fulfilled. Consequently,
the applicants
gave notice to the respondents of the failure of the memorandum of
understanding. It is further alleged that the
respondents are,
notwithstanding the termination of the memorandum of understanding,
utilising confidential information concerning
an intended
transaction with Harmony Gold Mine (Pty) Ltd in respect of adjacent
properties and that they are frustrating a potential
new investment
transaction with a new investor.
As a result, the applicant has approached the court for an order
declaring that the memorandum of understanding has failed
retrospectively or has been cancelled, declaring that the
directorship of the respondents' three directors on the first
applicant's
board of directors has been terminated, that the hundred
share certificates issued to the first respondent be returned and
other
related relief. The respondents filed a preliminary answering
affidavit which also served as a founding affidavit to a counter
application. The respondents did not dispute that they failed to
comply with the terms and conditions of the memorandum of
understanding and that the memorandum of understanding had failed
retrospectively. They tendered an undertaking not to continue
to use
the applicants’ confidential information.
In the counter application, the respondents sought an order
inter
alia
declaring that a further agreement concluded between the
parties on 8 June 2011 and reflected in an unsigned e-mail attached
to the answering affidavit, was validly concluded. The e-mail
recorded that an agreement of settlement was entered into between
the parties in terms whereof the respondents undertook to return the
share certificates, to deliver the resignation in writing
of the
respondents’ directors on the board of the first applicant and
to return the corporate records and confidential
information to the
applicants, against the repayment of all loans advanced to the
applicant in the amount of R2,394,559. The
respondents alleged that
they were exercising a right of retention in respect of the share
certificates, the company books and
records of the first applicant
and the first applicant's confidential information as a means of
securing payment of the loans
advanced until such time as the debt
has been satisfied.
It was contended on behalf of the applicants, with reference to
Commissioner South African Revenue Service v East Coast shipping
(Pty) Ltd
2000 (4) SA 533
(C) 540D-F, that the merits of the
dispute should be disregarded in light of the factual disputes that
existed between the parties.
Whilst it is evident from the
affidavits filed that the claims of the applicants are disputed by
the respondent, the nature of
the applicants’ claim remains a
relevant consideration which should be considered by the court in
appropriate instances.
(See
Giddey NO v J C Barnard and Partners
[2006] ZACC 13
;
2007 (5) SA 525
(CC) 538, par 30.) Thus, the relevant facts
establish that the applicant's claim can by no means be regarded as
frivolous and
that the litigation cannot be regarded as reckless or
vexatious. It is a relevant consideration against the granting of an
order
for security for costs that the evidence presented in the
affidavits on behalf of both parties indicates that the litigation
concerns issues of material significance to the applicants.
In seeking an order directing the applicants to provide security for
the cost of the proceedings, the respondents alleged that
the
respondents have no immovable property registered in their names and
that the respondents have no trading income, cash flow
or liquid
assets. Whilst it is conceded by the respondents that the
prospecting rights of the applicants are worth several hundreds
of
millions of Rands, they contend that such assets are not readily
realisable. In particular, the respondent refers to the provisions
of
section 11
of the
Mineral and Petroleum Resources Development
Act
, 28 of 2002, which provides that a prospecting right or mining
right or an interest in any such right, or a controlling interest
in
a company or close corporation may not be ceded, transferred,
alienated or otherwise disposed of without the written consent
of
the Minister of Minerals and Energy, except in the case of change of
controlling interest in listed companies.
The contentions of the respondents disregard the fact that the
Minister is obliged to grant the consent referred to in
section
11(1)
if the preconditions stipulated in
section 11(2)
are complied
with. The Minister clearly does not have an unfettered discretion.
Furthermore, the contentions of the respondents
do not take the full
implications into account of the fact that the new
Companies Act, 71
of 2008
, does not contain a provision similar to
section 13
of the
previous
Companies Act. Section
13 of the previous
Companies Act
provided
as follows:
"Where a company or other body
corporate is plaintiff or applicant 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 respondents if successful in his
defence, require
sufficient security to be given for those costs and
may stay or proceedings until the security is given."
In
Haitas v Port Wild Props 12 (Pty) Ltd
2011 (5) SA 562
(GSJ), it was held that by virtue of the court’s inherent
power to regulate its own process and to develop the common law,
the
court has the power to require of an
incola
company, which
was under final liquidation, to provide security for the cost of the
litigation. It was emphasised in the judgement
that such power
should be exercised where it was demanded by the interests of
justice and by the peculiar facts of the matter.
This judgement is
not authority for the proposition that the approach reflected in
section 13
of the previous
Companies Act should
still find
application, notwithstanding the fact that the legislature has seen
fit not to retain the equivalent of
section 13
of the previous
Companies Act in
the new
Companies Act. The
judgement is also not
authority for the proposition that an insolvent company or even a
company in liquidation is in general
obliged to provide security for
costs. Contrary to the contentions advanced on behalf of the
respondents, the judgement is even
less authority for the
proposition that a company whose assets exceed its liabilities by a
large margin, but whose assets are
not readily realisable, is
obliged to provide security for costs.
In the absence of a provision similar to
section 13
of the previous
Companies Act, an
applicant in an application for security for costs
must found its entitlement to security for costs on the principles
of the
common law. High Court
rule 47
only deals with procedural
aspects of applications for security for costs and does not state
the instances in which security
for costs can be obtained. Erasmus
Superior Court Practice
(service 35, 2010) at B1-342 states
as follows in this regard, with reference to
Ramsamy v Maarman NO
2002 (6) SA 159
(C) at 172E-173E:
"As a general rule, the
mere inability of a plaintiff or applicant as the case may be, who
is an incola, to satisfy a potential
costs order against him or her
is insufficient in itself to justify an order that he or she furnish
security for his or her opponent's
costs. Something more is
required. The court must be satisfied that the main application is
vexatious or reckless or amounted
to an abuse of the process of the
court."
Meskin, in
Henochsberg on the
Companies Act
(issue
30),
states as follows at page 28(1):
"At common law an
impecunious company or even an insolvent company or other body
corporate which is an incola of South Africa
cannot be required to
give security for the costs of proceedings instituted by it.
However,
section 13
creates an exception to this rule by according
to the court a discretion to order a plaintiff company to furnish
security for
its opponent's costs if there is reason to believe that
it will be unable to pay such costs if ordered to do so. The policy
underlying
the section, as was the case in relation to section 216
of the 1926 Act, is that the immunity accorded to an impecunious
incola
under the common law should not exist.”
It would be inappropriate to assume that the absence of a provision
similar to section 13 of the previous
Companies Act was
as a result
of an oversight on the part of the legislature. The fact that the
new
Companies Act was
promulgated after the inception of the
Constitution of the Republic of South Africa, 1996, suggests that
the legislature, in
not retaining an equivalent provision to the
previous section 13, was mindful of the provisions of section 34 of
the Constitution
of the Republic of South Africa, 1996, in terms
whereof access to the courts is enshrined.
Two conflicting considerations of public policy arise in instances
where security for costs is sought from a plaintiff or an
applicant.
On the one hand, it was recognised in the case law that the object
of section 13 of the previous
Companies Act was
to protect the
public against the cost of litigation by bankrupt companies. (See
Lappeman Diamond Cutting Works (Pty) Ltd v MIB Group (Pty) Ltd
1997 (4) SA 908
(W) at 919F-H.) On the other hand, it has often also
been recognised that
section 13
of the old
Companies Act may
have
the undesirable consequence that an impecunious or insolvent company
is precluded from recovering a valid claim. Thus,
in
Shepstone
& Wylie v Geyser NO
1998 (3) SA 1036
(SCA) at 1046G-I, the
court stated
"that the fact that an order of security will
put an end to the litigation does not by itself provide sufficient
reason for
refusing it. … If there is no evidence either way,
the mere possibility that the order will effectively terminate the
litigation can plainly not affect the court's decision … it
remains no more than a factor to be taken into account; by itself
it
does not provide sufficient reason for refusing an order."
The absence of an equivalent to
section 13
of the previous
Companies
Act indicates
that the legislature, in promulgating the new
Companies Act of 2008
, deviated from the approach as reflected
inter
alia
in the
Shepstone and Wylie
-judgement. The absence of
an equivalent to
section 13
suggests that the legislature placed
greater emphasis on the entitlement of even impecunious or insolvent
corporate entities
to recover what is due to them in the courts
without the obstacle of having to provide security in advance for
the costs of the
litigation. (See eg
Crest Enterprises (Pty) Ltd
v Barnett and Schlosberg NNO
1986 (4) SA 19
(C) at 20B-D, where
the court stated that
“no hurdle should be permitted to
stand in the way of any person’s access to a court in seeking
relief at its hands
…”.) A valid consideration in
support of the approach of the legislature as reflected in the new
Companies Act, would
be the fact that litigation can seldomly, if at
all, be instituted and proceeded with on a risk free basis. At the
very least,
those funding the litigation on behalf of the insolvent
or impecunious corporate entity would normally be exposed to the
deterrent
that the funding provided would be irrecoverable in the
event of unsuccessful litigation.
In the
Haitas
-judgement (above), the court recognised in
paragraph 4 of the judgement that, in the absence of a provision
similar to the previous
section 13
of the previous
Companies Act,
the
principles of the common law prevail, in terms whereof
"an
impecunious or even an insolvent company or other corporate entity
which is an incola of South Africa cannot be required
to give
security for costs for proceedings instituted by it. That being the
case the mere fact that an incola plaintiff is insolvent,
as is the
case in the present matter, does not justify that such a plaintiff
should be ordered to furnish security for costs."
It is also evident from paragraph 14 of the
Haitas
-judgement
that the court based its order on the approach that the courts
should guard against vexatious, reckless and unmeritorious
litigation. The feature in the
Haitas
-judgement, which
distinguishes it from a situation where the application is based
merely on the fact that the applicant or plaintiff
is an impecunious
or insolvent company, can be found in paragraph 10 of the judgement,
where reference is made to the fact that
the plaintiff has made no
attempt for a period of 3 years to enrol the matter. Even after the
plaintiff was finally liquidated,
the liquidators have taken no
steps to bring the matter to finality. The
Haitas
-judgement
accordingly did not simply reintroduce the approach to security for
costs as reflected in
section 13
of the previous
Companies Act, but
specifically took into account special circumstances which indicated
that the plaintiff was indeed proceeding with vexatious,
reckless or
unmeritorious litigation.
The
Haitas
-judgement indicates that other considerations
which are recognised as special circumstances, justifying the
granting of an order
for security for costs, may very well be
developed by the courts in those instances where insolvent corporate
entities institute
litigation. Different considerations apply where
insolvent corporate entities institute the proceedings than where
proceedings
are instituted by an insolvent or impecunious
individual. As indicated in
Lappeman Diamond Cutting Works (Pty)
Ltd v MIB Group (Pty) Ltd
1997 (4) SA 908
(W) at 920G-I, in the
event of an insolvent company litigating,
"those who stand
to benefit from the litigation in the event of an award being made
in favour of the plaintiff, are financing
the plaintiff's litigation
whilst shielding behind the plaintiff's corporate identity insofar
as the defendant's costs are concerned.
” In such event, in
the words of Tsoka J in paragraph 13 of the
Haitas
-judgement,
insolvent plaintiffs would be encouraged
"to unnecessarily
embark on litigation with a clear knowledge that they have nothing
to lose.”
By contrast, an insolvent individual, who stands to benefit directly
from litigation and who institutes litigation in his or
her own
name, would at least face the consequences of a potential
sequestration if an adverse cost order is not satisfied in
the event
of having litigated unsuccessfully. The
Haitas
-judgement has
already established that one of the considerations which may
constitute special circumstances justifying the granting
of an order
for security for costs against an insolvent or impecunious corporate
entity is the fact that the plaintiff or applicant
had for an
extended period of several years lost interest in the litigation and
failed to proceed expeditiously with the finalisation
thereof.
Whether these distinguishing features between an individual
insolvent or impecunious plaintiff or applicant and between an
insolvent or impecunious corporate entity are of such material
significance that they may justify a difference in approach in
respect of insolvent individuals than in respect of insolvent
corporate entities regarding the obligation to provide security
for
costs under the common law, will be a matter for future legal
development. Whilst future legal development may entail that
special
circumstances or considerations are recognised in the case of
insolvent or impecunious corporate entities which justify
the
granting of an order for security for costs, it is clear that the
common law requires
"something more"
than mere
insolvency or impecuniosity in the event of
incola
plaintiffs
or applicants, irrespective of whether the plaintiff or applicant is
a private individual or a corporate entity. Since
the respondents'
case in the present instance is focused exclusively on the
applicants' alleged inability to pay a potential
costs order against
them and on the allegation that the very substantial assets of the
applicants are not readily realisable,
it follows that there are no
special circumstances present in the instant matter and that the
established common law approach
to an order for security for costs
should be applied. The inevitable result is that the order for
security for costs sought
against the applicants cannot be granted.
Future legal development may very well recognise the fact that the
plaintiff or applicant
"has nothing to lose"
in the
litigation as a relevant factor which contributes to a finding that
special circumstances are present which justify the
granting of an
order for security for costs. In the present instance, it is
unnecessary to determine this issue, as the applicants
clearly stand
to lose an asset worth hundreds of millions of Rands, in the event
of the applicants being liquidated for their
failure to make payment
of a costs order against them.
Even if the approach reflected in
section 13
of the previous
Companies Act were
to be applied in the current matter, the
respondents may very well not have acquitted themselves of the onus
to establish that
there is reason to believe that the applicants
will be unable to pay the costs of the respondents, if successful in
their defence.
The contentions of the respondents are firmly based
on the allegation that the assets of the applicants, whilst
commercially
valuable, are not readily realisable. Whilst this may
be a relevant consideration, it will not necessarily be a decisive
consideration
in an application for security for costs under an
approach which is similar to that reflected in
section 13
of the
previous Companies Act. It is, on the probabilities, improbable that
a litigant will run the risk of being liquidated
(and as a result
thereof loose its valuable prospecting rights worth hundreds of
millions of Rands) as a result of its inability
to pay a costs order
of R250,000, which is the amount for which security is sought by the
respondents. It is, likewise, improbable
that the applicants, whilst
being the owners of assets worth hundreds of millions of Rands, will
not be able to raise finance
for an amount of R250,000 should it
become necessary to do so, in order to avoid being liquidated.
I make the following order:
The application for security for costs is dismissed with costs.
___________________________
LJ VAN DER MERWE, AJ
ACTING JUDGE OF THE HIGH COURT
14 December 2011.