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[2007] ZASCA 97
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MTN Service Provider (Pty) Ltd v Afro Call (Pty) Ltd (270/ 2006) [2007] ZASCA 97; [2007] SCA 97 (RSA); [2008] 1 All SA 329 (SCA) ; 2007 (6) SA 620 (SCA) (12 September 2007)
THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
REPORTABLE
Case number : 370/2006
In the
matter between :
MTN
SERVICE PROVIDER (PTY) LTD
.......................
APPELLANT
and
AFRO CALL (PTY) LTD
.......................
RESPONDENT
CORAM : BRAND, COMBRINCK JJA
et
KGOMO AJA
HEARD : 29 AUGUST 2007
DELIVERED : 12 SEPTEMBER 2007
Summary
: Application for
security for costs under s 13 of Companies Act 61 of 1973 –
refused by court
a quo
in
exercise of its discretion – powers of appellate court to
interfere strictly circumscribed – finding on facts that
court
a quo
exercised
discretion for no substantial reason – comment on when leave to
appeal should be granted to SCA as opposed to full
court.
Neutral citation: This judgment may be referred to as
MTN
Service
Provider v Afro Call
[2007] SCA 97 (RSA)
JUDGMENT
_____________________________________________________
BRAND JA
/
BRAND JA
:
[1] The respondent company (‘Afro Call’)
instituted action against the appellant (‘MTN’) in the
Pretoria High
Court. After close of pleadings MTN brought an
application for security for costs under the provisions of s 13 of
the Companies Act
61 of 1973 read with Rule 47 of the Uniform Rules
of Court. The application was dismissed by Prinsloo J. The appeal
against that
order is with the leave of the court
a
quo
.
[2] For present purposes the facts can be restricted to
bare essentials. The parties are both involved in the cellular
telephone industry.
In terms of a written agreement between them, MTN
undertook to provide Afro Call with specified equipment and services.
In the main
proceedings Afro Call claimed payment of damages in an
amount exceeding R4m, allegedly arising from MTN’s repudiation
of its
contractual obligations, under the agreement. MTN filed both a
plea and a counter-claim. The plea essentially denied the fundamental
elements of Afro Call’s claim. The counter-claim was for two
amounts exceeding R15m in aggregate, based on the contention that
it
was Afro Call’s repudiation that caused the termination of
their contractual relationship.
[3] Pleadings closed towards the end of 2004. During the
discovery process that followed, Afro Call provided MTN with its
financial
statements for the period ending 30 April 2004. From these
statements two things appeared. Firstly, that, as at the end of that
period,
Afro Call’s liabilities exceeded its assets by an
amount of R605 257.33 and, secondly, that during the last two
months
of the period, Afro Call ran its business at a substantial
nett loss.
[4] In the light of this information, MTN became
concerned that Afro Call would not be able to make payment of any
costs order against
it in the main proceedings. In consequence, MTN’s
attorneys, in a letter to the attorneys acting for Afro Call,
requested security
for costs in an amount of R400 000. The
letter ended with the postscript that, if Afro Call should deny its
inability to meet
an adverse costs order, it was invited to furnish
MTN’s attorneys with its most recent audited financial
statements and its
management account for the succeeding period.
[5] This letter was met by a bald denial on behalf of
Afro Call that it was under any obligation to furnish security for
costs. The
invitation to provide MTN with more recent financial
information was simply ignored. This gave rise to the formal
application by
MTN for security under Uniform Rule 47(3) in the court
a quo,
which
eventually led to the present appeal. The pertinent facts thus far
referred to, were set out in MTN’s founding affidavit.
Though
the application was opposed, Afro Call filed no answering affidavit,
notwithstanding that at the first hearing, the matter
had been
specifically postponed for two months to enable Afro Call to do so.
[6] Uniform Rule 47 only governs the procedure for the
application. For its basis in substantive law, MTN relied on s 13 of
the Companies
Act. It provides as follows:
‘
Where
a company or other body corporate is the 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
respondent if successful in his defence, require sufficient
security
to be given for those costs and may stay all proceedings till the
security is given.’
[7] The section plainly requires a two stage enquiry. At
the initial stage, the question is whether the applicant for security
had
established, by credible testimony, that the body corporate, if
unsuccessful, will not be able to pay the applicant’s costs
in
the main proceedings. If the applicant fails to meet this threshold
requirement, that is the end of the matter. The application
is bound
to be refused. If, on the other hand, the court is satisfied that
such reason to believe exists, it must, at the second
stage, decide,
in the exercise of the discretion conferred on it by the section,
whether or not to compel security (see eg
Vumba
Intertrade CC v Geometric Intertrade CC
2001
(2) SA 1068
(W) para 8).
[8] The court
a quo
appears
to have found for MTN on the first leg, because it proceeded to the
second stage where it decided, in the exercise of its
discretion, not
to award security. On appeal it was conceded on behalf of Afro Call
that, in all the circumstances and, particularly,
in the absence of
an answering affidavit, the conclusion, that it would not be able to
meet a costs order in favour of MTN in the
main proceedings, cannot
be avoided. I believe that that concession was rightly and fairly
made.
[9] In accordance with the well-settled principles of
our law, courts of appeal are reluctant to interfere with the
exercise of a
discretion by the court of first instance. For reasons
that are equally well-settled, the appellate court will not
substitute its
own discretion for that of the trial court simply
because it would have preferred a different result. It will only do
so if the court
of first instance had failed, through misdirection or
otherwise, to exercise its discretion properly (see eg
Benson
v SA Mutual Life Assurance Society
1986 (1)
SA 776
(A) 781G-J;
S v Basson
2005
(12) BCLR 1192
(CC) para 110).
[10] But, in
Media Workers
Association of South Africa v Press Corporation of South Africa
(‘Perskor’)
[1992] ZASCA 149
;
1992 (4) SA 791
(A)
at 796H-I and 800E-G, E M Grosskopf JA arrived at the
conclusion that, in the present context, the term ‘discretion’
has more than one meaning. On a proper analysis of earlier cases, he
said, the restraint on the appellate court’s powers of
interference only applies to a discretion in the strict or narrow
sense and not to a ‘discretion’ in the broad sense,
also
described as a ‘discretion loosely so called’. A
discretion in the strict sense, Grosskopf JA explained, involves
a
choice between different but equally admissible alternatives, while a
‘discretion’ in the broad sense – or loosely
so
called – means no more than a mandate to have regard to a
number of disparate and incommensurable features in arriving at
a
conclusion. When used in the broad sense, Grosskopf JA found, there
is no reason why the appellate court should not exercise its
own
discretion by deciding the matter according to its own view of the
merits. It is only with regard to discretion in the strict
sense that
the appellate court’s powers of interference are to be
circumscribed (see also eg
Knox D’Arcy v
Jamieson
[1996] ZASCA 58
;
1996 (4) SA 348
(A) at 361G-I;
Bezuidenhout v Bezuidenhout
2005
(2) SA 187
(SCA) para 17).
[11] With reference to s 13 of the Companies Act,
this gave rise to the debate as to how the discretion conferred by
the section
should be classified on appeal. Should it be regarded as
a discretion in the strict sense or in the broad sense of the term?
In
Shepstone & Wylie v Geyser NO
1998
(3) SA 1037
(SCA) at 1044I-1045G, the question was specifically left
open. In this light, the preliminary contention raised in MTN’s
heads
of argument, was that the discretion exercised by the court
a
quo
was not a strict one and that a wider
scope thus existed for the matter to be reconsidered on its merits by
this court. Before the
hearing of the matter, however, there was the
decision of the Constitutional Court in
Giddey
NO v J C Barnard & Partners
[2006] ZACC 13
;
2007 (2) BCLR
125
(CC) where the debate was resolved in favour of a discretion in
the strict sense. Thus the court held (in para 22, of its judgment
by
O’Regan J):
‘
It
[ie the court of first instance] is best placed to make an assessment
on the relevant facts and correct legal principles, and it
would not
be appropriate for an appellate court to interfere with that decision
as long as it is judicially made, on the basis of
the correct facts
and legal principles. If the court takes into account irrelevant
considerations, or bases the exercise of its discretion
on wrong
legal principles, its judgment may be overturned on appeal. Beyond
that, however, the decision of the court of first instance
will be
unassailable.’
[12] Succinctly stated, the issue in the present appeal
is therefore whether MTN has made out a case for interference with
the exercise
of the court
a quo
’
s
discretion,
in accordance with the
Giddey
-principles.
This requires an evaluation of the reasons given by the court
a
quo
as to why it exercised its discretion
against granting a security order. The first consideration that seems
to have weighed with the
court
a quo,
was
that the financial statements of Afro Call, which were relied upon by
MTN, showed a gross profit of R950 014.51 for the period
ending
30 April 2004 and that, bearing in mind that this was a trading
company, there was insufficient evidence to justify a conclusion
that
Afro Call was indeed in a state of insolvency.
[13] This consideration appears to be more appropriate
to the first stage enquiry, aimed at establishing whether Afro Call
would be
unable to meet an adverse cost order, which the court
a
quo
had already decided, rightly, in my view,
in favour of MTN. In any event, the consideration amounts to a
fallacy in reasoning. The
reality was that, despite the gross profit,
Afro Call was shown by the same financial statements to have made a
substantial nett
loss, which resulted in its insolvency at the end of
the period. From that reality, the fact that it was a trading company
cannot
detract. The further reality was that, as long as Afro Call
remained insolvent, it would
prima facie
be
unable to meet any costs order in favour of MTN. Of course, it is
true that, as a trading company, its financial position could
in the
meantime have improved. But the point is that Afro Call has failed to
show this by producing more recent financial information,
despite
MTN’s express invitation to do so.
[14] Another consideration which appears to have
influenced the court
a quo,
was
that the litigation in the main proceedings arose from a contractual
relationship between two commercial entities. Thus, the court
reasoned, it is fair to assume that the action instituted by Afro
Call could not be described as vexatious. This is of relevance,
so
the court held, because ‘even where an insolvent launches an
action, a court will be slow to order security unless the action
is
vexatious’. As authority for the proposition, the court relied
on a statement by Erasmus,
Superior Court
Practice
at B1-342 where the learned author
specifically deals with applications for security against insolvent
natural persons, as opposed
to applications against companies under s
13 of the Companies Act.
[15] To my way of thinking this line of approach is
indicative of a fundamental misdirection, because it fails to
recognise the crucial
dissimilarity in the legal substructures on
which the two different applications are based. Against an insolvent
natural person,
who is an
incola
,
so it has been held, security will only be granted if his or her
action can be found to be reckless and vexatious (see
Ecker
v Dean
1938 AD 102
at 110). The reason for
this limitation, so it was explained in
Ecker
(at 111), is that the court’s power to order
security against an
incola
is
derived from its inherent jurisdiction to prevent abuse of its own
process in certain circumstances. And this jurisdiction, said
Solomon
JA in
Western Assurance Co v Caldwell’s
Trustee
1918 AD 262
at 274, ‘is a power
which . . . ought to be sparingly exercised and only in very
exceptional circumstances’. (See also
eg
Ramsamy
NO v Maarman NO
2002 (6) SA 159
(C) 173F-I.)
[16] In the exercise of its discretion under s 13 of the
Companies Act, on the other hand, there is no reason why the court
should
order security only in the exceptional case. On the contrary,
as was stated in
Shepstone & Wylie (supra)
1045I-J, since the section presents the court with an
unfettered discretion, there is no reason to lean towards either
granting or
refusing a security order. It follows, in my view, that
although
bona fides
of
the company’s claim is a consideration that may legitimately be
taken into account in the exercise of the court’s discretion,
as one of many factors, mere
bona fides
in
itself cannot serve as a basis to refuse security when applied for
under s 13.
[17] What also seems to have been of concern to the
court
a quo,
was the
possibility that a security order could effectively deprive Afro Call
of the opportunity to proceed with its claim. Had that
possibility
been established, it would indeed have constituted a valid
consideration. In fact, it is part of the balancing act expected
from
the court when deciding whether or not to grant a security order.
This is borne out, for example, in the following statement
by O’Regan
J in
Giddey NO
(para
8):
‘
The
courts have accordingly recognised that in applying section 13, they
need to balance the potential injustice to a plaintiff if
it is
prevented from pursuing a legitimate claim as a result of an order
requiring it to pay security for costs, on the one hand,
against the
potential injustice to a defendant who successfully defends the
claim, and yet may well have to pay all its own costs
in the
litigation.’
[18] What the court
a quo
seems
to have lost sight of, however, is the consideration which appears
from the immediately following further statement in
Giddey
NO
(para 8) that:
‘
To
do this balancing exercise correctly, a court needs to be apprised of
all the relevant information. An applicant for security will
therefore need to show that there is a probability that the plaintiff
company will be unable to pay costs. The respondent company,
on the
other hand, must establish that the order for costs might well result
in its being unable to pursue the litigation . . ..’
[19] In the present case, as we know, Afro Call filed no
answering affidavit. Whether or not it will be able to furnish
security,
is therefore not known. What is more, the probability that
Afro Call will be unable to meet an adverse costs order – which
had been established by MTN – does not justify the inference
that it will not be able to furnish security. As was pointed out
in
Keary Developments Ltd v Tarmac Construction
Ltd
[1995] 3 All ER 534
(CA) at 542a-b, there
are two different issues involved. A shareholder or creditor might be
quite prepared to put up security to
assist a company to pursue its
claim, while the same shareholder or creditor would be extremely
unlikely to pay the costs of the
other party once the company had
lost the case.
[20] One of the very mischiefs s 13 is intended to
curb, is that those who stand to benefit from successful litigation
by a plaintiff
company will be prepared to finance the company’s
own litigation, but will shield behind its corporate identity when it
is
ordered to pay the successful defendant’s costs. A plaintiff
company that seeks to rely on the probability that a security
order
will exclude it from the court, must therefore adduce evidence that
it will be unable to furnish security; not only from its
own
resources, but also from outside sources such as shareholders or
creditors (see eg
Lappeman Diamond Cutting
Works (Pty) Ltd v MIB Group (Pty) Ltd (No 1)
1997
(4) SA 908
(W) 920G-J;
Keary Developments
at
540f-j;
Shepstone & Wylie
at
1047A-B;
Giddey NO
at
paras 30, 33 and 34).
[21] In the circumstances, the court
a
quo
erred, in my view, when it allowed the
consideration to weigh with it that an order for security could
prevent Afro Call from continuing
with its claim. The further
consideration which seemingly also weighed with the court, namely,
that MTN would in any event be able
to continue with its substantial
counter-claims was, in my view, equally inappropriate. The essential
difference, I think, is that
MTN could decide about the financial
wisdom of incurring further costs in pursuing a claim (substantial or
otherwise) against an
insolvent company, whereas it had no control
over whether or not that company should persist in its claim.
[22] Having regard to the court
a
quo
’
s reasoning as a whole, the
conclusion is, in my view, inevitable that it misdirected itself in
taking irrelevant considerations into
account and that, in the end,
it exercised its discretion against MTN’s application for no
substantial reason. In the result,
the court’s ultimate
conclusion cannot be justified and its order should therefore, in my
view, be set aside.
[23] What remains are issues relating to costs. First
among these are the costs incurred by MTN in submitting an affidavit
in opposition
to Afro Call’s condonation application, which was
necessitated by the filing of Afro Call’s heads of argument
more than
one month out of time. Afro Call rightly tendered the costs
of the condonation application on an unopposed basis. The dispute is,
therefore, restricted to the costs of the opposition. In considering
the latter, I agree with MTN’s argument that Afro Call
appears
not to have been entirely forthcoming in explaining its default. On
the other hand, MTN conceded that it suffered no prejudice
whatsoever
as a result of Afro Call’s failure to act in strict compliance
with the rules of this court. I do not believe that
technical
squabbles of this kind should be encouraged. They do not contribute
to the resolution of the dispute and thus only result
in wasteful and
time consuming exercises. In consequence I propose that, as to MTN’s
opposition of the condonation application,
there should be no order
as to costs. The further costs issue arose from MTN’s request
that a costs order in its favour on
appeal should include the costs
of two counsel. Since I do not believe that the employment of two
counsel in this relatively simple
matter was justified, I do not
believe we can accede to this request.
[24], Finally, there is the decision of the court
a
quo
that the appeal should be heard by this
court – and not by the full court – that I need to refer
to, lest it be thought
that we agree with that decision.
Section 20(2) of the Supreme Court Act 59 of 1959 makes
it clear that the primary court of appeal from a single judge of the
high
court lies to the full court, unless questions of law or fact or
other considerations involved dictate that the matter should be
decided by this court. On the face of it, there is no reason why the
full court could not have dealt with the present appeal. Since
the
order granting leave to this court was not accompanied by any
judgment, it is not possible to discern why the court
a
quo
found it necessary to deviate from the
norm. In the circumstances I can only reiterate the concerns
expressed by Marais JA in
Shoprite Checkers
(Pty) Ltd v Bumpers Schwarmas CC
2003 (5) SA
354
(SCA) para 23, when he said:
‘
The
inappropriate granting of leave to appeal to this court increases the
litigants’ costs and results in cases involving greater
difficulty and which are truly deserving of the attention of this
court having to compete for a place on the court’s roll with
a
case which is not.’
[25] In the event:
1. The respondent’s application for condonation is
granted with costs against the respondent on an unopposed basis. As
to the
opposition of the condonation application by the appellant,
there will be no order as to costs.
2. The appeal is upheld with costs.
3. The order of the court
a quo
is set aside and substituted with the
following:
‘
(a) The respondent is directed
to furnish the applicant with security for costs in an amount to be
determined by the Registrar.
The respondent’s claim under case no 2003/1597 is
stayed until such time as the respondent has furnished the aforesaid
security
for costs.
The applicant is granted leave to approach this court
on the same papers, duly supplemented where necessary to seek a
dismissal
of the respondent’s aforesaid claim, with costs, in
the event that the respondent does not furnish the required security
within 30 days of the Registrar’s determining the quantum of
that security.
The respondent is directed to pay the costs of this
application.’
………………
F D J BRAND
JUDGE OF
APPEAL
CONCUR
:
COMBRINCK
JA
KGOMO AJA