Brief Summary

Security for costs — Application for security by defendant — Appeal against dismissal of application for security for costs by incola company — Appellant contended that respondent's financial status warranted security due to alleged impecuniosity — Court a quo followed Ngwenda Gold decision, emphasizing entitlement of impecunious corporate entities to litigate without security — Legal issue centered on whether the High Court has the power to order security for costs from an incola company under the new Companies Act — Court held that the absence of a provision equivalent to section 13 of the old Companies Act does not preclude the court from exercising its discretion to order security for costs where the interests of justice demand it.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned an appeal against the refusal by the court a quo to order an incola private company to furnish security for costs in terms of Rule 47(1). The appellant sought an order compelling the respondent (as plaintiff in the main action) to provide security, and for the staying of the main proceedings pending the furnishing of security. Leave to appeal was granted by the court a quo.

The appellant was Hennie Lambrechts Architects (defendant in the main action and applicant for security), and the respondent was Bombenero Investments (Pty) Ltd (plaintiff in the main action and respondent to the security application). The appeal was heard by a Full Bench of the Free State Division, with a majority judgment (Mocumie J, concurred in by Lekale J) and a dissent (Moloi J).

The general subject-matter of the dispute was whether, following the omission of a provision equivalent to section 13 of the Companies Act 61 of 1973 in the Companies Act 71 of 2008, a High Court remains empowered to order an incola company to furnish security for costs, and, if so, on what basis and in what circumstances. The appeal also engaged the relationship between that power, the common law, and the High Court’s inherent jurisdiction under section 173 of the Constitution.

2. Material Facts

The respondent, as plaintiff, instituted an action against the appellant for payment of amounts said to represent damages allegedly suffered due to the appellant’s alleged breach of an agreement between the parties. The appellant delivered a plea and instituted a counterclaim for payment of amounts alleged to be due under the same agreement.

After summons was issued, the appellant demanded that the respondent furnish security for the appellant’s costs, contending that the respondent did not own immovable property or tangible attachable assets, had not provided requested financial statements, and had not indicated that any funds were set aside to prosecute the action. The appellant’s stated concern was that, if successful in defending the claim (and/or in pursuing the counterclaim), it would be unable to recover its costs because the respondent would not be in a position to satisfy an adverse costs order.

The respondent refused to tender security. In response, it disputed that it would be unable to pay costs and alleged that it owned two Iveco trucks valued at R1.4 million each, and that it had sufficient funds to pay costs if the appellant succeeded. The respondent maintained that it was not in the interests of justice to require disclosure of its financial statements to the appellant.

The appellant then proceeded by issuing a notice under Rule 47(1) and launched an application seeking an order compelling security in the amount of R150 000 (alternatively an amount determined by the Registrar), a stay of the main action pending the furnishing of security, and costs of the security application. The court a quo dismissed that application, largely on the basis that (in its view) the respondent’s inability to pay (or doubts about solvency) was not, without more, sufficient to justify security absent proof that the litigation was vexatious, reckless, or an abuse of process.

On appeal, the appellant relied on the respondent’s alleged financial inability, asserted lack of bona fides (including refusal to produce financial statements and failure to prove ownership and value of the trucks), and alleged inconsistencies in the respondent’s explanations as to funding. The respondent’s stance, as recorded in the judgment, was not that it would necessarily be prevented from litigating if security were ordered; rather, its position included that providing security could disturb its cash flow, together with later assertions (on reply) of sufficient funds without detailed disclosure.

3. Legal Issues

The appeal turned on the scope of the court’s power to compel an incola company to provide security for costs after the repeal of section 13 of the Companies Act 61 of 1973 and the absence of an equivalent provision in the Companies Act 71 of 2008.

The central legal questions were whether, notwithstanding the omission of section 13 in the new legislative scheme, a High Court is empowered to order an incola company to furnish security for costs; whether that power lies (if at all) in the common law, in the High Court’s inherent power to regulate its own process under section 173 of the Constitution, or in the development of the common law consistent with section 39(2); and what the applicable threshold should be (including whether financial inability alone suffices, or whether “something more” such as vexatiousness or abuse must be shown).

The dispute involved a combination of law (the existence and source of the power and the appropriate test), application of law to fact (whether the respondent’s position justified security on the facts), and an evaluative component in balancing access to court against the risk of an unrealisable costs order, particularly where the litigant is a corporate entity.

4. Court’s Reasoning

Majority judgment (Mocumie J, concurred in by Lekale J)

The majority located the appeal within the broader jurisprudential uncertainty created by the absence of a modern statutory equivalent to section 13 of the 1973 Companies Act. The judgment identified divergent approaches adopted in the High Courts, grouped into categories (including decisions emphasising the primacy of the common-law rule that incola plaintiffs are not required to provide security; decisions requiring “something more” such as vexatiousness; and decisions concluding that, absent section 13, courts may not extend grounds for security beyond common law).

The majority emphasised that section 13 historically served to protect defendants from being exposed to unrecoverable legal expense where a limited liability company, unlikely to satisfy an adverse costs order, could litigate without meaningful risk. In this context, the majority referred to Constitutional Court guidance (quoted in the judgment) describing the deterrent function of ordinary costs rules and how that effect can be attenuated where the plaintiff company cannot pay, thereby increasing the risk of litigation pursued without adequate prospects of success and with limited cost consequences.

On the majority’s approach, the correct exercise of discretion in security applications requires a balancing of potential injustice: the injustice to a plaintiff if security prevents pursuit of a legitimate claim, against the injustice to a defendant who successfully defends but cannot recover costs. The majority held that this balancing exercise depends on being placed in possession of relevant information, including a probability that the corporate litigant will be unable to pay costs, and (from the corporate litigant) evidence that security would prevent continuation of litigation, together with information regarding the nature and importance of the litigation (particularly to rebut allegations of vexatiousness or lack of prospects).

Applying these principles, the majority found that the court a quo did not properly take into account the section 13-era principles and did not adequately consider the nature of the claim, the respondent’s financial position at the time of the security application, the probable financial position if it lost, and the respondent’s alleged lack of bona fides in resisting disclosure. In particular, the majority considered it significant that the respondent did not establish that security would prevent it from pursuing the litigation, nor did it provide sufficient detail to rebut the risk that the appellant would face an unrealisable costs order.

A central feature of the majority’s reasoning was its conclusion that the prevailing common-law approach (as applied in certain post-2008 decisions) was inadequate for modern corporate litigation and commercial realities. The majority held that this case, in the context of divergent decisions and changed commercial circumstances, justified the development of the common law. Relying on the Constitutional Court’s articulation of the duty to develop the common law where it is deficient in promoting constitutional objectives, the majority reasoned that courts should not adopt a rigid “one-size-fits-all” approach, and that it would be incongruent with constitutional values of equality and fairness to treat corporate litigants as if they stood in the same position as impecunious natural persons seeking to vindicate personal rights.

The majority held that, in an application under Rule 47, an incola company should be expected to place detailed evidence before the court demonstrating that it can satisfy an adverse costs order, and that courts should insist on fuller disclosure than might be required of natural persons, particularly in purely commercial disputes. The majority further pointed to section 158(a) of the Companies Act 71 of 2008, which it treated as reinforcing the imperative to develop the common law to improve the realisation of rights under the Act.

In the result, the majority concluded that, on the facts and in the interests of justice, the respondent should be ordered to furnish security, and that the court a quo erred in dismissing the application on the basis that there was “nothing more” than doubts about solvency.

Dissent (Moloi J)

Moloi J agreed that courts have inherent power under section 173 and that development of the common law must promote the spirit, purport and objects of the Bill of Rights under section 39(2). However, the dissent concluded that the legislature’s omission of section 13 from the new Companies Act was deliberate, and that reintroducing a discretion akin to section 13 through common-law development would impermissibly limit the section 34 constitutional right of access to courts.

The dissent stressed that limitations on Bill of Rights rights must satisfy section 36, which requires a limitation to be in terms of a law of general application and to be reasonable and justifiable. On this view, once section 13 was repealed and not replaced, there was no longer a law of general application authorising such a limitation for incola companies, and courts could not use common-law development to “resuscitate” the repealed provision without usurping the legislative role. The dissent also rejected the proposition that the constitutionality of section 13 had been finally determined, emphasising that the Constitutional Court in Giddey proceeded on the basis of constitutionality because no constitutional challenge to section 13 was before it.

Moloi J would therefore have dismissed the appeal with costs.

5. Outcome and Relief

The appeal succeeded on the majority judgment. The order of the court a quo was set aside and replaced with an order compelling the respondent (as plaintiff in the main action) to furnish security for the appellant’s costs of the main action in an amount to be fixed by the Registrar, with security to be furnished within 10 days after the amount is fixed.

The respondent was ordered to pay the costs of the security application in the court a quo and also the costs of the appeal. In addition, the appellant was granted leave to apply, on the same papers duly amplified, for the dismissal of the respondent’s action should the respondent fail to comply with the security order.

A dissenting judgment would have dismissed the appeal with costs.

Cases Cited

Ngwenda Gold (Pty) Ltd v Precious Prospect Trading 80 (Pty) Ltd 2011 ZAGPJHC 217 (unreported).

Giddey, NO v JC Barnard and Partners [2006] ZACC 13; 2007 (5) SA 525 (CC).

Carmichele v Minister of Safety and Security [2001] ZACC 22; 2002 (1) SACR 79 (CC).

S v Matyityi 2011 (1) SACR 40 (SCA).

Legislation Cited

Companies Act 61 of 1973, section 13.

Companies Act 71 of 2008, section 158(a).

Constitution of the Republic of South Africa, 1996, section 34.

Constitution of the Republic of South Africa, 1996, section 36.

Constitution of the Republic of South Africa, 1996, section 39(2).

Constitution of the Republic of South Africa, 1996, section 173.

Rules of Court Cited

Rule 47(1) (security for costs), as referred to in the judgment as part of the Rules of Practice / Superior Courts Practice.

Held

The majority held that the High Court is empowered, through its inherent jurisdiction and by developing the common law consistently with constitutional imperatives, to order an incola company to furnish security for costs in appropriate circumstances notwithstanding the absence of an equivalent to section 13 of the Companies Act 61 of 1973 in the Companies Act 71 of 2008. The majority further held that, in applications of this nature, an incola corporate litigant should be expected to place sufficient evidence before the court to demonstrate that it can satisfy an adverse costs order, and that courts should adopt a fact-sensitive approach directed at protecting both access to courts and the opponent’s right not to face unrealisable costs exposure.

On the facts, the majority concluded that the court a quo failed to give proper weight to the respondent’s financial position, the need for adequate disclosure, and the balancing exercise required in security-for-costs applications, and that the respondent should be compelled to furnish security. The appeal was upheld, security was ordered in an amount to be determined by the Registrar, and costs were awarded against the respondent, including the costs of appeal.

The dissent held that developing the common law to reintroduce a discretion akin to repealed section 13 would improperly limit the section 34 right of access to court in the absence of a law of general application satisfying section 36, and would amount to judicial usurpation of legislative power. On that basis, the dissent would have dismissed the appeal with costs.

LEGAL PRINCIPLES

The judgment applied the principle that security-for-costs orders require a balancing between, on the one hand, the plaintiff’s interest in pursuing legitimate litigation (and the constitutional right of access to courts), and, on the other hand, the defendant’s interest in not being subjected to litigation that may yield an unrealisable costs order if the defence succeeds. The majority treated this balancing exercise as fact-dependent and dependent on adequate disclosure by both sides.

The majority endorsed the principle that courts may, where the common law is deficient in promoting constitutional objectives, be obliged to develop the common law under section 39(2) read with section 173. It held that changed commercial realities and the nature of corporate limited liability could justify requiring more substantial disclosure and accountability from corporate litigants than the common law historically required from indigent natural persons.

The dissent, by contrast, emphasised the principle that limitations of constitutional rights must comply with section 36, including the requirement of a law of general application, and that courts should not use common-law development to effectively revive a repealed statutory regime in a manner that subverts legislative choices.

Hennie Lambrechts Architects v Bombenero Investments (Pty) Ltd (A49/2013) [2014] ZAFSHC 15; 2015 (6) SA 375 (FB) (20 February 2014)