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[2010] ZAFSHC 80
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Francis NO and Another v Alitori 1470 CC (6113/2009) [2010] ZAFSHC 80 (25 June 2010)
FREE STATE HIGH
COURT, BLOEMFONTEIN
REPUBLIC OF SOUTH
AFRICA
Case number:
6113/2009
In
the matter between:
PETER
FRANCIS N.O.
1
st
Applicant / 1
st
Defendant
HILARY
BARRIS N.O.
2
nd
Applicant / 2
nd
Defendant
and
ALITORI
1470 CC
Respondent
/ Plaintiff
CORAM:
J.
B. MTHEMBU.AJ
HEARED
ON:
27 MAY 2010
JUDGMENT
BY
: J.
B. MTHEMBU,AJ
DELIVERED ON:
25
JUNE 2010
[1] This is an
Application in terms of
Section 8
of the
Close Corporations Act 69 of
1984
read
with Section 13 of the Companies Act 61 of 1973, requiring the
Respondent (Plaintiff in the main action) to provide security
for the
Applicants’ costs in the sum of R142 500.00.
[2] The Applicants
contend that the Respondent, a
Close
Corporation, will be unable to meet an adverse costs order as
envisaged in terms of the provisions of High Court Rule 47 and
is
impecunious and insolvent. The Applicants’ principal
contention is that the financial statements referred to in the
Founding Affidavit, which are dated the 28
th
of February 2007, reveal a trading loss of R1.72 million and reflects
a hopelessly insolvent position. The Respondents contend
that an
analysis of its most recent financial statements, being the 2009/2010
financial statements, reveals that the Respondent
Close Corporation
is not insolvent. The Applicants respond that on the Respondent’s
own version it is insolvent.
THE LEGAL POSITION:
[3] Section 13 of the
Companies Act 61 of 1973 reads:
“
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 Respondent if successful in his
defence, requires sufficient security
to be given for those costs and
may stay all proceedings until the security is given.”
[4] In
HENRY
v RE DESIGNS CC
1998 (2) SA 502
(C) the principles as set out at page 507G-508D by
the court are as follows:
1. “The Court would have the
power to order that security for costs be furnished by the Respondent
only if it appeared that
there was reason to believe that the
Respondent would be unable to pay the Applicant’s costs in the
unsuccessful application
for Leave to Appeal or her costs in the
action if she was successful in her defence thereof. See
VIVIERS
v WILLIAMS BUILDERS AND CONTRACTORS LTD
1936
TPD 273
at 274
2. For such reason to believe that the
Respondent will not be unable to pay the Applicant’s costs to
exist, it is not necessary
that the Respondent should be found to be
insolvent. As Greenberg J, as he then was, said in
VIVIERS
’
case supra loc cit:
“
The section does not refer to
bankruptcy or insolvency; it bases the power to make an order on the
fact that there is reason to
believe that the company will be unable
to pay the costs. The company might be solvent, but the figures may
show that it will be
quite unable to pay the costs.
3. Once the court is satisfied that
such reason to believe exists it has discretion whether or not to
order the Respondent to furnish
security; See
FRASER
v LAMPERT N.O
1951 (4)
SA 110
(T) at 115 A-B.
4. In exercising this discretion, (a)
the Court will lean towards ordering security to be furnished; (b) it
would not deprive the
Applicant of the benefit of the Section unless
special circumstances were found to exist; (c) the Court would
consider what the
Respondent’s financial position was after
having lost the Application for Leave to Appeal, and what it would be
if and when
it lost the action; In that regard its present financial
position was relevant; (d) the Court would not enquire fully into the
merits of the action and form an opinion of the Applicant’s
prospects of success, but the nature of the claim and defence
thereto
are not irrelevant the Applicant ought to specify her defence. All
this was held mutatis mutandis by Hiemstra J, in the
full bench
decision of the Transvaal Provincial Division in
TRUST
BANK VAN AFRIKA BPK v LIET AND ANOTHER
,
1963 (4) SA 752
(T) at 754 H – 755 B.”
[5] Once the requirements
of Section 13 have been satisfied, the only remaining issue is the
exercise of the Court’s wide
discretion. It is trite that this
discretion is to be exercised upon a consideration of all the
relevant facts and in so doing
the Court will have regard to the
nature of the claim, the financial position of the Company at the
stage of the Application for
security and its probable financial
position if it should lose the action.
[6] In the exercise of
its discretion, the Court does a balancing exercise which requires
that the Court needs to be apprised of
all the relevant information.
The Applicant, for security, will need to show that there is a
probability that the Respondent will
be unable to pay costs. The
Respondent, on the other hand, will have to explain the nature of the
litigation and should indicate
the nature and importance of its
litigation to rebut allegations that the litigation is without
prospects of success. A full enquiry
into the merits of the
contemplated litigation between the Respondent as Plaintiff and the
Applicants as Defendants is not required.
[7] The discretion which
the Court is enjoined to exercise is a narrow and strict one. The
onus
in
this regard rests on the Applicants in that they have to convince
this Court that not only are there such facts before the Court
entitling it to conclude that there is reason to believe that the
Respondent will be unable to satisfy an adverse cost order but,
furthermore that notwithstanding, it should exercise its discretion
in favour of the Applicants.
THE ARGUMENTS:
[8] The Applicants state
in the Founding Affidavits that the Respondent’s financial
statements dated 28
th
of February 2007 reveal a trading loss of R1, 72million and an
insolvent position in excess of R1, 5million. The Respondent
contends
that the 2007 earlier financial statements are outdated and
irrelevant and the Court should only have regard to the current
financial
statements.
[9] The Applicants
contend that an analysis of the Respondent’s most recent
financial statements, 2009/2010, annexed to its
Opposing Affidavit,
reveals a Net Deficit of R3 076.00. In addition it has non-current
assets totaling R635 000.00. These non-current
assets comprise of
loans to Group Companies and fixed assets. Part and parcel of the
Respondent’s financial statements incorporate
revenue to the
extent of R4 120 612.32, being the amount paid by Applicants to the
Respondent. This amount is in contention.
[10] The Applicants
aver that the current financial statements of the Respondent reveal
that the Respondent’s liabilities
exceed its assets. This
position is exacerbated by the fact that the Respondent’s trade
and other payables are R928 000.00
while its current assets are R726
000.00.
[11] The Applicants aver
that on the Respondent’s own version, it is admittedly
insolvent. On the facts, the averment that
the Respondent will not
be able to meet an adverse costs order
cannot
be disputed.
[12] The merits on the
main action are that the Respondent has instituted proceedings for
payment of the sum of R445 307.73 being
the value of computers and
ancillary equipment allegedly removed by the Applicant from the
premises of the Respondent.
[13] The Applicants
argued that whilst it is not submitted that the Court should
pronounce on the merits of the matter, having regard
to the admitted
facts, the failure of the Respondent to explain documents which have
been authored by it which are contrary to
its claim, should be taken
into account by the Court in the exercise of its wide discretion.
[14] The Applicants
submitted that the Respondent has not placed the quantum of the costs
in dispute. The Respondent’s only
contention in this regard is
that there is no factual basis to believe that the Respondent is
“either insolvent, alternatively,
will be unable to pay a costs
order in favour of the Applicants”.
[15] Mr. De Wet argued on
behalf of the Applicants that
Section 8
of the
Close Corporations Act
must
be kept in mind. The Applicant must satisfy the Court that
“there is reason to believe” that the Close Corporation
is insolvent and unable to pay its debts. The purpose of
Section 8
is to see to it that impecunious litigants must put up security and
not to actually pay it, because if the Close Corporation wins
the
case it gets the money which it put up as security back.
[16] Mr. De Wet argued
that if the Court finds that the Respondent’s liabilities are
more than its assets, then “there
is reason to believe”
that the Respondent is unable to meet its financial obligations. The
Respondent must convince the
Court that there are special
circumstances to deny the Applicants’
prima
facie
right
to be given security.
In
casu
no
special circumstances have been pointed out by the Respondent. If one
looks at the assets and liabilities of the Respondent,
there is no
way that it can pay its liabilities. The loans referred to in the
financial statements are unsecured, non-interest
bearing with no
specific time frame of repayment.
[17] On the other hand
the
Respondent states in its Answering Affidavit that it is quite clear
from the authorities that a two-stage enquiry is envisaged,
namely:
17.1 Are there facts on
which the Court can conclude that there is reason to believe that the
Respondent will be unable to satisfy
an adverse cost order? and;
17.2 If that be so,
should it nevertheless still exercise its discretion as to whether or
not to compel security to be filed?
[18] The Respondent
submitted that the debate between the parties relates essentially to
what can be inferred from the financial
statements filed on behalf of
the Respondent. The Applicants adopt the attitude that Respondent is
factually insolvent. The latter
is a fallacious argument and that
this whole question should be approached in the context of the
following:
18.1 The Application was
initially premised on the first set of financial statements for the
financial year ending 28 February2007;
18.2 This was the
Respondent’s first year of trading and clearly did not
represent the nature and extent of growth within
the Close
Corporation;
18.3 A comparison between
the liabilities of Respondent in 2007 as compared to 2009 and 2010
clearly shows a remarkable turn around
in excess of R3 million in
reductions thereof;
18.4 In 2007 the
accumulated loss was R1 728 857.00, in 2009 it was R3 554 824.00
whilst in 2010 it was R3 076.00 being the current
balance between
liabilities and assets;
18.5 Similarly the gross
revenue generated in 2007 amounted to R2 998 225.00, by 2009 it had
increased to R5 706 956.00, whilst
by 2010 it had increased to R8 685
110.00 evidencing a very strong growth index;
18.6 Similarly the
operating expenses between the 2009 and 2010 financial years were
literally halved from R4 160 639.00 to R2 146
799.00.
[19] On behalf of the
Respondent Mr. Fisher submitted that,
on
the aforementioned facts there is insufficient factual basis for this
Court to conclude that there is reason to believe that
Respondent
will be able to satisfy an adverse cost order. It is furthermore
submitted that even should the Court conclude that
there are facts
giving rise to a doubt as to whether the Respondent could satisfy an
adverse cost order, this Court is nevertheless
entitled to exercise
its discretion in favour of the Respondent, especially if regard be
had to the nature of the claim instituted.
[20]
In
casu
the
Respondent has contested its liability to provide security and it is
submitted that in such a case the demand by the Applicants
as well as
the amount demanded, must be an amount that the Applicants are
entitled to by reason of a determination by the Registrar
or
agreement between the parties prior to the launching of the
Application. There is nothing to suggest that this procedure has
been employed by the Applicant.
[21] Mr. Fischer argued
that there is nothing that shows that the Applicant sought the
Registrar’s guidance before approaching
Court. At best the
Court must direct the parties back to the Registrar to determine an
amount. Rule 47(3) of the Uniform Rules
says that if you “contest
your liability to pay” after determination by the Registrar
then you must approach Court.
Mr. Fischer argued that the 2009/2010
financial statement are an exceptional circumstance. A Court should
interpret and apply
Section 8
of the
Close Corporations Act 69 of
1984
in accordance with the principles which have evolved and have
been laid down in the cases pertaining to the corresponding
provisions
in Section 13 of the Companies Act 61 of 1973.
CONCLUSION:
[22] The Applicant bears
the
onus
of
establishing on a balance of probabilities that there is reason to
believe that the Respondent will be unable to pay adverse
costs. The
normal method to be adopted by Respondent in endeavoring to resist
such an application for security, being to furnish
a balance sheet
for the Court to see by how far assets exceed liabilities.
[23] It is indeed so that
the Application was initially premised on the Respondent’s
first set of financial statements for
the financial year ending 28
February 2007, which was its first year of trading and did not
represent the nature and extent of
its growth. A comparison between
the liabilities of Respondent in 2007 as compared to 2009 / 2010
seems to show a turn around
in excess of R3million. In 2007 the
accumulated loss was R1 728 857.00, in 2009 it was R3 554 824.00,
whilst in 2010 it was R3
076.00, being the current balance between
liabilities and assets. However, the accumulated loss of R3 076.00
incorporates the
sum of R4 120 612.32 that Applicant paid to
Respondent which forms the basis of Applicants’ claim in the
main action. In
addition the Respondent has non-current assets
totaling R635 000.00 which comprise loans to Group Companies and
fixed assets.
These are unsecured with no specific date of payment.
The current statements reveal that the Respondent’s liabilities
exceed
its assets. This position is exacerbated by the fact that the
Respondent’s trade and other payables are R928 000.00, while
its current assets are R726 000.00. On the Respondent’s own
version, it is admittedly insolvent.
[24] In
BROLLOMER
TIN EXPLORATION CO. LTD v KAMEEL TIN PROPRIETARY CO. LTD
1928 TPD
quoted
with approval in
FERREIRA
v ARLINDERS LTD 1964 (1) 631 (OPD)
,
De Waal
JP at Pages 601 and 602 had this to say:
“
A large volume of evidence has
been placed before us on Affidavit by the Respondent Company seeking
to justify its refusal to find
security on the ground that the
defence of the Defendant in the action is not
bona
fide;
but it seems to me
that all reference to the
bona
fides,
or otherwise, of the
Defendant Company is somewhat irrelevant,
because
if the Court is satisfied that the Plaintiff Company possesses no
assets, or insufficient assets, it seems to me it should
exercise its
discretion in favour of ordering the Plaintiff to give security
,
as it is manifestly undesirable, if not impossible, for the Court at
this stage of the proceedings to express any opinion as to
the
bona
fides
or otherwise of the
defence” (my own emphasis)
This, however, does not
mean that the Court is bound to order security in every case where it
is plain that if the action fails
the Company will be unable to pay
the Defendant’s costs. See
KRUGER
STORES (PTY) LTD AND ANOTHER v KOPMAN AND ANOTHER
1957(1) SA 645 (W).
[25] It was submitted on
behalf of the Respondent that
in
casu
the
amount of the security has not been agreed or established by the
Registrar and this Court should find as an exceptional circumstances.
I disagree. I agree with the Applicant’s submission that its
Application is premised on the fact that Respondent contests
its
liability to give security.
[26] The Respondent’s
submission that the Applicant rushed to Court cannot hold water. In
SASKO
BPK v FUTURUS CONSTRUCTION (PTY) LTD
1998 (4) SA 170
at 175B – 176B
the
Court held that the word “demanded” cannot be given its
narrow or literal meaning – it means agreed and then
demanded.
In casu
the
amount of security has not been agreed upon. Upon receipt of the
Applicants’ demand for security the Respondent disputed
its
liability to give security in that the grounds advanced by the
Applicants are unfounded and unsubstantiated. I agree with
Mr. De
Wet that the
SASKO
case
supra
has no
relevance to the present dispute, apart from the fact that it says
you cannot apply for a stay under Rule 47(3) of Uniform
Rules of
Court until the amount has been agreed or determined by the
Registrar.
[27] The reasons advanced
by Mr. De Wet, in particular that there has not been growth over the
past three years, and the most recent
statements are not correct
because the R4 million Applicant paid the Respondent as a consequence
of a representation made by the
Respondent that goods were delivered,
when in fact goods had not been delivered is included as an asset,
and the fact that the
loans are unsecured, satisfactorily established
that there is reason to believe that the Respondent will be unable to
pay the Applicants’
costs.
[28] In the result I make
the following order:
1. The Respondent is
ordered to furnish security;
2. The registrar must
determine the amount of the security;
3. The Respondent is to
pay the costs of this application.
________________
J B MTHEMBU, AJ
On behalf of the
Applicants: Adv. P J T
De
Wet
Instructed by:
Matsepes
BLOEMFONTEIN
On behalf of the
Respondent: Adv. P U
Fischer
Instructed by:
Lovius Block
BLOEMFONTEIN
/ar/wm