Brief Summary

Companies — Security for costs — Application for security for costs under section 13 of the Companies Act 61 of 1973 — Appeal against dismissal of application — Court's discretion in granting security — Liquidator's claims and applicability of section 13 — The Supreme Court of Appeal held that an order refusing an application for security for costs is appealable, and that section 13 applies to liquidators acting on behalf of a company in liquidation, regardless of whether the claims are statutory or general.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned an appeal to the Supreme Court of Appeal against a judgment of the Natal Provincial Division (Hugo J) which had dismissed an application for security for costs brought under section 13 of the Companies Act 61 of 1973. The security application was ancillary to pending action proceedings in which a company in liquidation (acting through its liquidator) pursued various claims against parties alleged to have contributed to the company’s financial collapse.

The appellants were Shepstone & Wylie (a firm of attorneys) and several individuals associated with that firm, including certain directors connected to the company’s affairs, as well as the executrix of a deceased director’s estate. The respondent was Andries Jonathan Lategan Geyser N.O., acting as the liquidator of Shepway Management Company (Pty) Ltd.

The procedural history was that the respondent, as liquidator, instituted action against the appellants. The appellants then sought an order compelling the respondent (in his representative capacity) to furnish security for costs under section 13, contending that there was reason to believe that the company (or its liquidator) would be unable to satisfy an adverse costs order. Hugo J dismissed that security application. The appellants appealed to the Supreme Court of Appeal, where the appeal turned principally on whether that dismissal should be set aside and security ordered.

The general subject-matter of the dispute was therefore costs-protection in litigation involving an insolvent corporate plaintiff (through its liquidator), and, more specifically, the proper interpretation and application of section 13 and the manner in which the discretion to order (or refuse) security should be exercised.

2. Material Facts

The respondent was the liquidator of Shepway Management Company (Pty) Ltd (“Shepway”), a company in liquidation. He had instituted action proceedings in which he advanced multiple claims against the appellants. The claims included (a) claims that Shepway itself could allegedly have pursued but for its liquidation, brought under the liquidator’s general power to litigate, and (b) additional claims brought under specific statutory provisions of the Companies Act read, where necessary, with provisions of the Insolvency Act (referred to in the judgment as “statutory claims”).

The Supreme Court of Appeal recorded that, by the stage of the appeal, it was common cause that the jurisdictional requirements of section 13 had been satisfied, meaning that there was credible testimony providing reason to believe that the company (or liquidator) would be unable to pay the appellants’ costs if the appellants were successful. The remaining dispute concerned whether the court below had correctly exercised its discretion to refuse security.

As background to the underlying action, the second, third, and fifth appellants, and the late McGowan (whose estate was represented by the fourth appellant), had at various stages been directors of Shepway and were partners in the first appellant firm, which managed Shepway’s affairs. Shepway itself managed timber farming operations of other concerns. The respondent’s pleaded causes of action ranged from breach of contract and negligence to breach of fiduciary duty and contraventions of the Companies Act, including an alternative reliance on reckless trading under section 424(1).

The judgment emphasised that the respondent’s central theme was alleged mismanagement, particularly a failure by the appellants (in their roles as managers/directors) to exercise proper control over persons engaged to oversee farming operations, which enabled those persons to defraud Shepway. The respondent did not allege that the appellants were parties to the fraud; the allegation was rather that their failures contributed to Shepway’s collapse.

On the question whether security would stifle the respondent’s claim, the evidence was treated as insufficient to establish, as a probability, that ordering security would necessarily terminate the litigation. The respondent’s papers suggested difficulty in continuing without security being ordered, but also contained allegations indicating an expectation of financial support from at least some major creditors, which was relevant to the court’s assessment.

3. Legal Issues

The court was required to determine three central legal questions arising from the security application and the appeal.

First, the court had to decide whether an order refusing security for costs under section 13 is appealable under section 20(1) of the Supreme Court Act 59 of 1959, given competing approaches in prior authority as to whether such orders lack finality.

Second, the court had to determine the ambit of section 13, specifically whether section 13 applies only where the company sues in the ordinary sense, or also where a liquidator brings proceedings; and, further, whether the section applies to claims brought by a liquidator under special statutory powers (the “statutory claims”), as distinct from claims brought under the liquidator’s general power to litigate.

Third, assuming the statutory threshold for section 13 was met, the court had to decide whether the discretion to grant security had been properly exercised. This was primarily a question of the application of legal standards to the facts, involving an evaluative judgment about fairness, including the weight to be given to factors such as public interest, the nature of the liquidator’s claims, and the risk that security would stifle the litigation.

4. Court’s Reasoning

Appealability of a refusal of security

The Supreme Court of Appeal rejected the approach taken in certain decisions that characterised security applications as merely preparatory or procedural steps lacking the finality required for appealability. It adopted the reasoning that a security-for-costs dispute is collateral to the main dispute, turning on the litigant’s financial position and the defendant’s protection against irrecoverable costs, rather than on the merits of the principal cause of action.

On that footing, an order refusing security was held to be final and definitive in the relevant sense: once refused, the applicant cannot later obtain the substance of the refused relief in the same proceedings on the same evidential basis, and any prejudice suffered may be irremediable. The existence of Rule 47 (which provides for variation of the amount of security by the registrar in certain circumstances) did not undermine finality in a case where security was refused rather than fixed. The court therefore concluded that the order refusing security was appealable.

Scope of section 13 and whether “statutory claims” are excluded

The court held that, properly interpreted in context, section 13 must be understood to apply to a company in liquidation acting through its liquidator. The explicit reference in section 13 to a company “being wound up” and to “the liquidator thereof” showed that the legislature contemplated liquidation litigation within the section’s reach.

The court then addressed the narrower question whether liquidators litigating under special statutory powers should be exempt from section 13. The court reasoned that, given section 13 plainly applies to liquidators when suing under their general power in section 386(4)(a), it was difficult to identify a principled basis to exempt proceedings merely because they are brought under other provisions of the Companies Act read with the Insolvency Act.

In evaluating the purpose of section 13, the court emphasised that its object is to protect defendants against the risk of unrecoverable costs in litigation instituted by companies that are, in effect, insolvent. That protective purpose does not depend on whether the liquidator’s cause of action is framed under general powers or specific statutory mechanisms, since in either event the litigation is pursued for the eventual benefit of creditors.

The court accepted that public interest considerations might be relevant in certain liquidation proceedings, but held that such considerations do not justify a categorical interpretive exclusion of “statutory claims” from section 13. Rather, public interest concerns are more appropriately considered at the level of the discretion whether to order security in the circumstances of a particular case.

Accordingly, the Supreme Court of Appeal held that Hugo J’s approach—excluding statutory claims from section 13’s reach—was incorrect. This error materially affected the exercise of discretion in the court below, because it narrowed the claims taken into account when considering whether to order security.

The discretion under section 13 and the correct approach

On the nature of the discretion, the court noted the distinction between a “discretion in the strict sense” and a broader evaluative decision involving multiple incommensurable factors. Without finally deciding the standard in all section 13 appeals, the court proceeded on the basis that it was entitled to interfere in this matter because the court a quo’s decision had been influenced by a wrong understanding of the ambit of section 13.

The court rejected the proposition, drawn from certain earlier lines of authority, that security should be granted unless “special circumstances” exist to justify refusal. It held that such an approach impermissibly fetters the discretion, creating a predisposition in favour of security. Instead, the court preferred a balancing exercise: weighing the injustice to the plaintiff (here the liquidator) if a meritorious claim is stifled, against the injustice to the defendant if compelled to defend expensive litigation without a realistic prospect of recovering costs should the defence succeed.

Applied to the facts, the court treated Hugo J’s view—that ordering security in anything beyond a nominal amount would probably end the litigation—as unsupported by the evidence. The court emphasised that the mere possibility of litigation being terminated is inherent in section 13 and is not, without more, a reason to refuse security. It becomes relevant only if established as a probability, and even then it remains only one factor in the overall balance. The court further endorsed the need to consider whether the company (or liquidator) might raise security from creditors, directors, shareholders, or other backers, not merely from the company’s own resources.

On the role of public interest, the court accepted in principle that liquidators should not be discouraged from bringing claims against those alleged to have caused a company’s demise. However, on the respondent’s pleaded case, the appellants were not alleged to have been parties to the fraud that directly caused the loss; they were alleged rather to have mismanaged affairs and failed to prevent fraud by others, and they were said not to have benefited beyond professional fees. In that context, the court regarded the public-interest factor as comparatively weak.

Against that, the court weighed considerations including the difficulty of proof faced by the respondent and the enormity of the costs exposure to the appellants, coupled with the admitted risk that the appellants would be unable to recover those costs if successful. In the court’s evaluative assessment, the balance of fairness favoured ordering security.

5. Outcome and Relief

The Supreme Court of Appeal upheld the appeal and set aside the decision of the court a quo. It substituted the refusal of security with an order granting security for costs in terms of the relief sought in paragraphs (a) to (f) of the notice of motion, with an amendment that the period referred to in paragraph (c) would be three months.

The respondent was ordered to pay the appellants’ costs of appeal, including the costs of two counsel.

Cases Cited

Wears v Nededandsch Zuid Afrikaansche Hypotheek Bank, Ltd 1908 TS 1147; Lombard v Lombardy Hotel Co Ltd (In liquidation) 1911 TPD 866; Petz Products (Pty) Ltd v Commercial Electrical Contractors (Pty) Ltd 1990(4) SA 196 (C); The Catamaran TNT; Dean Catamarans CC v Slupinsky (No2) 1997(2) SA 577 (C); Duncan NO v Minister of Law and Order 1985(4) SA 1 (T).

Ecker v Dean 1937 SWA 3; Ritch and Another v Orthopeadic Buildings (Pty) Ltd 1979(4) SA 19 (T); Bekker NO v Total South Africa (Pty) Ltd 1990(3) SA 159 (T); Knox D'Arcy Ltd and Others v Jamieson and Others 1996(4) SA 348 (A); Hix Networking Technologies v System Publishers (Pty) Ltd and Another 1997(1) SA 391 (A).

Trakman NO v Livschitz and Others: In Re Livschitz and Another v Trakman NO 1996(2) SA 384 (W); Waisbrod v Potgieter and Others 1953(4) SA 502(W); Turkstra v Goldberg NO 1946 TPD 535; Fraser v Lampert NO 1951(4) SA 110 (T); Liquidator, Salisbury Meat Market Ltd Perelson 1924 WLD 104; Hudson & Son v London Trading Company Ltd 1930 WLD 288; Jaga v Dönges NO and Another 1950(4) SA 653 (A).

Benson v SA Mutual Life Assurance Society 1986(1) SA 776 (A); Trust Bank van Afrika Bpk v Lief and Another 1963(4) SA 752 (T); Cometal-Mometal Sarl v Corliana Enterprises (Pty) Ltd 1981(4) SA 662 (W); Wallace NO v Rooibos Tea Control Board 1989(1) SA 137 (C); Lappeman Diamond Cutting Works (Pty) Ltd v MIB Group (Pty) Ltd (No 1) 1997(4) SA 908 (W).

Keary Developments Ltd v Tarmac Construction Ltd and Another [1995] 3 All ER 534 (CA); Magida v Minister of Police 1987(1) SA 1 (A); Beaton v SA Mining Supplies (Pty) Ltd 1957(2) SA 436 (W).

Shepstone & Wylie and Others v Geyser NO 1998(1) SA 354 (N).

Legislation Cited

Companies Act 61 of 1973, section 13; Companies Act 61 of 1973, section 386(4)(a); Companies Act 61 of 1973, section 424(1).

Supreme Court Act 59 of 1959, section 20(1).

Insolvency Act (referred to in the judgment without specification of an Act number or particular sections).

Rules of Court Cited

Uniform Rules of Court, Rule 47.

Held

The Supreme Court of Appeal held that an order refusing security for costs under section 13 of the Companies Act 61 of 1973 is appealable, because the dispute about security is a separate and collateral issue whose determination is final in effect.

It further held that section 13 applies to litigation instituted by a liquidator on behalf of a company in liquidation, and that there is no interpretive basis to exclude from the section’s reach claims brought by a liquidator under special statutory powers as opposed to the general power to litigate.

On the merits of the security application, the court held that the court a quo had adopted an incorrect approach by effectively treating “special circumstances” as a prerequisite for ordering security and by attributing determinative weight to a perceived public interest in allowing the liquidator’s action to proceed. Applying a balancing approach, and taking into account the probable difficulty of proof and the appellants’ risk of irrecoverable costs, the court concluded that security should have been ordered.

LEGAL PRINCIPLES

Section 13 of the Companies Act 61 of 1973 confers a power to order security for costs where credible testimony provides reason to believe a corporate plaintiff (including a company in liquidation acting through its liquidator) will be unable to pay the defendant’s costs if unsuccessful; once the statutory threshold is met, the court must decide the matter through an evaluative exercise.

An order refusing security for costs is properly characterised as determining a collateral and ancillary dispute separate from the main cause of action. Because the substance of the refused relief cannot later be obtained on the same basis within the same proceedings, such refusal is final and definitive for appealability purposes.

In exercising the discretion under section 13, a court should not adopt a rigid predisposition for or against security (including an approach that security should be ordered unless “special circumstances” exist). The proper approach is a balancing of fairness between the injustice to a plaintiff if a proper claim is stifled and the injustice to a defendant if forced to litigate without meaningful costs protection.

The possibility that ordering security may end the litigation is not, without more, a sufficient reason to refuse security; it becomes relevant only if demonstrated as a probability and must then be weighed with other factors. In evaluating whether security can be furnished, the enquiry is not limited to the plaintiff’s own assets but includes whether security can be raised from creditors or other interested backers.

Public-interest considerations may be relevant in liquidation litigation, but they do not justify a categorical exclusion of categories of liquidator claims from section 13; public interest is to be weighed in the discretionary assessment on the facts of the particular case.

Shepstone & Wylie and Others v Geyser NO (364/97) [1998] ZASCA 48; 1998 (3) SA 1036 (SCA); [1998] 3 All SA 349 (A) (28 May 1998)