Brief Summary

Security for costs — Discretion of court — Application for security for costs by defendant in response to action initiated by liquidator of company in liquidation — Court's discretion to require security must consider section 34 of the Constitution, which guarantees the right of access to court — Applicant liquidator claimed US $100 million against respondent for failure to hold funds in trust — High Court ordered applicant to furnish security for costs, leading to appeal — Court held that the potential injustice to a plaintiff in pursuing a legitimate claim must be balanced against the risk to a defendant of incurring unrecoverable costs — Importance of providing a fair opportunity for companies in liquidation to pursue claims while protecting defendants from vexatious litigation emphasized.

Comprehensive Summary

Summary of Judgment

1. Introduction

The matter was an application for leave to appeal to the Constitutional Court, and (once leave was granted) an appeal concerning the constitutional approach to ordering security for costs against a company litigant under section 13 of the Companies Act 61 of 1973, read with Rule 47 of the Uniform Rules of Court.

The applicant was Trevor B Giddey NO, acting in his capacity as the liquidator of Sadrema Explorations Ltd (in liquidation). The respondent was J C Barnard and Partners, a firm sued by the liquidator in the High Court. Although the applicant was the respondent in the security-for-costs application in the High Court, he was the applicant before the Constitutional Court.

Procedurally, the applicant had instituted action in the Johannesburg High Court for a very substantial money claim. The respondent (as defendant in the main action) applied in the High Court for an order compelling the applicant to furnish security for costs under Rule 47(3). The High Court granted the order, directed that security be furnished in an amount to be fixed by the Registrar, and stayed the action pending the furnishing of security. The applicant sought leave to appeal unsuccessfully in both the High Court and the Supreme Court of Appeal, and then approached the Constitutional Court.

The general subject-matter of the dispute was the interaction between security for costs (as a procedural mechanism intended to protect defendants against unrecoverable costs where a plaintiff company may be unable to pay) and the right of access to courts in section 34 of the Constitution, particularly in circumstances where a security order may effectively prevent a litigant from pursuing a claim.

2. Material Facts

The undisputed procedural background was that Sadrema Explorations Ltd had been in liquidation since 16 January 2001, and that the liquidator had instituted an action against the respondent in the Johannesburg High Court claiming US $100 million plus interest. The applicant’s pleaded case (as summarised in the judgment) was that the respondent had received that sum on behalf of Sadrema and was obliged to hold it in trust for Sadrema, and that the respondent’s failure to conserve those funds was allegedly a major cause of Sadrema’s liquidation.

It was also common cause that the respondent sought security for costs on the basis that, because the plaintiff was in liquidation, there was reason to believe that it would be unable to pay the respondent’s costs if the respondent successfully defended the action. The respondent further alleged that the litigation appeared complex and estimated its prospective costs of defence at R500 000.

In opposition, the applicant disputed that the respondent had established inability to pay adverse costs. The applicant relied on the existence of other pending litigation in which he (as liquidator) was pursuing a substantial claim (stated to be R90 million) which, if successful, would allegedly enable the liquidator to meet the respondent’s costs in the present action. The applicant also contended that, even if the statutory threshold (“reason to believe” the company would be unable to pay) were met, the court should exercise its discretion against ordering security.

As to the effect of a security order on the applicant’s ability to proceed, the Constitutional Court treated it as significant that the applicant did not clearly allege that he would be unable to furnish security if ordered to do so, nor did he set out attempts to obtain funding from creditors or shareholders. The applicant did, however, contend in general terms that the “injustice” of being prevented from pursuing the claim would outweigh any injustice to the defendant if security were refused.

The applicant also advanced contentions aimed at the discretionary balance: he asserted that there was evidence suggesting the respondent’s plea was unlikely to succeed; he argued that it would be in the public interest for the dispute to be determined because it concerned the integrity of an accounting firm; and he argued that the claim arose from conduct alleged to have impoverished the company (which, on his case, was a reason not to require security).

The High Court ordered security, with the amount to be determined by the Registrar, and stayed proceedings pending provision of the security. The applicant pursued leave to appeal before the Registrar had determined the amount of the security.

3. Legal Issues

The central legal questions the Constitutional Court was required to determine were, first, whether an appeal against a security-for-costs order under section 13 of the Companies Act raised a constitutional matter (given the potential impact of such an order on section 34 access to courts). Second, the Court had to determine whether it was in the interests of justice to grant leave to appeal.

On the merits of the appeal, the Court had to determine the correct approach to the exercise of the statutory discretion under section 13 in light of section 34, including whether it was correct to treat a security-for-costs order as requiring a section 36 limitation analysis in the absence of a direct constitutional challenge to section 13. It also had to determine the proper appellate standard of interference with the exercise of the section 13 discretion, namely whether the discretion is one “in the strict sense” and, if so, the narrow grounds on which an appellate court may interfere.

These issues largely concerned questions of law (constitutional characterisation, interpretive approach, and appellate standards) and the application of law to fact (whether the High Court applied the correct principles judicially on the information before it). The exercise of the section 13 discretion was treated as involving a value judgment (a balancing of competing potential injustices), which informed both the nature of the discretion and the appellate restraint applicable to it.

4. Court’s Reasoning

The Court held that the matter did raise a constitutional issue. It reasoned that an order compelling a company in liquidation to furnish security for costs may, where the company cannot provide it, have the practical effect of preventing the company from proceeding with its action, which implicates the right of access to courts in section 34 of the Constitution. Because courts must take section 34 into account when exercising the section 13 discretion, the decision engages constitutional considerations.

On leave to appeal, the Court considered it significant that this was the first time the Constitutional Court had addressed the proper approach to security for costs in light of section 34, that the issue regularly arises in courts, and that the matter was accordingly of sufficient importance to grant leave without a detailed assessment of prospects of success.

In setting out the function and purpose of section 13, the Court emphasised that the provision is an exception to the general rule that South African resident plaintiffs need not furnish security. It identified the purpose of section 13 as protecting defendants against the risk of irrecoverable costs where a limited liability company is unlikely to be able to satisfy an adverse costs order, thereby reducing the deterrent effect of the usual costs rule and creating a risk of vexatious or poorly founded litigation with limited cost consequences for the company.

The Court endorsed the approach that, in applying section 13, courts must perform a balancing exercise between the potential injustice to a plaintiff if prevented from pursuing a legitimate claim, and the potential injustice to a defendant who successfully defends the claim but cannot recover costs. The Court stressed that proper balancing requires adequate information: the party seeking security must show a probability that the plaintiff company will be unable to pay costs, while the plaintiff should place facts before the court showing that a security order may prevent the litigation from proceeding and should address the nature and importance of the claim in response to suggestions of vexatiousness or lack of prospects.

Turning to section 34, the Court adopted the general proposition that the right of access to courts is foundational to the rule of law and peaceful dispute resolution, but it also recognised that procedural rules necessarily regulate litigation and may validly require steps to be taken on pain of procedural consequences, including being barred from proceeding. The Court explained that, to the extent such rules limit access to court, the constitutional question ordinarily concerns whether they are properly interpreted and applied in conformity with the Constitution, particularly given section 39(2) of the Constitution, which requires legislation to be interpreted to promote the spirit, purport and objects of the Bill of Rights.

The Court rejected the applicant’s argument that any material procedural barrier necessarily triggers a section 36 limitation enquiry in the present case. It held that section 36 would arise if section 13 itself were directly challenged as limiting section 34 and requiring justification. Because the applicant did not challenge the constitutionality of section 13, the Court approached the matter on the basis that section 13 is constitutionally valid and that the question was whether the discretion had been exercised appropriately and constitutionally, not whether section 13 should be justified under section 36.

On the appellate approach, the Court considered whether the discretion under section 13 is a discretion “in the strict sense” and therefore subject to narrow appellate interference. It found persuasive the reasoning that section 13 decisions are closely connected to costs and the regulation of court procedure, and that the decision requires a value judgment on competing interests where reasonable differences of view may exist. It further reasoned that, as a procedural matter incidental to the main litigation, security-for-costs decisions should not be readily appealable on a correctness standard because that would cause delay and additional expense. The Court accordingly concluded that an appeal against an award of security under section 13 may succeed only if the court a quo did not act judicially, or acted on a misapprehension of the facts, or on wrong legal principles.

In addressing the substantive approach to section 13, the Court endorsed the position that courts should not approach security applications with any predisposition either in favour of granting security or refusing it, and that each case must be decided on its own features, consistent with earlier authority rejecting a “special circumstances” threshold as a fixed starting point.

The Court rejected the applicant’s further contention that it would be unconstitutional to order security where the effect would be to terminate the litigation. It held that section 13 contemplates that, in the commercial reality of a company in financial difficulties, an order for security may sometimes prevent the action from continuing if security cannot be found. The Court therefore treated the likelihood that litigation will be terminated as a relevant factor in the balancing exercise, but not as an absolute bar to granting security. The Court identified additional relevant considerations in the balancing exercise, including attempts to obtain assistance from shareholders or creditors, whether the defendant’s conduct caused the plaintiff’s financial difficulties, and the nature of the plaintiff’s claim.

Applying these principles to the High Court’s decision, the Court emphasised that the information before the High Court was scant in key respects. The applicant had not clearly alleged that a security order would prevent the litigation from proceeding; indeed, he suggested he would “probably” have the means to meet costs if ordered. He had not been candid about the source of funds used to retain attorneys and counsel, and he had not explained efforts to secure creditor or shareholder support to furnish security. The High Court accepted that there was reason to believe the company would be unable to pay costs and then exercised the discretion to order security, reasoning (among other things) that ordering security would not necessarily terminate the action and that creditors who stood to benefit might provide funding, and that it would be unfair for the defendant to litigate at risk of an unrecoverable costs order while those standing behind the corporate litigant were shielded.

The Constitutional Court acknowledged that a significant factor against ordering security was the applicant’s contention that the respondent’s alleged fraudulent conduct caused the liquidation. It held, however, that the High Court did not ignore this factor and weighed it in the balance. Ultimately, given the limited information placed before the High Court on the likelihood that security would terminate the litigation and the absence of evidence of attempts to obtain assistance to furnish security, the Constitutional Court concluded that it could not be said the High Court failed to act judicially or relied on incorrect facts or wrong legal principles. On that basis, the narrow grounds for appellate interference were not met.

Finally, on costs in the Constitutional Court, the Court held that given the constitutional issue raised and its importance, a costs order was not appropriate.

5. Outcome and Relief

The Constitutional Court granted leave to appeal but dismissed the appeal against the High Court’s order requiring security for costs and staying the main action pending provision of security.

No order as to costs was made in the Constitutional Court proceedings.

Cases Cited

Chief Lesapo v North West Agricultural Bank and Another [1999] ZACC 16; 2000 (1) SA 409 (CC); 1999 (12) BCLR 1420 (CC).

President of the Republic of South Africa and Another v Modderklip Boerdery (Pty) Ltd (Agri SA and Others as Amici Curiae) [2005] ZACC 5; 2005 (5) SA 3 (CC); 2005 (8) BCLR 786 (CC).

Beinash and Another v Ernst and Young and Others 1999 (2) SA 116 (CC); 1999 (2) BCLR 125 (CC).

Shepstone and Wylie and Others v Geyser NO 1998 (3) SA 1036 (SCA).

Lappeman Diamond Cutting Works (Pty) Ltd v MIB Group (Pty) Ltd (1) 1997 (4) SA 908 (W).

Bookworks (Pty) Ltd v Greater Johannesburg Transitional Metropolitan Council and Another 1999 (4) SA 799 (W).

Keary Developments Ltd v Tarmac Construction Ltd and Another [1995] 3 All ER 534 (CA).

Hudson and Son v London Trading Co Ltd 1930 WLD 288.

S v Basson 2005 (12) BCLR 1192 (CC).

Mabaso v Law Society of Northern Provinces and Another [2004] ZACC 8; 2005 (2) SA 117 (CC); 2005 (2) BCLR 129 (CC).

Knox D’Arcy Ltd and Others v Jamieson and Others [1996] ZASCA 58; 1996 (4) SA 348 (A).

Warner v Reid and Others 1907 TS 306.

JC Barnard & Partners v Trevor B Giddey, Case no 05/10006, 10 August 2005 (unreported).

Legislation Cited

Companies Act 61 of 1973, section 13.

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).

Supreme Court Act 59 of 1959, section 29.

Companies Act 1985 (United Kingdom), section 726(1).

Corporations Act 2001 (Australia), section 1335.

Rules of Court Cited

Uniform Rules of Court, Rule 47 (including Rule 47(3)).

Held

The Court held that a decision whether to order security for costs under section 13 of the Companies Act 61 of 1973 implicates section 34 of the Constitution and therefore raises a constitutional matter because a security order may, as a practical consequence, prevent a company litigant from pursuing its claim.

The Court held that section 36 does not arise on the facts because there was no direct constitutional challenge to section 13; the constitutional enquiry was confined to whether the discretion under section 13 was interpreted and applied with due regard to constitutional values and the right of access to court.

The Court held that the discretion under section 13 is a discretion in the strict sense, with the consequence that an appellate court may interfere only on narrow grounds, namely where the discretion was not exercised judicially, or was exercised on a misapprehension of the facts, or on wrong legal principles.

On the record, the Court held that the High Court did not misdirect itself or fail to act judicially in ordering security for costs and staying proceedings pending provision of security, particularly given the limited information placed before it by the applicant concerning inability to furnish security and efforts to obtain financial support.

LEGAL PRINCIPLES

A court exercising the discretion under section 13 of the Companies Act 61 of 1973, read with Rule 47 of the Uniform Rules of Court, must undertake a balancing exercise between the potential injustice to a plaintiff company (including the effect on the section 34 right of access to courts if a legitimate claim is impeded) and the potential injustice to a defendant who may be unable to recover costs if successful.

The discretion under section 13 should not be exercised with a predisposition either for or against ordering security; each case must be decided on its own relevant features, and the discretion must be exercised in a manner consistent with constitutional interpretation obligations (including section 39(2)).

In the balancing exercise, relevant considerations may include the likelihood that a security order will terminate the litigation, the plaintiff’s attempts to obtain assistance from creditors or shareholders to furnish security, whether the defendant’s conduct is alleged to have caused the plaintiff’s financial difficulty, and the nature of the plaintiff’s action. The mere possibility that a security order may end litigation is not decisive; it becomes a factor when shown to be a probability, and even then remains one factor among others.

For appellate purposes, an order under section 13 involves a discretion in the strict sense. An appeal will succeed only where the court a quo failed to act judicially or proceeded on an incorrect appreciation of the facts or wrong legal principles; appellate courts should not substitute their view merely on the basis of correctness in circumstances where the discretion was properly exercised.

Giddey NO v JC Barnard and Partners (CCT65/05) [2006] ZACC 13; 2007 (5) SA 525 (CC); 2007 (2) BCLR 125 (CC) (1 September 2006)