Under what circumstances can a Defendant request a Plaintiff Company or Close Corporation to furnish security for costs?

By Dean Brainin (Candidate Attorney) and Roy Bregman.

Section 13 of the Companies Act 61 of 1973 (the old Act) and Section 8 of the Close Corporations Act 69 of 1984 (the CC Act), entitle a Defendant to ask a company or Close Corporation as a Plaintiff in litigation to put up security for costs if there is reason to believe that the Plaintiff will not be able to pay the Defendant's costs if it loses an action or application.

The Companies Act 71 of 2008 (the new Act) replaced the old Act and does not contain a provision that allows a Defendant to ask a Plaintiff to provide security for costs. Under what circumstances can a party approach a court to compel a company to furnish security?

In the case of Boost Sports South Africa (Pty) Ltd v South Africa Breweries (Pty) Limited [2015] 3 All SA 255, the SCA set out the factors that determine if a court should order a Plaintiff incola Company to furnish security for costs, namely, if:

·         There is a basis in law to order an incola plaintiff company to furnish security.

·         Defendant fails to demand security expeditiously.

·         The application commits the Plaintiff under oath to a version before the trial.

·         Plaintiff's claim is vexatious, unmeritorious or amounts to an abuse.

·         Under section 34 of the Constitution, Plaintiff's constitutional right will be infringed unless a Court hears the case in a fair and public hearing.

·         There are material disputes which the parties cannot resolve on the papers and without the benefit of oral evidence.

Our courts have enunciated on these principles. In African Farms & Townships v C.T. Municipality 1963 (2) SA 555 (A) the Court stated: "an action is vexatious and an abuse of the process of Court … if it is obviously unsustainable ". In Golden International Navigation S.A. v Zeba Maritime 2008 (3) S.A. 10 (C) the Court posited that action is vexatious and frivolous, "where on the face of the pleadings it is shown that the action cannot be maintained ".

In the case of Telecommunications (Pty) Ltd v Datagenics (Pty) Ltd 2013 (1) S.A. 65 (GNP), the Court held it must apply the common law where the Companies Act did not contain a provision regulating security for costs. Additionally, the Court cannot order South African companies to furnish security purely based on their financial position.  

Section 8 of the CC Act still applies. In the recent case of Fusion Properties 233 CC v Stellenbosch Municipality (932/2019) [2021] ZASCA 10, the SCA addressed the uncertainty concerning an order for security for costs against a Close Corporation.

In this case, Fusion instituted legal proceedings against the Stellenbosch municipality for damages resulting from an alleged breach of contract for the sum of roughly R32 million. Fusion was a company that had no assets. Because of this, the Municipality made an application for security for costs as it believed it had no prospect of recovering their costs of litigation if they were successful in defending the claim brought by Fusion. The High Court ordered Fusion to furnish security for costs of R2 626 431.06 and further ordered that stay of action until Fusion complied with such order. Fusion contested its obligation to provide security for costs.

Fusion disputed the order to furnish security on three grounds, namely:

·         The Municipality did not call for security for costs "as soon as possible after the commencement of the action". 

·         Section 8 of the CC Act deals with security for costs in legal proceedings by Close Corporations.  Fusion argued that no basis existed for the High Court to order that Fusion put up security, even if Defendant believed that Fusion would be unable to satisfy an adverse costs order. 

·         If they were to furnish security, Fusion would be unable to pursue its claim by being denied access to Court in terms of Section 34 of the Constitution.

The High Court rejected all three grounds upon which Fusion relied. The SCA upheld the finding of the lower Court.  The SCA held that it could not ignore Section 8 because Section 13 of the Companies Act 61 of 1973 - the functional equivalent of Section 8 - was not carried over to the current Companies Act 71 of 2008 when the legislature repealed the old Act.

The Fusion case confirms that a Defendant may ask a Close Corporation to put up security when it has insufficient funds or assets to cover the Defendant's costs if a Court grants an adverse cost order against it. However, the Court still has to be satisfied that the main action or application is (1) vexatious, (2) reckless, or (3) amounts to an abuse of the process of the Court.