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Security for costs

October 2015

South Africa

In 2011 the Companies Act 71 of 2008 (the New Act) came into effect and in doing so created a statutory lacuna regarding the ability of a defendant to require an impecunious incola company that institutes legal proceedings to put up security for costs.  In the recent judgment of Boost Sports Africa (Pty) Ltd v The South Africa Breweries (Pty) Ltd (20156/2014) [2015] ZASCA the Supreme Court of Appeal (SCA) provided much needed clarity as to when a court can require an incola to provide security.  To give context to the significance of this judgment, it is useful to consider the common law applicable to security for costs.

Divide between a peregrinus and an incola

Peregrinus
At common law a peregrinus (a foreign litigant that is not domiciled within the jurisdiction of the court) may be required to furnish security in order to protect an incola (a local litigant domiciled within the jurisdiction of the court) from not being able to recover costs.  The common law is predicated on the ability of a successful litigant to execute the order against the unsuccessful litigant, but the courts have shown a degree of reservation in granting security for costs where the peregrinus owns immovable property within the court's jurisdiction.  This position is qualified insofar as the courts have held that no default position exists and security for costs should not be ordered merely because a peregrinus does not own immovable property within the Republic of South Africa.

In exercising its discretion to order security for costs, a court will consider the circumstances of each case and in particular whether it is fair and equitable, to both the incola and peregrinus, to require the furnishing of security (see Magida v Minister of Police 1987 (1) SA 1 (A) and Blastrite (Pty) Ltd v Genpaco Ltd; In re: Genpaco Ltd v Blastrite (Pty) Ltd (4530/15) [2015] ZAWCHC).  Security for costs should be provided by a peregrinus in order to protect an incola from the increased price tag, uncertainty and inconvenience concomitant with recovering costs in a foreign country (see Exploitatie-en Beleggingsmaatschappij Argonauten 11 BV and Another v Honig 2012 (1) SA 247 (SCA)).

When considering the circumstances of each case the court will take into account the financial status of the peregrinus and whether an order for security for costs may effectively preclude it from proceeding with its case (see Vanda v Mbuqe & Mbuqe; Nomoyi v Mbuqe 1993 (4) SA 93 (TK)).  The courts will also guard against placing unreasonable barriers in the way of either litigant to the extent that justice may be denied (see Silvercraft Helicopters (Switzerland) Ltd and Another v Zonnekus Mansions (Pty) Ltd, and Two Other Cases 2009 (5) SA 602 (C)).

Incola
The common law treats an incola differently to a peregrinus, and as general rule does not require an incola to furnish security for costs (see Witham v Venables Mez 291).  The mere fact that an incola will be unable to meet an adverse costs order is not a basis to require security.  By contrast, an incola may, in the exercise of the court's discretion, be ordered to provide security for costs in circumstances where the main action in question is vexatious, reckless or otherwise amounts to an abuse of the court's process (see Ramsey NO v Maarman 200 (6) SA 159 (C)). 

The courts have held that an abuse of process occurs when the provisions of the Uniform Rules of Court are used to achieve an outcome that is tangential to the pursuit of the truth (see Ramsamy NO and Others v Maarman NO and Another 2002 (6) SA 159 (C)).  The courts have further stated that if an incola is a so-called "man of straw", who litigates in a nominal capacity, the court has the inherent jurisdiction to order the incola to furnish security for costs (see Mears v Brook's Executor & Mears' Trustee 1906 TS).

The common law rule pertaining to incolae is therefore not unqualified.  The courts are vested with the inherent jurisdiction to curtail vexatious, reckless and abusive proceedings and may order an incola to furnish security for costs in order to achieve such an end (see Nielson v Rautenbach NO & Others 2014 (3) SA 17 (GNP)).

The Constitution

Section 9(1) of the Constitution of the Republic of South Africa 1996 provides that "everyone is equal before the law and has the right to equal protection and benefit of the law".  Case law has confirmed that security for costs does not fall foul of the right to equality and, in fact, gives effect to this right by creating parity between litigants.

Section 34 of the Constitution provides that "everyone has the right to have any dispute that can be resolved by the application of law decided in a fair public hearing before a court or, where appropriate, another independent and impartial tribunal or forum".  It encapsulates everyone's (not only a citizen's) right to access the courts, and the courts have held that such right to access should not be unduly limited by virtue of the provision of security for costs.  Accordingly, the courts must exercise their discretion in a manner that gives effect to an incola's right to institute legal proceedings within the Republic and that such right should not be curtailed by the provision of security for costs (see Sherenisa and Others v Minister of Safety and Security and Another (2394/09) [2012] ZAFSHC 30).

Legislation

Section 13 of the Companies Act 61 of 1973 (the Old Act) empowered a court to order a plaintiff company to lodge sufficient security for a defendant's costs when the court had reason to believe that a plaintiff company would be unable to meet an adverse costs order.  Section 13 of the Old Act vested in the court the discretion to stay the litigation until a plaintiff company furnished security for a defendant's costs.  The Old Act was repealed by the New Act and in doing so, deleted the provision contained in the old section 13 from codified South African company law.

The Boost Sports Africa case

In Boost Sports Africa (Pty) Ltd v The South Africa Breweries (Pty) Ltd (20156/2014) [2015] ZASCA, the SCA was called upon to decide if an incola could be compelled to furnish security for costs in the absence of section 13 of the Old Act.

Boost Sports Africa (Pty) Ltd (Boost), an incola of the court, alleged that South Africa Breweries (Pty) Ltd (SAB) made unauthorised use of its intellectual property and proceeded to claim damages from SAB.  Pursuant to Boost instituting action against SAB, SAB became concerned that Boost would be unable to pay an adverse costs order.  Further investigations by SAB revealed that Boost did not actively trade, did not own immovable property or possess any significant assets.  It was also established that Boost's litigation was funded by its shareholders.  SAB wrote to Boost requesting proof of its ability to meet an adverse costs order and Boost refused to produce any evidence that it would be able to pay.

These facts led to the contention by SAB that Boost would be unable to satisfy an adverse costs order and SAB made application to order the impoverished Boost to furnish security for costs.  SAB alleged that the shareholders of Boost appeared to be hiding behind the company in such a way that they were likely to benefit should the litigation be successful and would be sheltered from paying costs should the litigation fail.  In the absence of section 13 of the Old Act the High Court held that it was vested with discretion to regulate its own proceedings and ordered Boost to furnish security for costs.  Boost then took the matter on appeal to the SCA.

In deciding the appeal, the SCA considered five important points. 

  • First, section 173 of the Constitution vests the courts with the inherent power to regulate their own proceedings and such discretion should be exercised in order to give effect to fairness and the interests of justice. 
  • Second, the absence of section 13 of the Old Act from the New Act should be seen as intentional by the legislature and the courts should not adopt a position that the old section 13 still forms part of our law, as this would infringe on the separation of power between the legislature and the judiciary. 
  • Third, courts are required to balance the interests of a plaintiff who is prevented from pursuing a litigant by virtue of an order for security for costs against the injustice that will befall a defendant who is unable to recover costs. 
  • Fourth, when developing the common law, courts must promote the spirit, purport and objects of the Bill of Rights in terms of section 39(2) of the Constitution. 
  • Fifth, section 8 of the Close Corporation Act 69 of 1984 preserved the provisions of section 13 of the Old Act and the principles applicable to close corporations in relation to the furnishing of security for costs differ from those applicable to a company.

The SCA held that absent section 13 of the Old Act in the New Act the law no longer differentiated between an incola company and an incola person (individual).  In determining an order for security for costs the SCA stated that the factors contained in section 13 of the Old Act still had relevance and courts should have regard to the nature of the claim, the financial status of the incola and the incola's probable financial status should it fail in the matter.  The SCA placed the onus on the party seeking security for costs to go beyond merely showing that an incola is unable meet an adverse costs order and held that the applicant must satisfy the court that the main action is vexatious, reckless or otherwise amounts to an abuse (see Ramsey NO v Maarman 200 (6) SA 159 (C)).  An action will be vexatious if it is obviously unsustainable (see African Farms & Townships v CT Municipality 1963 (2) SA 555 (A)).

The court found that security must be furnished, saying, "The picture that emerges is that although these shareholders are funding the litigation, they are doing so in a manner that allows them to hide behind the corporate veil of the plaintiff. No evidence has been adduced by them that there has been an attempt to raise funds to put up security for the respondent’s costs, but that they have been unable to do so. That reticence to take the court into their confidence should inexorably lead to the inference that the shareholders, who authorised the litigation on behalf of the plaintiff, impecunious as it was, are shielding behind an empty shell in order to avoid liability for costs."

In making its judgment the SCA concurred with the judgment in the court a quo, insofar as the court had inherent jurisdiction to regulate its own proceedings and it was appropriate to shield a defendant from so-called risk free litigation when this was in the interests of justice.  The SCA found that there was no set rule as to when an incola should be required to furnish security for costs, but rather that the facts and circumstances of each matter should inform the decision.  The consideration contemplates reconciliation between the plaintiff's right to access courts and the defendant's interests of not being subjected to risk free litigation.

As published in Without Prejudice in October 2015.

The team

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