Security for costs – The Legislature removes a useful quiver from the defendant’s bow
23 May 2012

Section 13 of the 1973 Companies Act allowed a court to require a company litigating as claimant to provide security for the costs of the defendant if there was reason to believe that the company would be unable to pay such costs if unsuccessful.

A similar provision is conspicuous by its absence from the Companies Act, 2008 and defendants will have to resort to the common law in order to obtain security for their costs. This was confirmed by the South Gauteng High Court in the recent decision of Ngwenda Gold (Pty) Ltd & Another v Precious Prospect Trading 80 (Pty) Ltd & Another (delivered on 14 December 2011).

The Court held that in “the absence of a provision similar to Section 13 of the previous Companies Act, an applicant in an application for security for costs must found its entitlement to security for costs on the principles of the common law”. The legislature had been mindful of the enshrined right of to access to the courts in the Constitution.

In the absence of a provision similar to the previous Section 13 of the 1973 Companies Act, the principles of common law prevail. The mere fact that a plaintiff residing in South Africa is insolvent does not justify that such a plaintiff should be ordered to furnish security for costs.

The High Court has the inherent power to regulate its own process and to develop the common law. When the facts of a matter and the interest of justice demand, it has the power to require a company resident in South Africa which is insolvent to provide security for costs.

There is a distinction between litigation instigated by an insolvent company and an insolvent individual. With regard to an insolvent company those who benefit from an award in favour of the plaintiff could be shielded behind that plaintiff’s corporate identity if the plaintiff were unsuccessful and held liable for the defendant’s costs. Individual litigants would not be so protected. Whilst future legal development may entail that special circumstances or considerations are recognised in the case of insolvent or impecunious companies which justify the granting of an order for security for costs, it is clear that the common law requires something more than mere insolvency or impecuniosity, irrespective of whether the plaintiff or applicant is a private individual or a corporate entity. According to the Court future legal development “may very well recognise the fact that the plaintiff or applicant ‘has nothing to lose’ in the litigation as a relevant factor which contributes to the finding that special circumstances are present which justify the granting of an order for security for costs”. However, no such considerations were found in the Ngwenda Gold case.

Until the common law is so developed, corporate entities defending litigation should be aware that that they no longer have at their disposal the useful tool of requiring security for costs from an impecunious corporate plaintiff as a matter of course.