New Companies Act and security for legal expenses

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The previous Companies Act of 1973 provided a that where a company is plaintiff in any legal proceedings, the court may at any stage, if it is apparent that the company will be unable to pay the costs of a successful defendant, require sufficient security to be given for those costs and may stay all proceedings till such security is given. The 1973 Act was repealed by the Companies Act 71 of 2008, which contains no similar provision to the previous Section 13.

The question now is under what circumstances, and in absence of the statutory right to do so, can a defendant that is brought to court by an impecunious plaintiff demand security for the costs of the action? This issue has been dealt with in a number of recent cases, and not always consistently. In the Siemens Telecommunications v Datagenics case, the court found (in our view incorrectly) that a local company could not be compelled to give security for costs under any circumstances, even if an insolvent company embarked upon vexatious and/or speculative action.

In the case of Ngwenda Gold v Precious Prospect Trading an application for security for costs by a defendant who was sued by an insolvent company was refused on the basis that the common law requires something more than mere insolvency and that 'special circumstances' would have to exist before a local plaintiff company could be ordered to provide security.

Protection for defendant

The matter was perhaps most comprehensively dealt with in the recent case of Boost Sports Africa (Pty) Ltd v South African Breweries in the North Gauteng High Court. In this matter, the court found that despite the lack of an equivalent provision in the new Companies Act, a defendant should be protected from impecunious plaintiffs indulging in risk free litigation and that the court should invoke its inherent power to protect and regulate their own process by ordering the furnishing of security in cases in which the interest of justice demanded it.

To do so, a court need not find that any special circumstances exist. Rather, a court has a broad discretion which it must properly exercise by taking into account all relevant factors without adopting a pre-disposition either in favour of or against granting security. In essence, a balancing exercise must be carried out. On the one hand the court must weigh the injustice to the plaintiff if prevented from pursuing its claim against the injustice to a successful defendant that finds itself unable to recover from the plaintiff the legal costs incurred by it.

What other factors should be taken into account would be dictated by the peculiar facts and circumstances of the given case. In the Boost case, some of the specific factors that the court took into account were the fact that the plaintiff company had no financial means to satisfy an adverse court order, that it had not put forward any meaningful evidence or account of its inability to continue with the litigation if it was compelled to provide security for costs and that the plaintiff's case appeared weak on the merits. The court did not regard it as relevant that the defendant was a company with substantial means of its own to pay any legal costs.