In terms of s13 of the old Companies Act 69 of 1973 ("the Old Companies Act") read with High Court rule 47, a South African Company could be ordered to provide security for costs if the party seeking security had reason to believe that such a company would be unable to satisfy a costs order which may be awarded against it. The clear purpose of this provision was to ensure that where a plaintiff company was unsuccessful with its claim that a defendant would be able to recover its costs. There is no similar provision in the Companies Act 71 of 2008 ("the New Companies Act") and the New Companies Act has created uncertainty as to whether an SA company can be made to to provide security for costs on this basis alone, that is, until the June Supreme Court of Appeal (“SCA”) decision in Boost Sports South Africa (Pty) Ltd v The South African Breweries Limited.
The SCA stated that South African legislature had not erred when it did not include a provision similar to s13 of the Old Companies Act in the New Companies Act and therefore the new companies Act had to be read accordingly (without a section 13 or similar).
Due to the absence of s13, the SCA had to apply the common law to this case, which meant that the court had the discretion and power to compel Boost Sports (or any company under the common law) to furnish security for costs. The court could do so, as long as the party seeking security has demonstrated that the legal proceedings against the defendant were vexatious or reckless or constitute an abuse. The SCA laid out the factors the court must take into account when deciding a security for costs case. These factors were:
- The nature of the claim;
- The financial position of the company at the stage of the application for security; and
- Its probable financial state in the event of it losing the legal proceedings.
Based on these facts, the SCA ordered the plaintiff to put up security for costs.
The omission of s13 in the New Companies Act is confusing, especially in light of the fact that Section 8 of the Close Corporations Act 69 of 1984 has been retained. Section 8 states:
“When a corporation in any legal proceedings is a plaintiff or applicant or brings a counterclaim or counter application, the court concerned may at any time during the proceedings if it appears that there is reason to believe that the corporation or, if it is being wound up, the liquidator thereof, will be unable to pay the costs of the defendant or respondent, or the defendant or respondent in reconvention, if he or she is successful in his or her defence, require security to be given for those costs, and may stay all proceedings till the security is given.”
Retaining Section 8 of the Close Corporations Act and omitting Section 13 of the old Companies Act means that the principles dealing with furnishing of security by a close corporation are now different from those that apply to companies.