The lacuna created by the absence of a provision in the Companies Act 71 of 2008 analogous to Section 13 of the Companies Act 61 of 1973.

Feb 3, 2023 | News

The lacuna created by the absence of a provision in the Companies Act 71 of 2008 analogous to Section 13 of the Companies Act 61 of 1973.

In Systems Applications Consultants (Pty) Ltd t/a Securinfo v Systems Applications Products AG and Others (1371/2018) [2020] ZASCA 81 (2 July 2020),[1] the Supreme Court of Appeal reiterated the significant role played by Section 13 of the Companies Act 61 of 1973 (”the 1973 Act”) with regards to security of costs in relation to an insolvent company.

Section 13 of the 1973 Act, provided that:

 “where a company or other body corporate is plaintiff or applicant in any legal proceedings, the Court may at any stage, if it appears by credible testimony that there is reason to believe that the company or body corporate or, if it is being wound up, the liquidator thereof, will be unable to pay the costs of the defendant or respondent if successful in his defence, require sufficient security to be given for those costs and may stay all proceedings till the security is given”.[2]

This meant that a company which is confronted by legal proceedings, instituted by a company that has a dubious financial position, could invoke the provisions of section 13 of the 1973 Act, and bring an application requesting the Court to direct the plaintiff/applicant to furnish security for the costs of the pending legal proceedings. This position was premised on the assumption that the plaintiff/applicant company, having a precarious financial position, would be unable to meet an adverse cost order, should the application be unsuccessful.

In the abovementioned case, the applicant was a local software development company with its place of business in South Africa, and the respondent was a Geran global software company involved in the development and sale of software systems application products (SAP).[3]The applicant instituted action proceedings in the High Court, against the respondent, for damages.The respondent approached the High court  on the strength of Section 13 of the 1973 Act for an order compelling the applicant to furnish security for the respondent’s costs in the main action.[4]In the intervening period, the 1973 Act was repealed and replaced by the Companies Act 71 of 2008 (”the 2008 Act”) which  came into operation on 1 May 2011.[5] The application, however, fell to be determined in terms of the provisions of the 1973 Act because of the transitional provisions contained in the 2008 Companies Act.  In the High Court, the application was initially dismissed by Satchwell J, and on full bench appeal the application was granted in favour of the respondent. As a consequence, the applicant was compelled to furnish security, amounting to R4 Million. The applicant subsequently approached the court on an interlocutory basis and demanded that the amount of money furnished as security for cost, be released to the applicant due to a material change in factual circumstances.[6]  

The cogent legal issue considered by the Court was whether the amount of security for costs ordered by Court could subsequently be released on account of a material change in legal position and factual circumstances. Molemela JA, in a unanimous judgement, held that the applicant failed to prove that there were any new circumstances warranting the release of the amount lodged as security.[7]  Relying on Giddey NO v JC Barnard and Partners,[8] the SCA held that ordering security for costs is a procedural matter incidental to civil proceedings and that when a Court makes an order for costs, it exercises its power to regulate its own process.[9] The Court stated that inasmuch as section 13 of the 1973 Companies Act granted a substantive right, this does not detract from the fact that granting an order for security for costs has been held to be a procedural matter.[10]  The Court emphasised that, even though section 13 grants the Court a discretion to order security for costs, it does not mean that the plaintiff is automatically entitled to such an order.[11]  The Court further stated that, though there are no provision in the 2008  Act analogous to Section 13 of the 1973 Act, the mischief that section 13 addressed, is still prevalent.   The Court concluded that the evidence at its disposal was inadequate to justify the release of security that had already been furnished.[12] As a consequence, the application was dismissed.

In critically analysing the aforesaid judgment, it is commendable that the Court recognised that the inclusion of Section 13 in the 1973 Act was not an error, and still played a critical legal role, despite its obsolescence. However, it is submitted that it is regrettable that the Court did not take the opportunity afforded, to address the lacuna that exists in the 2008 Act, by not re-enacting a provision analogous to Section 13 of the 1973 Act. Indeed, it is submitted that the Court could have adopted a judicially – active stance by drawing the attention of the legislature to the existing vacuum in the 2008 Act. Van Loggerenberg and Malan argue that the retention of Section 8 of the Close Corporation Act 69 of 1984 which carries provisions analogous to section 13 of the 1973 Act, is an indication that the absence of a provision like section 13 of the 1973 Act in the 2008 Act, was probably not deliberate but a pure oversight by the legislature.[13]

Molemela JA did not make any speculations with regards to the motive behind the repeal of section 13 of the 1973 Act. It goes without saying that it is imperative for the judiciary to be cautious about overstepping its boundaries, however, it would have sufficed for it to simply have initiated a call for legislative intervention in order to remedy the situation. Moreover, though the SCA in this case acknowledged that the mischief that section 13 of the 1973 Act remedied, remains, it would have been remiss of it to continue relying on that provision as if it had not been altered. Doing so could have been tantamount to an impermissible intrusion into the domain of the legislature, and thus offend the doctrine of separation of powers.

It may be argued that the legislature presumed the unconstitutionality of Section 13 of the 1973 Companies Act and decided not to re-enact a similar provision in the 2008 Act. Section 34 of the Constitution envisages the right to access to courts,[14] and requiring the plaintiff/applicant to furnish security for costs would inevitably preclude the plaintiff/applicant from instituting legal proceedings. However, the use of the word “may” in section 13 of the 1973 Act denotes that the Court was vested with a “discretion “to make such an order. In that context, with such an unfettered discretion it would be logical to presume that this is the message that Molemela JA, in Systems Applications, conveyed when she said that no litigant is automatically entitled to an order for security of costs.[15] Notably, the Court had to engage in a delicate balancing act between the interests of the plaintiff and those of the defendant. The Court would have to consider the prejudice that may be suffered by the plaintiff when ordered to furnish security for costs, and the prejudice that may be suffered by the defendant in relation to recoverability of costs from the plaintiff. It is apparent that Section 13 of the 1973 Act, would have passed the constitutionality test.

In conclusion, it is contended that the obsolescence of section 13 of the 1973 Act, is nothing more or less than a pure oversight by the legislature, and legislative intervention is the most appropriate remedy for the omission.  Loggerenberg and Malan suggest that the legislature must enact a provision similar to that of section 13 of the 1973 Act into the 2008 Act.[16] They are of the view that section 8 of the Close Corporation Act, could serve as a guideline in framing the new provision.[17] As a logical corollary, it is contended that the legislature should not use section 8 of the close Corporations Act as a guideline (as suggested by Loggernberg and Malan) but should simply duplicate the provisions of section 13 of the Companies Act of 1973 into the Companies Act of 2008 – there is no clear justification for not re-enacting them.  Hence, the amendments to the 2008 Act should be considered, in that, section 13 of the 1973 Act should be replicated in its current form, as established procedural mechanisms during aforesaid liquidations.

Authors:

Sive Dukada and Kirshia Pillay

Candidate Attorneys at Fairbridges Wertheim Becker


[1] Systems Applications Consultants (Pty) Ltd t/a Securinfo v Systems Applications Products AG and Others 2020 ZASCA 81

[2] The Companies Act 61 of 1973.

[3]  n (1) abovepar 2.

[4] n (1) above, at par 5

[5] n (1) above at par 5

[6] n (1) above, at par 41

[7] n (1) above, at par 41

[8] Giddey No v JC Barnard and Partners 2007 2 BCLR 125 (CC).

[9] n (14) above, at par 22

[10] n (14) above, at para 23

[11] n (14) above, at para 23

[12] n (14) above, at par 49

[13] Loggerenberg and Malan “Security for costs by local Companies: Back to 1909 in the Transvaal, or not?” 2012 THRHR 619 620

[14] The Constitution of the Republic of South Africa, 1996.

[15] n (1) above, at para 23

[16] n (13) above, 621

[17] n (13) above, 621