With the enactment of the Companies Act (71 of 2008) (“Companies Act”), the registration of close corporations under the Close Corporations Act (69 of 1984) (“Close Corporations Act”) became a thing of the past. Whilst the registration of these entities has been done away with, close corporations registered prior to the enactment of the Companies Act are still legally recognised. In the current dispensation, there is a clear distinction in how close corporations and companies are regulated in terms of their respective empowering legislation.

The recent judgment in the case of Mahomed Mahier Tayob v Lifestyle Furnishers CC (in liquidation) (14835/2020) [2024] ZAGPPHC 1283 (29 November 2024) provides valuable insight into the application of security for costs in matters involving a close corporation under final winding up. This case sheds light on the balancing act that our courts must perform between protecting defendants from financial prejudice and ensuring plaintiffs' access to justice.

Facts of the Case
The applicant, Mahomed Mahier Tayob ("Mr Tayob"), a business rescue practitioner, sought an order compelling the respondent, Lifestyle Furnishers CC (in liquidation) ("Lifestyle "), to provide security for costs amounting to R500 000.00. The application was brought about in response to the action instituted by Lifestyle. It was alleged that Mr Tayob's conduct during the business rescue proceedings led to the final liquidation of the entity. The appointed liquidator of Lifestyle sought to recover R82 618 765.00 from Mr Tayob under section 64 of the Close Corporations Act on the grounds that, during business rescue, he carried on the business of Lifestyle recklessly and/or with gross negligence and/or with the intent to defraud its creditors and/or for fraudulent purposes. Mr Tayob argued that the claim was vexatious and financially unsustainable, raising concerns about Lifestyle’s inability to meet adverse cost orders should the main action fail. Lifestyle’s financial wherewithal and insolvency status was central to the interlocutory application.

Legal Principles on Security for Costs
The principle of security for costs protects defendants from potential financial losses from litigation initiated by plaintiffs who may lack the financial capacity to satisfy adverse cost orders. Procedurally, such applications are regulated by Rule 47 of the Uniform Rules of Court, while substantively, they are guided by common law and statutory provisions. Under common law, a court may order security for costs when the plaintiff is a peregrinus (foreign natural person or juristic person) or where the claim is found to be vexatious, reckless or an abuse of the court's processes. Statutory provisions, notably section 8 of the Close Corporations Act – derived from section 13 of the old Companies Act (61 of 1973)
(“Old Companies Act”) – empower courts to require security for costs at any stage if credible evidence demonstrates that the plaintiff close corporation is unlikely to satisfy an adverse cost order or, if it is being wound-up, the liquidator thereof will be unable to pay the costs of the defendant if successful in their defence.

In the case of companies, the effect of the omission of section 13 of the Old Companies Act in the new Companies Act is that the prospects of an incola (local) company’s inability to pay the costs of a successful defendant is no longer per se an indicator for granting an order for the provision of security for costs. Having said that, Courts generally have the discretion to determine whether to grant an order for security for costs, striking a balance between the plaintiff's right to access justice and the defendant's right to protection from irrecoverable expenses. In Fusion Properties 233 CC v Stellenbosch Municipality (932/2019) [2021] ZASCA 10 (29 January 2021), the Supreme Court of Appeal highlighted the importance of weighing the potential injustice to a plaintiff 3 who is prevented from pursuing a legitimate claim against the potential prejudice to a defendant faced with unrecoverable costs after successfully defending the action.

Analysis of the Case
According to a report filed with the Master’s Office, termed the “the Kets Report”, Lifestyle was hopelessly insolvent. The substance of this report was introduced by Mr Tayob as evidence by way of a supplementary founding affidavit, which was accepted by the court. In placing reliance on the Kets Report, Mr Tayob asserted that Lifestyle's insolvency evidenced its inability to satisfy an adverse costs order. He further argued that the claim lacked merit and was pursued with ulterior motives. Mr Tayob raised concerns regarding Lifestyle’s reliance on external funding, which he contended could result in undue benefit to the funder without accountability for costs if the claim fails. Lastly, Mr Tayob mentioned Lifestyle's appointed liquidator’s history of vexatious litigation, referencing frivolous applications to mount legal costs against him based on a personal vendetta. Lifestyle, represented by the appointed liquidator, opposed the application on both procedural and substantive grounds. It argued that the application for security was delayed and that the introduction of the Kets Report through a supplementary affidavit was procedurally incorrect/irregular. Lifestyle also defended its reliance on external funding, which became contentious due to concerns about funders shielding themselves behind the corporate entity to evade legal costs if the action was unsuccessful.

The court considered several pivotal principles. First, it underscored that a plaintiff's insolvency status was crucial in deciding whether to order security for costs under section 8 of the Close Corporations Act. Second, it highlighted that claims pursued recklessly or with ulterior motives compromise the integrity of judicial processes and justify the imposition of security orders to safeguard defendants. Lastly, the court emphasised the necessity of transparency and accountability in litigation funding arrangements to prevent funders from gaining undue advantages. The court ruled in favour of Mr Tayob, ordering Lifestyle to furnish security for costs. As confirmed by the Kets Report, the judgment relied on the respondent's insolvency status and found the external funding arrangements to contravene section 8 of the Close Corporations Act.

Key takeaways from the Judgment
This judgment highlights key considerations for litigants in commercial disputes, emphasising the importance of financial due diligence, particularly when dealing with entities in liquidation. Rule 47 applications for security for costs serve as a strategic arsenal, which can be useful in frivolous or unsustainable claims. Additionally, the judgment emphasises the judiciary's critical role in scrutinising funding arrangements to ensure fairness and equitable outcomes. The decision in casu highlights the vital role of security for costs in maintaining the fairness and integrity of litigation. By balancing the interests of both parties, the court reaffirmed its commitment to preventing the abuse of legal processes while ensuring access to justice. Practitioners must carefully assess the financial position of opposing parties and consider the strategic impact that a demand for security for costs may have in overcoming high stakes litigation.