Shepstone &Wylie and Others v Geyser NO (364/1997) [1998] ZASCA 48 (28 May 1998)

2

HEFER JA

This is an appeal against the judgment of Hugo J in Shepstone

& Wylie and Others v Geyser NO 1998(1) SA 354 (N) dismissing an

application for security for costs in terms of sec 13 of the Companies

Act 61 of 1973, as amended. The section reads as follows:

"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 until the security is given."

The parties are agreed that the granting of relief is discretionary once the requirements of sec 13 have been satisfied. The main issue is whether Hugo J correctly exercised his discretion in favour of the respondent.

There are three preliminary questions. The first is whether an order dismissing an application for security under sec 13 is appealable. It is not necessary to deal with all the cases on which respondent's

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counsel rely for their submission that it is not. Some of the early ones, like Wears v Nededandsch Zuid Afrikaansche Hypotheek Bank, Ltd 1908 TS 1147 and Lombard v Lombardy Hotel Co Ltd (In liquidation) 1911 TPD 866, were decided on grounds which, in the light of legislative developments and modern trends, are of little assistance in considering whether an order qualifies as a "judgment or order" under sec 20(1) of the Supreme Court Act 59 of 1959 as amended. More directly in point are Petz Products (Pty) Ltd v Commercial Electrical Contractors (Pty) Ltd 1990(4) SA 196 (C) and The Catamaran TNT; Dean Catamarans CC v Slupinsky (No2) 1997(2) SA 577 (C) in which it was held that an order relating to an application for security is not appealable under sec 20(1) for lack of finality and definitiveness and because it does not dispose of any portion of the relief claimed in the main action. In both cases (and also in Duncan NO v Minister of Law and Order 1985(4) SA 1 (T) at 2E-3B) this kind of application was regarded as a preparatory or procedural step in the proceedings to which it relates. This, in my view, is not correct. As Van den Heever J said in Ecker v Dean 1937 SWA 3 at 4,

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"[t]he usual test, ie whether the order finally disposes of portion of, or a certain phase of the issue between the parties does not really fit circumstances such as these, for the claim for security was a separate and ancillary issue between the parties, collateral to and not directly affecting the main dispute between the litigants ... it is not a procedural step in attack or defence at all but a measure of oblique relief sought by one party against the other on grounds foreign to the main issue, ie the financial situation of one litigant, this relief to be effective, if at all, only after judgment. The order determining this collateral dispute is therefore final and definitive for at no later stage in the proceedings can the applicant obtain the substance of what has been refused to him. If he has been prejudiced by the order his prejudice is irremediable."

(Cf Ritch and Another v Orthopeadic Buildings (Pty) Ltd 1979(4) SA 19 (T) at 23E-24E; Bekker NO v Total South Africa (Pty) Ltd 1990(3) SA 159 (T) at 1621-165B; Knox D'Arcy Ltd and Others v Jamieson and Others 1996(4) SA 348 (A) at 356H-357E.)

Viewed in this manner there can be no doubt that an order refusing an application for security is appealable. (Whether an order granting such an application is appealable is not necessary to decide.) Admittedly, as respondent's counsel pointed out, there is provision in

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Rule 47 of the Uniform Rules of Court for the variation by the registrar of an order granting security if he is satisfied that the amount originally furnished is no longer sufficient. But this does not affect the position where, as in the present case, the application for security is refused. It may be that the court, having once refused an application, retains the power to entertain a subsequent one. But any subsequent application will obviously require new evidence. Even if such a power does exist, it does not affect the finality of the order in the first application.

The second preliminary question relates to the ambit of sec 13.

The respondent is the liquidator of Shepway Management Company (Proprietary) Limited. As appears from 3G2A-363E of the Court a quo's judgment some of his claims in the action in connection with which the application for security has been brought, are for the recovery of amounts which the company itself could, but for its liquidation, allegedly have recovered. A liquidator may institute proceedings for the recovery of claims like these under his general powers under sec 386(4)(a) of the Companies Act. The respondent's other claims are ones which a liquidator is empowered to bring under

6 other provisions of the Companies Act read, where necessary, with

certain provisions of the Insolvency Act (henceforth referred to as

"statutory claims"). On the authority of Trakman NO v Livschitz and

Others: In Re Livschitz and Another v Trakman NO 1996(2) SA 384 (W)

at 391 et seq and Henochsberg on the Companies Act 5^th ed 27 Hugo

J found (at 361E-F) that sec 13 does not apply to statutory claims.

I do not think Hugo J was correct in saying (referring at 360C-D

to the judgment in Trakman) that "Wunsh J found that s 13 does not and

cannot apply" where a liquidator institutes a statutory claim. After

referring, first, to the practice in England and Wales, then to the same

passage in Henochsberg on which Hugo J relied, and finally to the

decision in Waisbrod v Potgieter and Others 1953(4) SA 502(W),

Wunsh J continued as follows at 392I-392B:

"To sum up so far, a liquidator who seeks to set aside dispositions under the Insolvency Act should not be required to furnish security either because s 13 applies where a company is the plaintiff or applicant in any legal proceedings (even though the liquidator acts for it), but not to a case where the liquidator is exercising a power to recover for the benefit of the company an amount which was paid out by it, or because the Court should, generally,

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exercise its discretion not to order security for costs to be given in favour of the party alleged to have been the beneficiary of the disposition."

It is obvious that the two alternatives mentioned cannot both be applied in the same case. Where it is found that sec 13 does not apply, an application for security falls to be dismissed for that very reason, and the need for the exercise of the court's discretion does not arise. On which basis Wunsh J did not make an order in respect of the costs of the first respondent in that matter does not emerge from the judgment, which is in any event so ambivalent that it is difficult to fathom its real import.

However, the passage in Henochsberg does support Hugo J's view and remains to be dealt with. As mentioned earlier it is to the effect that on the ordinary meaning of its, language sec 13 is not applicable to statutory claims. Before I deal with the language of the section a few brief remarks about the judgment in Turkstra v Goldberg NO 1946 TPD 535 are required because the case is mentioned in respondent's counsel's heads of argument and because Henochsberg,

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whilst acknowledging that the reasons may be flawed, supports the conclusion that a liquidator who sues to set aside an impeachable disposition cannot be ordered to give security for costs. That the reasons are indeed flawed, is beyond question. Price J misread some of the English cases on the topic (as demonstrated in Fraser v Lampert NO 1951(4) SA 110 (T) at 113-115). He relied moreover on Liquidator, Salisbury Meat Market Ltd Perelson 1924 WLD 104, not realizing that a provision like the present sec 13 did not appear in the legislation. when that case was decided. And his remark that "the relevant sections of the English Companies Acts are the same as the sections of our Acts", was simply not correct at the time. Whenever the ambit of sec 13 comes up for consideration again, Turkstra's case may safely be ignored.

Which brings me to the language of the section. According to the opening words it applies "where a company or other body corporate is plaintiff or applicant in any legal proceedings." But it is well to be reminded of Schreiner JA's observation in Jaga v Dönges NO and Another 1950(4) SA 653 (A) at 664H that

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"[t]he legitimate field of interpretation should not be restricted as a result of excessive peering at the language to be interpreted without sufficient attention to the contextual scene."

The express reference in sec 13 to a company which is being wound up and to its liquidator indicates that the legislature envisaged cases where the plaintiff or applicant is a company in liquidation. It could not have been unaware of the fact that in such cases the company is always represented by the liquidator, whether the latter sues nomine officii or not. There can be no doubt that the reference in the opening words to a company must be interpreted to include a liquidator suing on behalf of a company in liquidation. The enquiry is thus reduced to the question whether cases are excluded where a liquidator exercises a power specially entrusted to him by the Companies Act read with the relevant provisions of the Insolvency Act. Bearing in mind that sec 13 clearly applies to liquidators exercising the general power to institute proceedings under sec 386(4)(a), it is difficult to conceive of any reason why the legislature would exempt those who exercise a power specially entrusted to them

10 elsewhere in the Act. The object of a provision like sec 13 is "to protect

persons against liability for costs in regard to any action instituted by

bankrupt companies" (per Greenberg J in Hudson & Son v London

Trading Company Ltd 1930 WLD 288 at 291); and, as far as the

achievement of the object is concerned, it makes no difference whether

the liquidator is exercising his general power or not. Nor does it make

any difference in regard to the purpose for which the power is

exercised, because every action brought by a liquidator, whether it be

under his general power or not, is for the eventual benefit of creditors.

It may be that the exercise of certain special powers are also in the

public interest and therefore require different treatment. But this is not

always the case. To expose fraudulent dealings on the part of the

directors or officers of the company and to recover whatever may be

recoverable on that score, for example, may well be in the public

interest. But the public does not always have an interest in the recovery

of dispositions without value or some of the other impeachable

transactions. General statements about the public interest cannot solve

the problem of the interpretation of sec 13. It is at the level of the

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court's discretion to grant relief that this consideration can best receive attention in appropriate cases.

I am unable to support the view expressed in Henochsberg and in Hugo J's judgment. I should say that respondent's counsel did not support it either. They argued the appeal on the basis that liquidators exercising special powers have not been exempted from the provisions of sec 13. This judgment will proceed along the same lines.

The last preliminary matter relates to the discretion which a court has to grant or refuse relief under sec 13. Numerous judgments of this Court are to the effect that the power to interfere on appeal with the exercise of a discretion is limited to cases in which it is found that the trial court has exercised its discretion capriciously or upon a wrong principle, or has not brought its unbiased judgment to bear on the question, or has not acted for substantial reasons. (See eg Benson v SA Mutual Life Assurance Society 1986(1) SA 776 (A) at 781I-782B and the cases cited there.) The judgment in Knox D'Arcy Ltd and Others v Jamieson and Others (supra) reveals, however, that this is not the correct approach in cases where the word "discretion" is not used

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in the strict sense. To say, for example, that the court has a discretion

to grant or refuse an interim interdict means no more than that "the Court is entitled to have regard to a number of disparate and incommensurable features in coming to a conclusion" (per EM Grosskopf JA at 361 H-l). In such cases the court of appeal is at liberty to decide the matter according to its own views of the merits. (See also Hix Networking Technologies v System Publishers (Pty) Ltd and Another 1997(1) SA 391 (A) at 401G-402C.) Accordingly, whenever such a court is asked to interfere, the nature of the discretion must first be ascertained. This will not be a simple exercise where a discretion is conferred in a statute by the use of the word "may" which, standing on its own, is not particularly informative. Although the present is precisely such a case, a quest for the sense in which the word was used in the section is not necessary because the parties are agreed that we are at liberty to interfere even on the restricted grounds listed in the Benson line of cases. Their agreement stems from the fact that Hugo J exercised his discretion and refused the application on an incorrect understanding of the ambit of sec 13. In effect he wrongly excluded the

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statutory claims from consideration. Since we are thus entitled to

interfere I will proceed to consider the merits of the application without

deciding whether the restricted approach is indeed the correct one in an

appeal against an order under sec 13. It is common cause at this stage

that the requirements of the section have been satisfied and the only

question is whether the discretion to grant relief was correctly exercised

in favour of the respondent.

The reasons why Hugo J refused to grant an order appear at

3G4B-E of his judgment. A convenient starting point for discussion is

the reference towards the end of the passage to "special circumstances

that justify a decision not to order security". The learned judge probably

had in mind a line of cases commencing with Fraser v Lampert NO

(supra) in which a Full Court of the Transvaal held that

"a defendant or respondent should not be deprived of this benefit unless special circumstances exist" (per Malan J at 115B).

(See eg also Trust Bank van Afrika Bpk v Lief and Another 1963(4) SA 752 (T) at 754H ad fin; Cometal-Mometal Sarl v Corliana Enterprises

14 (Pty) Ltd 1981(4) SA 662 (W) at 663F-G).

In my judgment this is not how an application for security should

be approached. Because a court should not fetter its own discretion in

any manner and particularly not by adopting an approach which brooks

of no departure except in special circumstances, it must decide each

case upon a consideration of all the relevant features, without adopting

a predisposition either in favour of or against granting security. (Cf

Lappeman Diamond Cutting Works (Pty) Ltd v MIB Group (Pty) Ltd (No

1) 1997(4) SA 908 (W) at 919G-H; Wallace NO v Rooibos Tea Control

Board 1989(1) SA 137 (C) at 144B-D.) I prefer the approach in Keary

Developments Ltd v Tarmac Construction Ltd and Another [1995] 3 All

ER 534 (CA) at 540a-b where Peter Gibson LJ said:

"The court must carry out a balancing exercise. On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security. Against that, it must weigh the injustice to the defendant if no security is ordered and at the trial the plaintiff's claim fails and the defendant finds himself unable to recover from the plaintiff the costs which have been incurred by him in his defence of the claim."

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These are probably the "considerations of equity and fairness"

mentioned in Magida v Minister of Police 1987(1) SA 1 (A) at 14D-F in

regard to the consideration of an application for security for costs

against a peregrinus, and which should, in my judgment, also prevail

in an application under sec 13.

The "special circumstances" which persuaded Hugo J to refuse an order in the present case are (1) the nature of the claims, (2) the relationship between the appellants and the company and (3) the public interest (3G4D-E). The nature of the respondent's claims as such is not particularly significant; nor is the relationship between the appellants and the company. It is clear that the learned judge referred to these factors in the context of the third one - the public interest - and the passage at 364B-D where, after remarking that an order granting security in anything but a nominal amount would probably put an end to the litigation, he expressed the belief that it is not in the public interest that liquidators be prevented from litigating against the very people that are alleged to have caused the "bankrupt demise" of the company. It is this belief that eventually led him to refuse relief, but, before I deal

16 with it, it is necessary to canvass the remark to the effect that an order

of security would probably put an end to the respondent's case.

Let me say at the outset that the fact that an order of security will put an end to the litigation does not by itself provide sufficient reason for refusing it. It is a possibility inherent in the very concept of a provision like sec 13 which comes into operation whenever it appears to the court that the plaintiff or applicant will not be able to pay the defendant or respondent's costs in the event of the latter being successful in his defence. If there is no evidence either way, the mere possibility that the order will effectively terminate the litigation, can plainly not affect the court's decision. It only becomes a factor once it is established as a probability by the plaintiff or applicant. And, even if it is established, it remains no more than a factor to be taken into account; by itself it does not provide sufficient reason for refusing an order. (Keary's case supra at 539j-540a).

In the present case the evidence does not justify Hugo J's remark. The respondent's opposing affidavit does contain a suggestion that the respondent will not be able to pursue the action if he is required

17 to give security for the appellants' costs, but some of his allegations

lead one to believe that he is confident of receiving the financial support

of at least some of the major creditors. I am in full agreement with the

statement in Keary's case (at 540j) that

"[t]he court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons."

Turning to the remarks about the public interest and litigation against the very persons who are alleged to have caused the company's financial ruin, I have already indicated that the public interest may indeed come into play in appropriate cases. I also accept that a liquidator should not be discouraged from pursuing a claim based on the conduct which has impoverished the company (Henochsberg 28; Beaton v SA Mining Supplies (Pty) Ltd 1957(2) SA 436 (W) at 439G-440C). In order to see how this affects the present case a brief reference to the respondent's particulars of claim is necessary. In the discussion I will refer to the company as "Shepway."

18 At various stages second, third and fifth appellants and one

McGowan were directors of Shepway and partners in first appellant - a

firm of attorneys which managed Shepway's affairs. (McGowan has

since died. Fourth appellant is the executrix in his estate.) Shepway in

turn managed the timber farming operations of several other concerns.

Most of the respondent's claims relate in one way or the other to the

alleged improper way in which first appellant, through its partners,

managed Shepway. The causes of action pleaded range from simple

breach of contract and negligence to breach of fiduciary duty and

contravention of the Companies Act. The central theme of the

respondent's case, as far as the alleged mismanagement is concerned,

is that the appellants failed to exercise proper control over persons

whom they had engaged to oversee the farming operations. This

enabled the latter to defraud Shepway. It is not alleged that the

appellants were parties to the fraud, but only (in one of the alternative

causes of action) that they were parties to the reckless carrying on of

Shepway's business as envisaged in sec 424(1) of the Companies Act.

This being the respondent's case I find it difficult to see the

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interest of the public in the matter. But even if it is correct to say, as the learned judge's remarks suggest, that it is a matter of public interest because the respondent is seeking to pursue a claim against the persons who have caused Shepway's financial ruin, it is not a consideration which can tip the scale in the respondent's favour. We must bear in mind that the appellants are not the persons immediately responsible for Shepway's financial problems and that they are not alleged to have reaped any benefit other than the professional fees which first appellant charged for its services in managing Shepway's affairs. That they allegedly neglected or breached their duties as directors and managers and thus contributed to the collapse of the company is certainly something to be taken into account. But I do not regard it as decisive. Weighed against factors such as the admitted difficulty which the respondent will have to prove his allegations and the enormity of the costs which the appellants will not be able to recover should the action fail (see 363G-I of Hugo J's judgment), it pales into insignificance. In all the circumstances of the case an order for security should, in my judgment, have been granted.

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The appeal is accordingly upheld with costs including the costs

of two counsel. Substituted for the Court a quo's order refusing the application with costs is an order in terms of paragraphs (a), (b), (c), (d), (e) and (f) of the notice of motion save that the period in paragraph (c) will be three months.

JJF HEFER JUDGE OF APPEAL

Howie JA )

Harms JA )

Schutz JA ) Concur

Farlam AJA)