Trevor B Giddey NO v J C Barnard and Partners

The applicant, Trevor B Giddey NO, was the liquidator of Sadrema Explorations Ltd (in liquidation). He instituted an action in the Johannesburg High Court against J C Barnard and Partners (the respondent), claiming payment of US $100 million plus interest. The applicant alleged that the respondent received this sum on behalf of Sadrema Explorations and was to have held it in trust, but failed to conserve the funds, which was allegedly one of the main causes of Sadrema's liquidation. In response to the combined summons, the respondent applied to the High Court for an order in terms of Rule 47(3) of the Uniform Rules of Court directing the applicant to furnish security for costs under section 13 of the Companies Act 61 of 1973. On 10 August 2005, the High Court ordered the applicant to furnish security in an amount to be fixed by the Registrar and stayed the action pending the furnishing of security. The applicant's applications for leave to appeal to the High Court and the Supreme Court of Appeal were both unsuccessful. He then approached the Constitutional Court.

• Whether the application for leave to appeal raises a constitutional matter
• Whether the discretion to order security for costs under section 13 of the Companies Act must be exercised with regard to section 34 of the Constitution (right of access to courts)
• What is the proper approach of an appellate court to an appeal against an order for security for costs
• What legal principles should govern the exercise of the discretion to order security for costs in light of the Constitution
• Whether the High Court properly exercised its discretion in ordering security for costs in this case

1. The application for leave to appeal is granted. 2. The appeal is dismissed.

The ratio decidendi of this case comprises several binding principles: (1) A decision whether to order security for costs under section 13 of the Companies Act raises a constitutional matter as it may affect the right of access to courts under section 34 of the Constitution. (2) The discretion conferred by section 13 is a discretion in the strict sense, and an appellate court may only interfere where the discretion was not exercised judicially, or was based on a misapprehension of facts or wrong legal principles. (3) In exercising the section 13 discretion, courts must interpret and apply the provision with appropriate regard to the spirit, purport and objects of the Bill of Rights, particularly section 34. (4) Courts must conduct a balancing exercise weighing the potential injustice to the plaintiff if prevented from pursuing a legitimate claim (incorporating recognition of the right of access to courts) against the potential injustice to the defendant if it succeeds in its defence but cannot recover its costs. (5) Relevant considerations in this balancing exercise include: the likelihood that an order will terminate the plaintiff's action; attempts made by the plaintiff to find financial assistance from shareholders or creditors; whether it is the defendant's conduct that caused the plaintiff's financial difficulties; and the nature of the plaintiff's action. (6) The fact that an order for security may terminate litigation does not by itself provide sufficient reason for refusing the order; it is inherent in the concept of section 13 and only becomes a factor once established as a probability, and even then remains only one factor to be weighed in the balance.

The Court made several important observations obiter: (1) Section 13 of the Companies Act was not challenged as unconstitutional and the Court proceeded on the basis that it is constitutional (para 18). (2) A challenge to whether section 13 constitutes an unjustifiable limitation of section 34 would require a section 36 analysis, but no such challenge was brought in this case (paras 17-18). (3) For courts to function fairly, they must have rules regulating their proceedings, and those rules will often require parties to take certain steps on pain of being prevented from proceeding with a claim or defence. Such rules must be compliant with the Constitution, and to the extent they limit rights, must be justifiable under section 36 (para 16). (4) The purpose of section 13 is to protect persons against liability for costs in actions instituted by bankrupt companies, as the ordinary deterrent effect of adverse costs orders may be attenuated where a limited liability company will be unable to pay its debts (para 7). (5) The Court observed that the applicant was not candid with the Court about the source of funds to retain attorneys and counsel, nor about attempts to secure support from creditors or shareholders to furnish security (para 31). (6) Ordering security for costs is a procedural matter incidental to civil proceedings, and if it could be appealed on the standard of correctness each time, it might result in lengthy delays and considerable costs (para 22).

This is a landmark case establishing the correct constitutional approach to orders for security for costs in South African law. It is the first Constitutional Court judgment to comprehensively address how section 34 of the Constitution (right of access to courts) affects the exercise of the discretion to order security for costs under section 13 of the Companies Act. The judgment clarifies that: (1) decisions on security for costs raise constitutional matters; (2) the discretion is one in the strict sense, subject to limited appellate review; (3) courts must balance the constitutional right of access to courts against the interests of defendants in recovering costs; and (4) certain factors are relevant to this balancing exercise. The case has been widely cited in subsequent jurisprudence on security for costs and provides important guidance on how procedural rules must be interpreted and applied in light of constitutional rights.