Fusion Properties 233 CC v Stellenbosch Municipality

Fusion Properties 233 CC (Fusion), a close corporation with no assets, instituted a damages claim of R32 million against Stellenbosch Municipality for alleged breach of contract relating to a failed property development deal. Fusion was a special purpose vehicle incorporated specifically to contract with the municipality. The municipality had invited proposals in 2005 for purchase and development of eight erven. After negotiations failed and the municipality decided not to proceed with the sale in 2014, Fusion sued in 2015. The municipality demanded security for costs in December 2018 in the sum of R2,626,431.06, invoking section 8 of the Close Corporations Act 69 of 1984 and Uniform Rule 47. Fusion opposed the application, arguing: (1) the demand was not made as soon as practicable; (2) the Close Corporations Act should be treated like the Companies Act 71 of 2008, which abolished the security for costs provision; and (3) the requirement violated section 34 of the Constitution (access to courts). The high court (Allie J) granted the order compelling security for costs. Fusion's application for leave to appeal was dismissed by the high court and subsequently referred to the Supreme Court of Appeal for oral argument.

• Whether the high court properly exercised its discretion in ordering a close corporation to provide security for costs under section 8 of the Close Corporations Act 69 of 1984
• Whether delay in demanding security for costs under Uniform Rule 47(1) should be a bar to the application
• Whether the repeal of section 13 of the Companies Act 61 of 1973 by the Companies Act 71 of 2008 means that section 8 of the Close Corporations Act should be treated as pro non scripto
• Whether an order for security for costs violates the constitutional right of access to courts under section 34 of the Constitution
• What are the grounds for appellate interference with the exercise of a discretion in the narrow sense
• Whether Fusion's prospects of success were relevant to the exercise of discretion

The application for leave to appeal was dismissed with costs, including costs of two counsel.

1. An order for security for costs under section 8 of the Close Corporations Act 69 of 1984 involves the exercise of a discretion in the narrow or strict sense. An appellate court will only interfere with such discretion if it was not exercised judicially, or was based on wrong appreciation of facts or wrong legal principles. 2. Section 8 of the Close Corporations Act permits a court to order security "at any time during the proceedings". Delay in demanding security is a relevant factor but not a jurisdictional bar to the relief. 3. The repeal of section 13 of the Companies Act 1973 by the Companies Act 71 of 2008 does not affect the validity or operation of section 8 of the Close Corporations Act. The legislature's decision not to repeal section 8 was deliberate and must be respected by courts. 4. Section 8 of the Close Corporations Act does not violate section 34 of the Constitution. When properly interpreted in accordance with section 39(2), it requires a balancing exercise between the potential injustice to a plaintiff prevented from pursuing a legitimate claim versus the potential injustice to a defendant unable to recover costs. 5. A court exercising discretion under section 8 must consider all relevant factors including: the corporation's impecuniosity and inability to pay costs; the opposing party's knowledge of the impecuniosity; any delay in seeking security and its explanation; the prospects of success; and whether the litigation is vexatious or abusive. 6. The purpose of section 8 is to prevent those who benefit from litigation by impecunious corporations from shielding behind corporate personality when adverse costs orders are made, and to deter vexatious litigation or litigation with poor prospects.

1. The Court observed (obiter) that one of the mischiefs section 8 is intended to curb is that those who stand to benefit from successful litigation by a close corporation will finance the litigation but shield behind corporate identity when costs are awarded. A plaintiff corporation relying on inability to furnish security must adduce evidence of inability from both its own resources and outside sources such as members or creditors. 2. The Court noted (obiter) that in assessing prospects of success for security for costs purposes, a court is not required to undertake an in-depth analysis as would occur at trial. It is sufficient to have a fair sense of the strength and weakness of the parties' respective cases. The extent to which assessment is practicable depends on the nature of the dispute. 3. The Court commented (obiter) that Fusion's lack of candour in failing to explain why previous litigation funders would not provide security could not redound to its benefit. 4. The Court observed (obiter) that Fusion sought "a free pass to litigate luxuriously without the risks of indemnifying the municipality" if unsuccessful. 5. The Court noted (obiter) that the jurisprudence developed under section 13 of the Companies Act 1973 offers useful guidance in interpreting section 8 of the Close Corporations Act, given their substantive similarity. 6. The Court commented (obiter) that appeals against exercises of discretion under section 8 should be discouraged in the absence of demonstrable blunder or unjustifiable conclusion, as such applications mark no stage in the progress of the case but are incidental to it.

This judgment clarifies important principles regarding security for costs applications against close corporations in South African law: 1. It confirms that section 8 of the Close Corporations Act 69 of 1984 remains valid and enforceable despite the repeal of the analogous section 13 of the Companies Act 1973. 2. It affirms that orders for security for costs under section 8 involve the exercise of a discretion in the narrow/strict sense, which attracts limited appellate interference. 3. It confirms the proper constitutional interpretation of section 8, rejecting arguments that it violates section 34 (access to courts), and affirming that it requires a balancing exercise between competing interests. 4. It establishes that the phrase "at any time during the proceedings" in section 8 is to be given its plain meaning, making the timing of a demand for security a factor to be weighed but not a jurisdictional bar. 5. It reaffirms the mischief that section 8 addresses: preventing those who benefit from litigation by impecunious corporations from shielding behind corporate personality when costs are awarded against the corporation. 6. It provides guidance on the assessment of prospects of success in security for costs applications, clarifying that courts need not undertake in-depth analysis but should have a fair sense of the strength and weakness of the parties' cases. The case is significant for practitioners dealing with close corporations as litigants and confirms that they may be treated differently from companies for security for costs purposes.