Nasionale Aartappelkoöperasie Beperk v PricewaterhouseCoopers Ingelyf and Others

NAK (the appellant) sued PWC (the respondents) for approximately R500 million for alleged negligence in auditing NAK's finances between 1984 and 1998. A special plea of champerty was dismissed and an appeal against that dismissal failed. The trial commenced in October 2005 before Botha J and continued through various periods. After approximately 105 court days, with NAK's first witness still being cross-examined, PWC brought an application on 20 November 2006 for security for costs under section 13 of the Companies Act 61 of 1973. Previously, NAK had provided security totaling R1.4 million in 2000 and 2002 without conceding liability. In October 2004, NAK's attorney wrote to PWC stating NAK's financial position had dramatically improved, with shareholders' equity of R37.4 million as at February 2003. PWC undertook to give adequate notice if it required further security. By 2006, NAK's financial position had deteriorated significantly. NAK sold various assets (including its shareholding in NTK Limpopo Agric Ltd and property) to fund the litigation. NAK acknowledged in its answering affidavit that it was in a parlous financial state and would be unable to meet an adverse costs order. NAK opposed the application on grounds including: (1) PWC's unreasonable delay in bringing the application; (2) NAK's financial predicament was caused by PWC's negligence; (3) granting security would stifle NAK's claim and violate its right of access to court; (4) PWC's costs were covered by insurance up to US$45 million; and (5) PWC was unnecessarily prolonging the trial.

• Whether the trial court properly exercised its discretion in ordering security for costs under section 13 of the Companies Act 61 of 1973
• Whether PWC's delay in bringing the application for security was unreasonable or oppressive
• Whether granting security would unconstitutionally infringe NAK's right of access to court under section 34 of the Constitution
• Whether the fact that PWC's costs were covered by insurance was a relevant consideration in determining whether to order security
• What standard of review applies to an appeal against the exercise of discretion by a trial court in ordering security for costs

The appeal was dismissed with costs, including costs of two counsel for the respondents. The order for security for costs made by Botha J was upheld.

The binding legal principles established are: (1) An appeal against a trial court's exercise of discretion in a security for costs application will only succeed if the appellant demonstrates that the discretion was not judicially exercised or was based on wrong principles of law or wrong facts - mere disagreement with the conclusion is insufficient; (2) In applications under section 13 of the Companies Act 61 of 1973, once the applicant establishes reason to believe the respondent company cannot satisfy an adverse costs order, the court must perform a balancing exercise weighing the potential injustice to both parties; (3) The right of access to court under section 34 of the Constitution is a relevant consideration in the balancing exercise, but does not preclude the grant of security where appropriate, particularly where the plaintiff is receiving financial assistance from third parties who would benefit from a successful claim; (4) A defendant's insurance coverage is generally not a relevant consideration in determining whether to order security for costs, as it is res inter alios acta - to allow a plaintiff to benefit from a defendant's prudent insurance decision would be contrary to insurance principles and the doctrine of subrogation; (5) Where a plaintiff company is being funded by shareholders, affiliates, or third parties who would benefit from a successful claim, the court is entitled to infer that such parties could provide security, particularly in the absence of evidence establishing their inability to do so; (6) Delay in bringing a security application will not necessarily be fatal if the delay was caused or contributed to by misleading conduct by the plaintiff or its legal representatives.

Hurt AJA made several non-binding observations: (1) The judge suggested that Botha J should have taken a different approach to the application for leave to appeal - he should only have granted leave if he considered there was a prospect this court could find he did not exercise a judicial discretion or committed some other misdirection vitiating his decision; (2) The Court noted, without deciding definitively, that there 'may well be situations in which the fact that a defendant is covered against the costs of the litigation by a contract of insurance may be weighed in the balance in this type of application,' but declined to express a view on what those situations might be; (3) The Court observed that it would be 'an idle exercise to try to compile a list of the considerations relevant to the decision of an application in terms of s 13' as this would 'of necessity, limit the court's discretion'; (4) The Court noted that since the enactment of the Bill of Rights, the right of access to court under section 34 'must have more weight attached to it than was the situation in pre-Constitution days,' though this does not make orders for security unconstitutional; (5) The Court commented that the scale of the trial and the amount of costs at stake were 'cogent considerations' in deciding that both PWC and its insurer should be given the protection of security for costs.

This case is significant for several reasons: (1) It clarifies the standard of review applicable to appeals against the exercise of discretion in security for costs applications - requiring demonstration of material misdirection rather than mere disagreement with the outcome; (2) It confirms that applications under section 13 of the Companies Act require a balancing exercise between potential injustice to the plaintiff if prevented from pursuing a claim and potential injustice to the defendant if unable to recover costs; (3) It addresses the constitutional dimension of security for costs applications post-Constitution, confirming that while section 34's right of access to court is relevant, it does not preclude orders for security and must be weighed against the defendant's rights; (4) It establishes that a defendant's insurance coverage is generally not a relevant consideration in security for costs applications, being res inter alios acta; (5) It confirms that where a plaintiff company is being funded by third parties (such as shareholders or affiliates), the court may infer that such funding could extend to providing security, particularly where those funders would benefit from a successful claim; (6) It demonstrates that delay in bringing a security application will not necessarily defeat the application if the delay was caused or contributed to by misleading conduct by the plaintiff; (7) It illustrates the modern approach to security for costs applications, rejecting the historical requirement to show 'special circumstances' and instead adopting a more balanced, fact-specific analysis.