Judgment summary
This is an interlocutory application brought by eThekwini Municipality (the First Defendant) in terms of Section 8 of the Close Corporations Act, 1984, read with Rule 47 of the Uniform Rules of Court. eThekwini sought an order requiring the joint liquidators of Zikhulise Cleaning Maintenance and Transport CC ("ZCMT") to furnish security for costs in the main action, together with an order condoning its late filing of the security-for-costs application [1].
In the main action, the joint liquidators claim R169,168,164.26 from eThekwini, being monies alleged to be due and owing to ZCMT but paid by eThekwini to a separate entity, Zikhulise Group (Pty) Ltd, as a result of alleged fraud or misrepresentation [1].
The court dismissed the security-for-costs application and granted condonation. It held that eThekwini had failed to adduce sufficient facts to establish the threshold requirement of a "reason to believe" that the liquidators would be unable to pay costs, and identified further cumulative reasons against granting the order. The court also expressed the view that organs of state bear a heightened constitutional duty before they may seek security for costs against private litigants [36, 42, 54].
Background
ZCMT operated primarily as a construction entity and was awarded large contracts from public tenders for the construction of low-cost housing in numerous municipalities in KwaZulu-Natal [4].
On or about 25 February 2016, the South African Revenue Service ("SARS") brought an application for the winding up of ZCMT in the High Court, Pretoria, under case number 14886/2016. By that time, ZCMT had already ceased to operate during 2015 due to its inability to procure confirmation of its tax compliance status in terms of Section 256 of the Tax Administration Act, 28 of 2011, as a result of its substantial outstanding tax debt [4].
Ms Mabong Flora-Junior Mkhize, the sole member of ZCMT, caused Zikhulise Group (Pty) Ltd to be incorporated on 2 March 2016. Ms Mkhize also launched a business rescue application in the High Court, Pretoria, under case number 18101/2016, on behalf of ZCMT. That application was dismissed on 22 August 2017 and ZCMT was placed under provisional liquidation. It was placed under final winding up on 16 October 2020 [5].
The First and Second Plaintiffs were appointed as joint liquidators of ZCMT on 06 September 2017 [2].
eThekwini had previously entered into a settlement agreement with ZCMT, made an order of court, under case number 8614/2012, in which eThekwini undertook to pay ZCMT in full for all outstanding construction work already done [6].
Ms Mkhize, as sole director of Zikhulise Group, submitted 29 invoices to eThekwini for payment and gave instructions to pay Zikhulise Group. The payments were authorised and approved by Ms Beryl Nozipho Ntombifuthi Khanyile, formerly head of Human Settlements. The payments were made to Zikhulise Group, not to ZCMT as contemplated in the settlement agreement [7].
The payments were made between 22 January 2021 and 13 August 2021 to Zikhulise Group in the total amount of R169,168,164.26, after the effective date of liquidation of ZCMT of 25 February 2016 [8].
eThekwini averred that Ms Mkhize had represented to it that ZCMT had been converted into a private company, namely Zikhulise Group. The Plaintiffs' version was that the conversion produced a separate entity, Zikhulise Cleaning Maintenance and Transport (Pty) Ltd, and that Zikhulise Group was a completely separate and distinct entity registered prior to that conversion. The conversion was later set aside by court order on application brought by the Plaintiffs [9].
When Ms Mkhize applied to the Companies and Intellectual Property Commission ("CIPC") for the conversion, SARS had already launched its winding-up proceedings and Ms Mkhize had launched her business rescue proceedings. Ms Mkhize did not disclose to the court, at the hearings of the winding-up and business rescue applications, that ZCMT had been converted. She also signed a declaration to the CIPC confirming that there were no pending liquidation or business rescue proceedings against ZCMT [10].
A letter dated 3 March 2016 was addressed by Ms Mkhize's personal assistant, Ms Samantha Holland, purporting to indicate that Zikhulise Group had complied with Regulation 18 of the Companies Act, No 71 of 2008 and had disbanded the close corporation and incorporated ZCMT (Pty) Ltd. A further letter on the letterhead of Russel James and Co Inc was later found to have been manipulated by the removal of the registration number of the company from the entity name, which resulted in a tender for which ZCMT had submitted a bid being awarded to Zikhulise Group [11].
Core dispute
The central interlocutory dispute was whether eThekwini Municipality was entitled to an order compelling the joint liquidators of ZCMT to furnish security for costs in the main action, in which the liquidators seek R169,168,164.26 from eThekwini [1].
The threshold question was whether eThekwini had adduced sufficient facts to establish a "reason to believe", as required by Section 8 of the Close Corporations Act, that the joint liquidators would be unable to pay eThekwini's costs if eThekwini succeeded in its defence [28, 30, 32].
A secondary question, raised by the court of its own motion, was whether an organ of state, in view of its obligations under Section 7(2) of the Constitution to respect, protect, promote and fulfil the rights in the Bill of Rights (including the right of access to courts in Section 34), is required to meet a heightened threshold before it may seek security for costs against a private litigant in the absence of an allegation that the litigation is frivolous, vexatious or brought for an ulterior purpose [3, 46, 48].
A further issue was whether condonation should be granted for eThekwini's late filing of the security-for-costs application [1, 43].
Court findings
On the threshold "reason to believe" requirement, the court found that, apart from the Plaintiffs' concession in their particulars of claim that ZCMT is unable to pay its debts and that its liabilities exceed its assets, eThekwini put up no further evidence in support of a reason to believe [33]. The court held that the concession alone was insufficient, particularly because the Plaintiffs indicated they were in the process of collecting debts due to the ZCMT estate and undertook to pay costs if unsuccessful, and because SARS, as the sole proved creditor and the liquidating creditor, is in law obliged to make a contribution to any shortfall in the insolvent estate [33, 34].
The court distinguished Trust Bank Van Afrika Bpk v Lief and Another on the basis that, in the present matter, there was only one proved creditor (SARS), no suggestion that SARS would withdraw its proved claim, and no suggestion of unreasonable delay or unpredictability in furnishing costs [25, 34].
The court relied on FirstRand Bank Limited v Master of the High Court (Pretoria) and Others (1120/19) [2021] ZASCA 33; 2021 (4) SA 115 (SCA) as authority for the proposition that a petitioning creditor is always obliged to make a contribution under Section 14(3) read with Section 106 of the relevant legislation, noting that counsel for eThekwini was unaware of that decision at the hearing [27, 33].
The court held that, in the absence of facts supporting a reason to believe, it could not proceed to the second step of exercising its discretion by weighing the relevant factors [35, 36].
Even if it were wrong on the threshold finding, the court identified five further cumulative reasons against granting security for costs [37]: first, eThekwini had not filed a plea in the main action and had not particularised its prescription defence, leaving the court without a basis to assess the strengths and weaknesses of the parties' cases [37]; second, there was no allegation supported by facts that the litigation was reckless, vexatious or an abuse of process [39]; third, the matter involved serious allegations of impropriety on the part of municipal officials, and one would have expected eThekwini to welcome rather than resist the litigation [39]; fourth, the potential prejudice to creditors of ZCMT if security were ordered was immense, with no alternative means of recovery identified, and there was no evidence of any budget allocation for eThekwini's legal services unit to support its claim of an inability to meet litigation expenses [40]; and fifth, eThekwini admitted that municipal officials were motivated by deception at the instance of Ms Mkhize, making its resistance to the litigation difficult to explain [41].
On the constitutional question, the court held that, because an order for security for costs limits a litigant's right of access to courts under Section 34 of the Constitution, which is at odds with the state's duty under Section 7(2), organs of state bear a higher duty to establish frivolity, vexatiousness or poor prospects of success before they can seek security for costs against a private litigant [54, 55]. The court stated that this consideration does not eradicate the court's discretion but is one of the factors to which the court will have regard [55].
On condonation, the court accepted that the explanation for the delay was poor but found that the matter was of sufficient public importance not to be disposed of on a technicality, that both parties had not always kept to their timelines, that the delay was not unreasonably excessive, and that no material prejudice was occasioned [43, 44]. Condonation was granted [45].
Outcome
The court made the following order [59]:
1. The application for condonation for non-compliance with the time periods prescribed in Rule 47 of the Uniform Rules of Court was granted.
2. The security-for-costs application was dismissed.
3. eThekwini Municipality, as applicant and First Defendant, was ordered to pay costs, including the costs occasioned by the employment of two counsel on Scale C.
Major issues / areas of contention
- Whether eThekwini Municipality adduced sufficient facts to meet the threshold 'reason to believe' requirement under Section 8 of the Close Corporations Act, 1984, that the joint liquidators would be unable to pay an adverse costs order.
- Whether the Plaintiffs' concession that ZCMT is unable to pay its debts, standing alone, constitutes a sufficient factual basis for the 'reason to believe' threshold.
- Whether SARS, as the sole proved creditor and liquidating creditor, is in law obliged to contribute to any shortfall in the insolvent estate, thereby reducing the risk that an adverse costs order would go unsatisfied.
- Whether Trust Bank Van Afrika Bpk v Lief and Another stands as a general rule that a creditor's potential contribution does not excuse the furnishing of security, or whether it is distinguishable on its facts.
- Whether the absence of a plea by eThekwini in the main action prevented the court from properly assessing the prospects of success and the alleged vexatiousness of the litigation.
- Whether organs of state, by reason of their constitutional duty under Section 7(2) of the Constitution to respect, protect, promote and fulfil the rights in the Bill of Rights, bear a heightened threshold requirement before they may seek security for costs against a private litigant.
- Whether an order for security for costs against the joint liquidators would effectively stifle the litigation and prejudice ZCMT's creditors.
- Whether condonation should be granted for eThekwini's late filing of the security-for-costs application under Rule 47 of the Uniform Rules of Court.
- Whether the court could raise the constitutional question concerning organs of state and security for costs of its own motion, in the absence of the point having been pleaded by the parties.