Security for Costs in Corporate Litigation

Last updated on August 16th, 2024 at 09:15 am

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Case Title: A.K. Detergents (U) Ltd. v G.M. Combined (U) Ltd.
Court: High Court of Uganda at Kampala
Case Number: Civil Suit No. 348 of 1994
Date of Decision: 11 July 1994
Judge: Hon. Justice J.W.N. Tsekooko [pictured].

Topics: Security for Costs, Corporate Insolvency, Receivership, Corporate Law, Civil Procedure.

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Background and Facts:

A.K. Detergents (U) Ltd., the applicant, sought an order for security for costs against G.M. Combined (U) Ltd., the respondent, under Order 23 Rule 1 of the Civil Procedure Rules and Section 404 of the Companies Act (at the time).

The respondent had defaulted on loans from the Uganda Development Bank (UDB) and the Development Finance Company of Uganda (DFCU), leading to the appointment of receivers.

The receivers sold the respondent’s assets to the applicant. Subsequently, the respondent filed a suit to nullify the sale and registration of the applicant as the proprietor of certain properties.

The applicant argued that due to the respondent’s precarious financial state, evidenced by ongoing winding-up proceedings and the appointment of receivers, it was likely that the respondent would be unable to pay costs if the suit was unsuccessful.

Issues Before the Court:

1. Whether the court should order the respondent to provide security for the costs likely to be incurred by the applicant.
2. The quantum of security for costs, if ordered.

Decision of the Court:

1. Order for Security for Costs: The court granted the application for security for costs, citing the respondent’s severe financial difficulties and the fact that its assets were under receivership. The court held that the respondent’s inability to meet previous financial obligations, including a decree in another suit, justified the need for security for costs.
2. Quantum of Security: The court considered the value of the suit property and the likely costs of the litigation. While the applicant requested UGX 60 million as security, the court scaled down this figure to UGX 50 million, which it deemed sufficient to cover the probable costs. The respondent was ordered to deposit this amount within 90 days, with a stay on all proceedings until the security was provided.

Ratio Decidendi (Holding): The court held that in cases where a company is in financial distress, especially when under receivership or facing winding-up proceedings, it is appropriate to require security for costs to protect the opposing party from the risk of non-payment.

Law Relied on:

• Civil Procedure Rules: Order 23 Rule 1, which allows the court to order a plaintiff to provide security for costs. (at the time). [now Order 26 Rule 1).
• Companies Act: Section 404, which permits the court to require security for costs from a company likely to be unable to pay if the defense succeeds. (at the time).

Quote: “The power to grant an order for security for costs is discretionary… In cases where a company plaintiff is in financial difficulties, courts will readily order it to provide security for costs.” – Hon. Justice J.W.N. Tsekooko

Counsel for the Parties

• Applicant: Represented by Mr. Mulenga.
• Respondent: Represented by Mr. Kabenge.

Conclusion

This case illustrates the principle that courts have the discretion to order security for costs in litigation involving corporate entities, particularly where the plaintiff company is in financial distress.

However, the court guided that such security for costs should be avoided in the case of a natural person facing financial difficulties except in exceptional circumstances such as where the person resides outside the jurisdiction of the Court or where his or her suit is vexatious or frivolous.

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