Companies Act 2016: Absence of the Security for Costs Provision

The Companies Act 1965 (CA 1965) contained section 351 which allowed for an application for security for costs. The rationale for that section 351 was as follows.

When a company litigates against a party, and if that action were to fail, the defending party could find itself prejudiced if the company did not have enough money to pay the legal costs to that party. Hence, section 351 of the CA 1965 stated that if it appears by credible testimony that there is reason to believe that the company cannot pay the costs of the defendant, then the court can order that the company pay security for those costs.

Unfortunately, section 351 of the CA 1965 was not carried forward under the Companies Act 2016 (CA 2016). It was a useful provision to safeguard the interests of the defendant. Nonetheless, there are still other possible reliefs that a defendant can take to possibly apply for security for costs against a company.

The recent High Court decision of Customer Loyalty Solutions Sdn Bhd (in liquidation) v Advance Information Marketing Bhd & Anor [2017] MLJU 1919 involved a security for costs application.

The Plaintiff company had been wound up. The liquidator determined that there were unsubstantiated payments out of the company. The Plaintiff company, under the management of the liquidator, filed a legal suit. The three Defendants applied for security for costs against the Plaintiff company, since the Plaintiff company was wound up and insolvent.

The High Court noted that section 351 of the CA 1965 is no longer found in the CA 2016. The High Court had to therefore refer to one other primary ground to allow for security for costs. That is under Order 23 rule 1 of the Rules of Court 2012 (Order 23).

However, I note that this Order 23 is more limited in scope than section 351 of the CA 1965. Order 23 also does not quite apply in the same way as section 351. Order 23 only provides for security for costs in four specific scenarios:

  1. The plaintiff is resident out of jurisdiction;
  2. The plaintiff is a nominal plaintiff who is suing for the benefit of some other person. And there is reason to believe that the plaintiff is unable to pay the costs of the defendant if ordered to do so;
  3. The plaintiff’s address is not correctly stated in the court papers; or
  4. The plaintiff has changed his address during the course of the proceedings with a view to evade the consequences of the litigation.

The above four scenarios under Order 23 do not quite provide for the situation of an impecunious corporate plaintiff.

However, the High Court also held that the removal of section 351 of the CA 1965 does not equate to removing the Court’s inherent power to order security for costs. The Court still retains its inherent jurisdiction to grant security for costs. This will therefore still allow the Court to have flexibility and to consider all the circumstances of the case. Ultimately, the Court would still have to examine all these circumstances to achieve the justice of the case.

On the facts of this case, the High Court allowed the application for security for costs. But the quantum of the security was not fixed at the RM100,000.00 sum applied for by the first Defendant. Security for costs was fixed at RM50,000.00 for each of the three Defendants.



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