SECURITY FOR COSTS

A Defendant may apply under CPR 25.12 to 25.15 for an order requiring the Claimant to give “security for costs”. Security for costs is generally only available against a Claimant or a party in the position of being a Claimant (eg a Defendant advancing a Counterclaim or a Petitioner on an unfair prejudice petition under CA 2006, s.994).

Claimant resident outside the jurisdiction

Condition (a) in CPR 25.13(2)(a) applies to a Claimant, whether a natural or legal person, who is resident out of the jurisdiction and outside the States covered by the EU’s Jurisdiction and Judgments Regulation.

Impecunious Claimant company

CPR 25.13(c) allows Security propose to be ordered where:

“the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the Defendant’s costs if ordered to do so”

This is the main ground relied on in practice, both pre-trial, and on appeal. Impecuniosity is no ground for ordering security for costs against an individual claimant, the principle being that individual should not be prevented from seeking justice through want of means. Companies and other artificial persons attract no such protection. The question of whether there is “no reason to believe” a company could not be able to pay an order for costs is one of “evaluating the risk”, and does not have to be established on the balance of probabilities. No gloss (such as the phrase “insignificant danger” used in Re Unisoft Group Ltd (No.2) (1993) BCLC 532) should be put on the words of the test in the rule (Jirehouse Capital v Beller (2008) EWCA Civ 908).

Applications based on this ground usually require a comparison between the company’s assets and not to costs (of the proceedings to the stage at which security is sought). The crucial question is whether the company will be able to meet the costs order at the time when order has to be paid (Re Unisoft Group Ltd (No.2) (1993) BCLC 532). A “net asset balance” is therefore not determinative of whether a company can pay a cost liability when it falls due: the court must consider the nature and quantity of the company’s assets (Thistle Hotels v Gamma Four Ltd (2004) EWHC 322). Judges are entitled to look behind the accounts of reality of the situation, and to bear in mind the costs of the company would have to pay for its own representation (Autoweld Systems Ltd v Kito Enterprises LLC (2010) EWCA Civ 1469). Inability to pay may be inferred from evidence that the claimant has declared unusually large dividends after the dispute arose (Frost Capital Europe Ltd v Gathering of Developers Inc Ltd (2002) LTL 20/6/02). It may not be right to order security against a company which has no assets about which can meet the costs out of income (Kim Barker v Aegon Insurance Co (UK) Ltd (1989) The Times, 9th October 1989).

Often a statement in support of this ground will cover the following:-

  • That the Claimant is a company incorporated in UK and there is reason to believe that it will be unable to pay the Ds costs if ordered to do so;
  • Include a company search e.g. evidencing that the Company is no longer trading; or assets are very small. A Claimant company in liquidation is a prima facie example of where a Defendant would succeed on a security for costs application. The Defendant is looking for evidence of “financial” stress in the Claimant. The applying party should adduce the latest accounts. A company who is late in filing accounts, or whose auditors “qualify” its accounts, may be evidence of financial stress sufficient for security. Reference should be made to the cash in the bank figure in the accounts ie liquidity. A Claimant should be invited in correspondence to disclose its “cash in bank” figure (adverse comment being made if it fails to do so). If there has been no offer can suggest that “there has been no explanation why the cash in bank cannot be offered a security”. The opposing company should say that that money is required to cover its own legal costs. It is entirely proper to expect the directors of a Claimant litigant to put their hands in their pockets to make security, as it is usually they who have been funding the litigation to date, and they who will receive the fruits of the action if successful. They are driving the litigation, so why should they be protected behind the company. In addition, the company will of course get the money back if the action is successful).
  • Should annex a bill/statement of costs to a particular stage of proceedings.

It is not uncommon for an application to seek 2/3rds of its costs to and including trial.

If the bill of costs includes trial then there is a strong submission that that party cannot then apply for another security for costs order (as the last order covered the costs for trial) and unless the applying party can show “a change of circumstances”. It is not uncommon to have a number of security for costs applications to different stages of the proceedings. There is a usual provision on a security for costs application that “unless Claimant pays into court the sum of £X (usually within 14 days) then the action is struck out”.

  • A Claimant opposing an application for security will often argue that:

    • to make an order will “stifle” a genuine claim. This assertion will not “fly” with the court unless positive evidence is adduced by a Defendant that a particular payment (ordered by security) will actually stifle the claim. It is not enough to “throw it into the air” the stifling point, and hope it goes somewhere. A claimant making this point must “descend to careful particulars” of the Company’s financial and trading position as failure to do leaves the court with the impression that the argument is hollow and runs the judge holding “there was no evidence advanced of inability by the company to pay, and some evidence that it could pay but no reasoned explanation as to why it had not paid”.
    • that its “Impecuniosity” was caused by, or significantly contributed to by the actions of the Defendant which has led to the claim eg a party may submit that the Impecuniosity has been caused in large measure by a Defendant failing to pay its invoices properly due. The usual answer to this is to show that there is and was no casual link between the impecuniousity and the failure to pay – that the company had no assets before the contract in question.

Nominal Claimant (CPR 25.13(2)(f))

The court can order security against a “nominal claimant” if there is reason to believe that he will be unable to pay Defendant’s costs if ordered to do so. The fact that others will benefit from the claim does not render the claimant a nominal one.

Change of Address

CPR 25.13(2)(d) is aimed at the Claimant who goes to ground to avoid the possibility of having to pay the Defendant’s costs (Aoun v Bahri (2002) EWHC (Comm) 3 All ER 182).

The Amount of Security

any security should be such as the court “thinks fit in all the circumstances” (Procon (Great Britain) Ltd v Provincial Building Co (1984) 1 WLR 557). The amount ordered should be neither “illusory” nor “oppressive” (Hart Investments Ltd v Larchpark Ltd (2007) EWHC 291 (TCC). The court will need assistance on the amount of costs the defendant is likely to incur in the claim, and for this reason it is usual to exhibit a summary statement of costs to the Defendant’s evidence in support. Security may be ordered from the entire cost of the proceedings, or to a future point the claim, and may include past as well as future costs. Whilst security for costs Include pre-action costs, the court should be slow to exercise its discretion to include these as there is a risk that such an order would become payable in nature (Lobster Group Ltd v Heidelberg Graphic Equipment Ltd (2008) EWHC 413). There is no “rule of practice” that the court will always reduce the Defendant’s estimate by third (Procon (Great Britain) Ltd v Provincial Building Co (1984) 1 WLR 557); But it is usual to make a deduction from the Defendant’s costs estimates take into account any likely reduction on assessment of costs, and also to make an arbitrator discount in respect of future costs to take account of the chances of the action settling.