Litigation can be costly. Having to defend an unmeritorious claim made by a financially unstable company is the worst case scenario for any defendant and, in a period of economic downturn, the risk of this happening is increased. In a number of circumstances, the Civil Procedure Rules (CPR) permit a defendant to apply for the provision of security by the claimant for the legal costs the defendant will incur in defending the claim. Any such order will require the claimant to deposit money into court or provide a guarantee or bond for the defendant's costs, or a proportion of them, before it can continue with the claim. This provides the defendant with some comfort that there will be money available from which to recover its costs should it successfully defend the claim and be awarded its costs.
Here we look at the most common situation where security for costs is sought - which is where a claimant company appears unable to pay the defendant's costs if ordered to do so. Such an application can only be made against a defendant company by a claimant if there is a free-standing counterclaim by the defendant.
Fully investigate the financial circumstances of the claimant company. To obtain an order a defendant must show that there is reason to believe that the claimant will be unable to pay the defendant's costs if ordered to do so. Make sure the evidence substantiates this ground for obtaining security and is properly analysed and explained. Bear in mind that in the current economic climate in particular, the last filed accounts will not necessarily reflect a claimant company's true current financial position which may have deteriorated further since the accounts were filed. Ask for the claimant's management accounts – any reluctance to disclose them can be used in evidence in aid of an application for security.
Demonstrate the strength of the defence. If the defence is weak or spurious, the court may well consider the application a cynical attempt to stifle a genuine claim and will not order security as there is only a limited risk to the defendant in any event.
Look at the circumstances of the case carefully. The court has a wide discretion whether to order security. It will look at all the facts and circumstances and aim to deal with the case justly. If there is any criticism of the manner in which the claimant has conducted the litigation this should be included in the application.
Calculate the amount of security being applied for. Ensure that the amount of security is justified. The application can seek to cover the costs incurred to date (including pre-action) and future costs should the matter proceed to trial. However, the court will often only grant security up to a certain stage in the proceedings, leaving a defendant to make a further application at a later date.
- Simple lack of funds is not a ground for obtaining an order against an individual (wherever he/she is based) unless he/she is a nominal claimant.
- If the defendant's failure to make payment to the claimant has in any way caused the claimant's current financial problems then the court will be reluctant to order security.
- Although an application for security can be used tactically, in an attempt to encourage the claimant to negotiate and settle rather than parting with and tying up its money early in proceedings, the application will be unsuccessful unless it meets the criteria for obtaining security.
Make the application promptly. If there is a delay in applying for security the court may refuse to grant it whatever its other merits. The application should be made as soon as the financial circumstances of the claimant become a real concern.
All may not be lost if there is no security at trial. Remember, where a claimant company has not given security for costs, but the defendant wins at trial and secures a costs order in its favour, only for the claimant to go bump, there may still be a chance of recovering those costs. It is possible to seek to join the directors/shareholders of the claimant into the claim for the purpose of enforcing the order for costs against them personally if they have effectively funded the litigation for their own benefit.