September 2021
It is important for defendants to consider the ability of claimant companies to fund litigation in which they are involved. It is useful in these circumstances for a defendant to consider asking the Court to order a claimant to pay funds into Court by way of security for the defendant’s costs, primarily as protection if the claimant is unable to satisfy a costs order following a failure of the case.
Applications for Security for Costs
The conditions to be satisfied on an application for security for costs are set out in the Civil Procedure Rules (CPR 25.13). One of the most routinely invoked conditions is CPR 25.13 (2) (c), highlighting the Court’s power to make a security for costs order against a limited company where there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so.
The Courts have held that security for costs may also be granted if a counterclaiming defendant is unable to pay the costs of the claimant. Factors determining whether the claimant’s application is likely to be successful include the relative size of the claim and counterclaim and the extent of the expert evidence supporting the counterclaim.
The granting of an application for security for costs is discretionary and the judge will consider the justness of the circumstances in each case. Since such applications are regarded as serious matters and Courts need to be persuaded that they are essential, sworn financial evidence is often needed. On this basis, forensic accountants may be particularly useful by providing sworn statements based on a review of the financial statements of and other financial information on the claimant.
Financial Evidence
Obtaining current, reliable and relevant financial information is the major issue in forming a professional opinion as to the claimant’s financial standing in the following context:
- it is necessary to analyse past information, including past trends in the volume of trading and profitability as an indicator of the company’s future activities and its cash flows relative to its profitability given that the former is a crucial factor in the “funding” of litigation;
- the company’s financial position will underpin the views formed on its technical solvency, including the availability of details of the lines of finance and credit open to the claimant;
- it is likely to be useful to analyse future information such as forecast profits and cash flows and contingent liabilities since it is the company’s future performance which will underpin its ability to fund litigation costs;
- it will be necessary to request additional information such as the latest financial and management accounts if the expert only has access to publicly available historical data; and
- the above need to be considered with the overall legal costs involved since an evaluation is required of the claimant’s ability to fund anticipated legal expenses.
Complexities
In analysing financial information, relevant factors include the status of the available financial statements, i.e. whether audited or otherwise, the extent to which the financial statements comply with generally accepted accounting practice, the financial relationships which a company has with other entities within a group structure and the extent to which published financial statements, e.g. abbreviated accounts, provide “complete” information on the company.
Even if a company appears to have insufficient net assets to fund prospective litigation costs, an application for security for costs will not succeed if the claimant can successfully argue that its impecuniosity arises as a result of the defendant’s action.
Conclusions
An application for security for costs is unlikely to be successful unless it is both reasonable and realistic. It is therefore important to have available sufficient time for the analysis of relevant information on a comprehensive basis. Objectivity and impartiality will also be important attributes for the expert given the primary objective of assisting the Court.
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The information contained in our Newsletters is provided as general information only. It does not constitute professional advice and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. In addition, since the Newsletters were published in recent years, the information contained in them may not be applicable at the current time.