security for costs

When a claimant in legal proceedings appears to the court to be impecunious, the defendant may apply to the court for an order to require the claimant to pay a sum into court for 'security for the defendant's costs'. Where a court makes such an order, the sum paid into court and is held by the court until an order for its release is made - usually after the substantive issues in the legal proceedings have been determined. If the defendant wins at trial the sums paid in security for their costs are paid over to the Defendant to satisfy its legal costs. If it is the case that the proceedings settle, the funds are not released until the court makes an order authorising the release.

In English legal proceedings, liability for the costs of the proceedings to be paid by the losing party is determined after the court has considered the merits of the case and determined the parties' rights and liabilities at trial. An exception to this rule lies in orders for security for costs. Where a defendant has been sued, the court has a discretion to make an order to secure the costs of the defendant where it is shown on the evidence available that there is no real prospect of the defendant recovering their costs in the event of the defendant successfully resisting the claim. Thus a fund is created that the defendant may draw upon to recover their costs in the event that they successfully defend the proceedings.

Applications

On the application of a defendant, the court will consider whether there are grounds upon which an order may be made. it then moves on to consider whether its discretion ought to be exercised to make an order, and if that is the case determine the sum that should be paid, and the method security should take. If the application is successful the usual order will stay the proceedings and if it is the case that the claimant fails to make such the payments required into court, the claim will be struck out. Once the proceedings are struck out, the defendant is in a position to apply for an order to recover its costs of the proceedings.

The grounds by which the court may make such orders is set out at CPR 25.13. The grounds include where:

1. the claimant is out of the jurisdiction, but not a country forming part of the EU;
2. where the claimant is within the jurisdiction and there is doubt as to whether it would be able to pay the costs of the defendant if it was unsuccessful;
3. the claimant has taken steps to move assets (inadvertently or otherwise) that would make it difficult to enforce a costs order. Security for costs may also be ordered on the basis that the claimant has failed to comply with directions made during the course of the litigation.

Foreign Companies

Foreign businesses outside the EEA are susceptible to security for costs orders, as an adverse judgment will always cause a successful defendant difficulties in recovering costs from a company resident outside the jurisdiction of English Courts. The making of an order for security for costs forces the defendant to bring assets within the jurisdiction of the Court. Where a company operates internationally, the location of the central management is usually taken to be the seat of control of the international company. In an investigation, the starting point will be where the company was incorporated, and extend to where board meetings are held, where the directors reside and where administrative work is performed. If the assets of a company are located in a country where enforcement is likely to be impossible, the court should be expected to be minded to award security for the likely costs of the entire claim.

Impecunious Companies

The defendant may base their application upon evidence of impecuniosity on the part of a claimant company showing an inability to pay the likely costs. Such evidence may be sourced from the publicly available resources such as company searches. A court will be mindful of oppressive applications by a large company against small company to stifle a small claim. A court will consider the nature and liquidity of the assets of the company and whether the defendant company has played a part in the predicament of the claimant, such as delaying payment, and whether there are means available for the claimant to finance the claim, such as a loan from a bank.

The factors that a court will take into account, having regard for all the circumstances of the case, in deciding whether its discretion should be exercised to award for security for costs include whether:

1. the claim has good prospects of success;
2. the defendant has made any admissions in respect to liability;
3. the defendant has made a payment into court;
4. the defendant has made the application to stifle a good claim;
5. the application for security has been delayed since the commencement of proceedings.

Form of Security

The security to be provided will ordinary be a sum of money to be paid into court, but may be securities such as bonds or guarantees.

Third Party Liability

The Civil Procedure Rules provide that such orders may be made against a person funding the litigation where there is evidence showing the claim was assigned to claimant in the proceedings for the purposes of avoiding a costs order or agreed to contribute to the claimant’s costs for share of the proceeds that the litigation may bear.