How will the court approach an application for security for costs against a corporate claimant that is reticent about revealing details of its financial position?
Where a defendant has reason to believe that a claimant company will be unable to pay the defendant’s costs if ordered to do so, the defendant can protect its position by applying for security for costs. The Court of Appeal has clarified the appropriate approach where a security for costs application is brought against a company on this basis and the company refuses to reveal its financial position.
The decision reached by the Court of Appeal in SARPD Oil International Ltd v Addax Energy SA & another, affirms the judgment of Flaux J in Robert Tchenguiz & another v Grant Thornton UK LLP & others ( EWHC 3209 (Comm)), in which Simmons & Simmons acted for Grant Thornton, the security for costs applicant.
Back to basics
An order for security for costs pursuant to CPR 25.12, if complied with, provides the party in whose favour it is made with a fund (normally held by the Court) against which that party can enforce any award of costs it may later obtain. The purpose of such an order is to protect the party against the risk of being unable to enforce any awards that it may receive for its costs.
CPR 25.12 provides for an application by a “defendant to any claim”, which can include a claimant against whom a counterclaim has been brought and a person against whom a Part 20 claim has been brought.
For ease of reference, this article generally refers to ‘the defendant’ when referring to the party bringing a security for costs application and to ‘the claimant’ when referring to the respondent to such an application.
Essentially, the following three issues must be addressed when making an application for security for costs pursuant to CPR 25.12:
- Does the application fall within one or more of the grounds for security provided by the CPR or by statute?
CPR 25.13(2) and certain statutory provisions provide the conditions under which a Court may order security for costs, subject to the Court’s discretion.
- If so, will the Court be satisfied, having regard to all the circumstances of the case, that it is just to exercise its discretion and make an order for security for costs?
It is not sufficient for the application to fall within one of the grounds for security discussed above. The Court must also consider, pursuant to CPR 25.13(1)(a), whether it is just for it to make an order for security in the circumstances of the particular case. The Court’s discretion in this regard is very wide. Additionally, the Court will look at whether making such an order would be in accordance with the overriding objective, and in particular whether making an order might thwart a claim with apparent merit.
- If so, what amount of security should the Court order?
If the Court is satisfied that an order for security for costs should be made, it will determine the amount of security to be provided. The Court also has a wide discretion in this regard.
In determining the amount to be provided, the Court will consider the defendant’s costs already incurred and likely to be incurred in the future. These costs must be evidenced in the defendant’s application. The Court can order that the security be paid in instalments as costs are incurred throughout the case, rather than all at once.
The provision of financial information by companies
CPR 25.13(2)(c) provides that the Court may, subject to its discretion, make an order for security for costs if “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”.
The question before the Court in the Tchenguiz case was whether a negative inference could be drawn against a claimant for its refusal to provide any evidence of its financial position. Flaux J found that where there is no legitimate reason for the claimant’s reticence, it is not a big step for the Court to take to conclude that there is reason to believe that the claimant will be unable to pay the costs that it may be ordered to pay. In this case, the claimant argued that it did not wish to provide such evidence because that information was confidential. In Flaux J’s view, this was not a legitimate reason in itself; there are many ways in which the Court could address legitimate concerns about confidentiality.
In its decision in the SARPD case, the Court of Appeal held that if a company is given every opportunity to show that it could pay the defendant’s costs and refuses to do so, there is every reason to believe that, if required to pay them, it would be unable to do so. It also found, like Flaux J, that insofar as a company might want to keep its financial position confidential “for business reasons”, arrangements can always be made by the Court, such as private hearings or avoiding referring in public to relevant financial information.
In the SARPD case, the Lords Justice further noted that in their view the practice of granting security for costs against a foreign company which is not obliged to publish accounts, has no discernible assets and declines to reveal anything about its financial position, is a sound one and one that they would uphold.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.