In this article, we explore Security For Costs and how we as Forensic Accountants can add value through appraising risks and drafting applications or responses.
What is security for costs?
Litigation can be expensive – to bring or to defend. While a successful party will usually recover its costs, that recovery is only as good as the opponent’s ability and willingness to pay.
Defendants can ask for claimants to deposit funds with the court or other neutral party to guarantee that the Defendant will be reimbursed if the action fails. This is called giving Security For Costs (“SFC”). (There are alternatives to depositing money: e.g. the Claimant or its sponsors might grant the Defendant a conditional legal charge over property or other assets.)
SFC is an important issue – one on which Defendant solicitors must advise their clients. The concept will be well known to most litigation lawyers, especially as third party Litigation Funding becomes more common. Rather than being a simple procedural tick-box, it is an important tactical tool. However, it is sometimes neglected in favour of the central litigation.
Conditions for SFC
Under Civil Procedure Rules Part 25, the Court has discretion to order security where certain conditions are met. A key condition is set out in paragraph 27(b)(ii): “there is reason to believe that [Claimant] will be unable to pay the defendant’s costs if ordered to do so”.
This is most logically true if the potential costs bill is large versus the Claimant’s financial assets. But it can also be true for relatively small costs if the Claimant is likely to become insolvent for other reasons, leaving the Defendant’s cost bill to join a pile on the Liquidator’s desk.
Applications for SFC
Applications must set out a credible and evidenced risk that the Claimant may be unable to meet an adverse costs order. It is often essential for a Forensic Accountant to contribute to the application, whether formally or informally.
Based on our experience supporting numerous applications, the following principles are key:
- Do your research first. Courts will not entertain a “fishing expedition” for more evidence.
- Understand the wider group context. Financial resources (or risk) may exist beyond the immediate target company. Identify which other group companies would be willing, able or compelled to meet the target’s debts.
- Identify the principal recovery risk. Is it that the target could not afford your costs? Or that it might become insolvent in any event?
- Assess the risk factors for default. What specific, sectoral, financing or macro trends is the target vulnerable to?
- Note the dates of evidence. Published accounts are immediately out of date. For unlisted companies, the reporting date of the latest filed accounts may well be more than a year ago.
- Seek management information, but treat with caution. If possible, can you obtain detailed management accounts or forecasts? If so, remember that they may be unaudited and prepared in contemplation of the litigation.
- Maintain objectivity and proportionality. Courts will be unimpressed by weak arguments, hyperbole, speculation, and statements that the opponent can refute.
- Be clear about sources, assumptions and limitations. Cite information relied upon, describe estimations made, and list any important “unknowns”.
The role of the forensic accountant in SFC applications
Forensic accountants can support SFC applications in several ways:
- Analysing financial statements and underlying records
- Assessing liquidity, solvency, and financial resilience
- Reviewing forecasts and stress-testing assumptions
- Identifying group support and contingent funding
- Preparing independent expert reports or informal advisory input
In many cases, the difference between a successful and unsuccessful application lies in the quality and clarity of the financial evidence presented.
This article was written by our Director, Paul Widger, who is part of our Forensic Accounting division. If you would like to find out more or speak confidentially about a specific concern, Paul and the team can be contacted on on ofa@opusllp.com. Alternatively, you can reach the team on 0203 995 6380.