This article explores security for costs applications in claims where fraud is pleaded.
It is a court order requiring a party to pay money into court, or to provide a guarantee as security for the opponent’s costs. Security for costs is a way for a defendant to ensure they can recover their legal costs should they successfully defend proceedings brought against them.
The purpose of and reasoning behind the principle of security for costs is that a claimant has choice on whether it incurs the costs of commencing proceedings. A defendant - once served with proceedings - has no choice, and is forced to incur costs in defending the claim. A defendant will want to be certain that if their defence succeeds they are able to recover the costs they were forced to incur in defending the proceedings.
Those defending a claim can apply (including a claimant facing a counterclaim).
Pursuant to CPR 25.13, an application can be made if one of six grounds is satisfied:
Fraud often has a devastating financial impact on the victim. In too many cases, the victim may have lost so much money to the fraud that they find themselves impecunious. For example, a company may be on its knees financially due to an employee committing a fraud which results in significant monetary loss to the company. The company may wish to bring a claim against the employee but is then met by an application from the defendant wanting security for its costs alleging that the company would be unable to pay the defendant’s costs if ordered to do so (even though the very reason it is unable to do so is because of the defendant itself).
A claimant with limited funds would find it challenging to generate enough money to fund their claim and to provide security for the defendant’s costs, should the court order it.
So how does the court deal with this friction?
The court has considerable discretion in determining whether to require security. Weighing the potential injustice to either the claimant or the defendant requires a careful consideration of whether a security order is justifiable. Balancing the potential injury to either party in deciding whether to grant or deny such an order is essential.
Like in the above example scenario, in a situation where the defendant is alleging the claimant company is impecunious, in considering whether to mandate security, the court must be firstly satisfied that the claimant can’t pay the defendant’s costs if ordered to do so. Assuming the court is satisfied that the claimant can’t pay the defendant’s costs (which will include no prospect of raising funds from any other source) the court will go on to consider whether it is just in all the circumstances to make the order.
In Absolute Living Developments Ltd (in liquidation) v DS7 Ltd  the court was satisfied the claimant would be unable to meet the defendant’s costs if ordered to so. The first limb was therefore satisfied. The court then considered whether it was just to order the security. Based on the second limb, the court refused to grant security on the basis that doing so would stifle the claimant’s chances of bringing a genuine claim. In reaching this conclusion, the court considered various factors, including whether the claimant’s inability to pay costs had been brought about by the defendant’s own conduct.
The Court found that, if security were to be ordered, there were only three possible results: (a) the claim would not proceed any further; (b) the liquidator would have to pay the amount of security ordered; or (c) the liquidator would seek to persuade the creditors to put up some money to enable the security to be provided. By analogy with common practice in relation to non-party costs orders, Marcus Smith J considered it would be inappropriate for the Court to make an order that, in reality, would either result in (a) the claim being stifled; or (b) the liquidator having to fund the security. Indeed, Marcus Smith J held that such a result would be “entirely contrary to the public interest in the insolvency regime that exists in this jurisdiction. It is critical in the public interest that liquidators proceed in a manner that is uninhibited in terms of deciding how to bring actions, including how those actions are framed and funded.”
Where a claim has a good chance of success, the court will be reluctant to make an order that will prevent the claim from being pursued. The fact that the claim may be stifled is a factor to weigh in the balance and the court has to consider whether the stifling of the claim would be unfair. In considering whether it is unfair, the court is likely to take into consideration the defendant’s own conduct, particularly where there is a serious allegation such as fraud.
For claimants who have a good arguable case and are impecunious due to their opponent’s fraud, there may be hope even when an application for security is made. The extent of this will vary depending on the facts of each case. The key point to take away is that, as is the case for all cases concerning allegations of civil fraud, it is essential to seek legal advice as early as possible to ensure the correct course of action is taken and at the right time.
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