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The Rise in Security for Costs Applications in a Fragile Economic Climate
- Nov 9, 2021
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by Neil Rudd, Senior Forensic Accounting Manager at Azets
I’m sure you don’t need a finance expert to tell you that the last eighteen months have not been the best for the UK economy. However, all being well, UK businesses in the main have hopefully managed to weather the storm and can succeed again without the need for government financial support.
Azets’ recent SME Barometer Report1 found that more than two thirds of businesses surveyed are expecting the economy to improve in the next twelve months. Positively, 89% were confident that they will be trading in twelve months’ time, however, only 54% thought that their profits would increase in that timeframe, with the remainder believing that their profits will either stay the same or reduce.
In the context of this uncertain economic climate, I wanted to pick up the fictional story of ‘you’ as the CEO of the polyester manufacturer, Luxurious Polyester Ltd. For those of you who missed my article on contract disputes in the March 2021 issue of Expert Witness (see link at bottom of article), you are defending a contract dispute claim for failure to fulfil minimum volumes required under a supply contract to PPE Pandemic Ltd (a wholesaler of personal protective equipment).
If, as you hope, you defeat the claim, the vast majority of the time you would expect the Court to award you at least some proportion of the costs incurred defending it. These would be paid to Luxurious Polyester Ltd by PPE Pandemic Ltd (or their third party litigation funder) in recognition that you did not have a choice in incurring the costs to defend a claim which ultimately proved to be unfounded.
Like many businesses in the current economic climate, PPE Pandemic Ltd’s finances are suspected to be precarious, with its future prospects unclear. Should Luxurious Polyester Ltd successfully defeat the claim, you are concerned that the Claimant would not be able to pay an award for costs ordered by the Court.
You probably feel aggrieved that your business might get lumbered with significant costs defending an ultimately unfounded claim. However, there is a legal mechanism that could come to your aid. As Defendant, you can apply to the Court for a ‘security for costs’ order under Civil Procedure Rule 25.123. This should be applied for as early in the proceedings as possible and if you are successful, the Court will order PPE Pandemic Ltd to pay an amount which will be held by the Court, until such time it may be required to fulfil an award for costs.
To persuade the Court to grant the security for costs order, Luxurious Polyester Ltd must provide written evidence setting out:
(a) why the Claimant may be unable to satisfy any potential cost order; and
(b) an estimate of the likely costs that will be incurred defending the Claim.
This is where your forensic accountant can help you. Having accounting expertise complimented by a familiarity with submitting written evidence to courts, arms them with the key skills for assisting your legal team in the preparation of the application.
Often the hardest part of demonstrating that the Claimant may be unable to satisfy a costs order, is obtaining sufficient financial information to analyse their financial position and recent / prospective trading performance. A forensic accountant with advanced open source data and asset tracing capabilities, complimented with access to a global network, can add significant value.
It is also worth noting that the claim submitted may also be a valuable source of information. Luckily this is the case for Luxurious Polyester Ltd, as PPE Pandemic Ltd has provided significant financial information about itself as part of its quantification of the profit it alleges it has lost as a result of a breach of contract.
The information obtained can be used by forensic accountants, to address whether the Claimant would be able to satisfy a costs order, presenting complex financial information in a simple and understandable way, suitable for use in the security for costs application. Alternatively, if the Claimant’s financial outlook is not as bad as suspected, a forensic account will advise on the merits of pursuing a security for costs application, preventing wasted costs.
Such analysis would include for example, an assessment of the Claimant’s:
(a) recent and likely future financial performance, considering risks specific to the business, the industry it operates in and the wider economy;
(b) solvency position and whether this will likely improve or deteriorate; and
(c) ability to turn sufficient assets into cash at the time required to satisfy an award for costs.
In the case of Luxurious Polyester Ltd, there is a good argument that PPE Pandemic Ltd would be unable to satisfy an award for costs. Having only been incorporated at the start of the Covid-19 pandemic, it has not built-up significant assets. Despite demand for personal protective equipment being extremely high recently, supply chain and certification issues have meant that trade has been poor and its balance sheet is weak.
However, unfortunately you might not be in for the easy win with your security for costs application as it might appear. PPE Pandemic Ltd has its own forensic accountant critiquing the application and they have access to more detailed financial information from their client. PPE Pandemic Ltd will emphasise the role Luxurious Polyester Ltd’s alleged breach of contract has played in reducing its access to the raw materials needed to trade.
The Court would likely be reluctant to grant a security for costs order that could potentially stifle and force the abandonment of a genuine claim. It is a delicate balancing act for the Court, weighing a possible injustice against PPE Pandemic Ltd against the risk that Luxurious Polyester Ltd will be unable to recover its legal costs defending a potentially unfounded claim.
Given the large number of businesses in delicate financial circumstances and the increase in contract disputes, security for costs applications are likely to be common in the coming months. As forensic accountants, we look forward to assisting our clients in applying for or critiquing security for cost applications.
About the Author
Senior Forensic Accounting Manager
Neil is part of a highly experienced team at Azets who deliver forensic accounting and expert witness services in both civil and criminal cases as well as providing forensic advisory services. He manages the delivery of clients’ needs in relation to:
• Commercial, shareholder and matrimonial disputes
• Loss of profits litigation
• Fraud investigations
• Contentious and non-contentious business valuations
• Post company acquisition / sale disputes, expert determinations, and breach of warranty claims
2. Covid-19, Making Complex Contract Disputes Even More Complex (expertwitness.co.uk)
3. PART 25 - INTERIM REMEDIES AND SECURITY FOR COSTS - Civil Procedure Rules (justice.gov.uk)
Please see prervious linked articles;
Covid-19, Making Complex Contract Disputes Even More Complex