What Factors Will the Courts Take Into Account When Considering Applications for Security?

Published: 20/7/2016

The Commercial Court held last week that only in rare and exceptional cases is the wealth of an applicant for security for costs, or an applicant’s ability to recover costs from elsewhere, a relevant factor when considering whether or not to award security (LIC Telecommunications SARL & Another v VTB Capital Plc & Others [2016]).

In response to an application for security brought by five defendants in an action relating to the sale of shares following a loan default, the two claimants argued that the defendants should not be entitled to security since they each had access to cost protection elsewhere, by means of an indemnity for their costs.

Judge Waksman QC considered the relevance of two factors when considering applications for security: (a) an applicant’s wealth; and (b) an applicant’s availability of costs protection from elsewhere. He held that neither factor was relevant to the application for security, and reiterated the long-standing rationale for awarding security for costs; it would be unjust to expose a defendant to the costs of litigation where a claimant had chosen to sue and brought the defendant into litigation.

This decision follows another recent successful application for security for costs, SARPD Oil International Limited v Addax Energy SA & Another [2016], and reinforces the view that an application for security for costs can serve as a useful tool for defendants, as well as a prudent and convenient safeguard.

In February 2016, the Court of Appeal considered an appeal about a security for costs application brought against the claimant, SARPD Oil International Limited, a company incorporated in the British Virgin Islands. Evidence in support of the defendant’s application for security was based on the claimant’s continued refusal to provide information about its financial standing. At first instance, the Commercial Court held that there was no reason for the court to believe that the claimant would be unable to pay the defendant’s costs if an order for costs was made against it. The judge commented that the apparent practice of the Commercial Court to order security where a company was not obliged to disclose public accounts, and failed to reveal its financial information, was unjustified.

The Court of Appeal overturned the decision, ruling that:

“If a company is given every opportunity to show that it can pay a defendant's costs and deliberately refuses to do so there is, in our view, every reason to believe that, if and when it is required to pay a defendant's costs, it will be unable to do so."

When considering an application for security made pursuant to CPR 25.13(2)(c), the Court of Appeal ruled that it is not satisfactory for the defendant to be left in doubt about the claimant's ability to pay the defendant's costs if the claimant loses. A defendant is not required to rely on positive evidence suggesting that the claimant would be unable to pay; there can be sufficient reason to believe the claimant’s inability to pay a defendant’s costs where certain financial information is absent.  

The Court of Appeal’s decision serves as an important warning to claimants, particularly foreign claimants without publicly available accounts, minded (often for tactical reasons) to withhold information regarding their financial standing when faced with an application for security. Lord Justice Sales, who delivered the Court of Appeal judgment, reminded claimants that although they may have legitimate business reasons for keeping their financial positions confidential, the appropriate recourse would be to apply for the court to sit in private, or to avoid referring to relevant financial amounts in public.

Summary

When considering whether or not to make an application for security, or how to respond to requests for security, parties should be aware that the court has a very wide discretion in deciding whether or not to order security. The court will consider “all the circumstances of the case” and form its decision based on whether it is “just to make such an order” ((CPR 25.13(1)(a) and CPR 25.14(1)(a)).

The above two decisions provide a helpful insight into which factors the court is willing to take into account when exercising this discretion in deciding applications for security.

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