Insights

Covid-19 Lockdown – Time to look again at Security for Costs?

  • Written By: Doug Hall
  • Published: Thu, 07 May 2020 11:10 GMT

The adverse effects on businesses, large and small, of the lockdown in response to the Covid-19 pandemic have been well publicised, with new updates published daily.

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Every business, including those providing professional services, will have rapidly identified that the key issue for their survival will be the preservation of their cash reserves and cash generation until the economy can start its recovery once the lockdown has ended.

It has always been the case for businesses that “Cash is King” but if there was ever any need for that message to be reinforced, our present state of lockdown has certainly pressed it home. Even businesses that would previously have maintained strong cash reserves and cash generation are finding that those are now in danger of being eroded.

The parties to existing and contemplated commercial disputes and their legal advisers will have been reviewing how the lockdown may change the course of those disputes and, in some cases, revising their overall strategy for how they should be pursued. The question of Security for Costs is a key issue that needs to form part of any such review. Claimants out of the jurisdiction, impecunious or potentially impecunious claimant companies, nominal claimants and claimants who have taken steps to make enforcement difficult need detailed consideration. To address the question of whether the above categories of claimant in a commercial dispute will be able to meet an adverse costs order requires:

  • An assessment of whether the claimant currently has the financial resources to meet the costs of the Defendant/Respondent if ordered to do so; and
  • More importantly, proof that the claimant will still be able to meet those costs at the date in the future when they would need to be paid.

Therefore “Cash is King” has always applied to any assessment of Security for Costs.

Typically the financial assessment of whether Security for Costs is justified starts with a review of the claimant’s most up to date balance sheet, focusing on cash reserves and liquidity, but then requires a forecast of how that position may change in the period before the adverse costs would need to be paid.

In normal times it is possible to make an assumption that the claimant’s pattern of cashflow in the past will continue in the future and during the period before the adverse costs would need to be paid, but since the lockdown started it is unlikely that the same assumption can still be made. The result may be that, whereas previously there would have been no justification for the Court/Tribunal making an order for Security for Costs, there now could be.

For defendants/respondents and those advising them, even if it had previously been decided that there would be no need to make an application for Security for Costs, there may well now be a pressing need to revisit that decision. Also, if payment of Security for Costs has been ordered to take place as phases of an action are completed, that position should be revisited. The starting point would be to request disclosure of the claimant’s most up to date management accounts, with further disclosure requests following an assessment of what they show.

For claimants and those advising them, even if the defendant/respondent has not yet raised any issue over Security for Costs, be prepared for them to do so, even before they read this article. The key for claimants opposing applications for Security for Costs is always to stay on the front foot. Adverse inferences can be drawn from the disclosure of out of date and/or unreliable data by a claimant on their financial position.

For both defendants/respondents and claimants, the effective analysis of financial data is only half the challenge, the remainder is the effective presentation of that analysis to the Court.

For further details of our expertise in Applications for Security for Costs or to book a lecture on the subject please contact me at doug.hall@smithandwilliamson.com.

 

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.

Smith & Williamson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.

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