Parties to commercial disputes should, from an early stage in proceedings, be alive to recessionary factors impacting the successful outcome of their case. Claimants should be comfortable that the defendant has sufficient resources to meet their claim, whilst defendants should consider the necessity of applying for security for their costs.

In considering a security for costs claim, the Court generally looks to strike a balance. On the one hand, it does not want to impose a level of security that the claimant cannot afford, and thereby effectively deprive the claimant of the right to bring its claim. That might be particularly unpalatable if the claimant’s precarious financial position was caused by the actions of the defendant and which formed the basis of the claim.

On the other hand, it does not want to expose the defendant to the unnecessary risk of being unable to recover its costs. Here, the Court may perform a cursory review of the merits of the claim. If the claim appears to be a “sham”, then all the more reason to enforce security over the defendant’s costs.

The criteria for a security for costs application is set out in CPR 25.13. Assuming that the claimant is a UK-resident company and there is no dispute concerning its given address, the key test is generally whether:

“there is reason to believe that [the claimant] will be unable to pay the defendant’s costs if ordered to do so”.

It is this test that we, as accountants, are often instructed to consider.

Determining the claimant’s financial position is not always straightforward (hence the need for expert testimony, I hear you say). A key handicap is the availability and content of financial information.

Key issues often include:

  • publicly available information may be outdated: the filing deadline for a private limited company is nine months from the end of the accounting period-end date, and the directors often wait until the last possible moment to file accounts (particularly if the reported financial position is poor); and
  • the limitations in the information included in publicly available accounts: if a business is categorised as “small” under the Companies Act, then the company may only be required to file abbreviated accounts. Abbreviated accounts comprise only a balance sheet and reduced notes, and not a profit and loss account. Most directors, given the option, will choose to disclose as little information as possible. Struggling businesses frequently meet the relevant criteria. Therefore, paradoxically, in circumstances where the financial information may be most critical the requirement for disclosure is reduced.

Nevertheless, even in the absence of a profit and loss account, which indicates whether a company is trading profitably, the balance sheet can still tell you a lot about a company’s financial position. A crude review of its liquidity can be performed by a review of its net asset (or liability) position, and also its net current assets or liabilities.

If a company has net liabilities, then the total amount it owes exceeds the aggregate value of its assets. The business is technically insolvent. Unless that business can profitably trade out of that precarious position or obtain additional funding, then any amounts owing to unsecured creditors (including, potentially, the defendant’s costs) are at risk.

If a company has net current liabilities (i.e. amounts due within one year exceed its current assets) then this is also a time-honoured signal that there are potential cash-flow problems. Such a business may not be able to pay its creditors as they fall due.

Even businesses reporting a surplus of assets over liabilities may face financial difficulties. In order to properly establish the position, it is necessary to understand the nature of those assets and liabilities and sildenafil citrate. For example, if a company’s stock balance has unexpectedly doubled from one year to the next, this might suggest surplus (and potentially unsellable) stock. Similarly, increased trade debtors may be a sign of unpaid debts. Therefore, not all current assets may be fully recoverable.

A secondary source of financial information might be management accounts, if provided. Unlike filed statutory accounts, a company has no requirement to make these publicly available – so these must be requested from the claimant. Management accounts are generally prepared on a monthly basis, and therefore should reflect the latest financial situation. However, on the downside, there are no regulations covering the format or basis of preparation, so they are likely to be less reliable than filed accounts.

In summary, a review of accounts will not necessarily provide comfort with regard to all the issues raised in a security for costs application. However, such a review will often provide a foundation to generate the key questions that will allow the key risks to be considered and eliminated.