Security for costs is a common feature of civil litigation in England and Wales. It is designed to protect defendants from the risk of being unable to recover their legal costs if they successfully defend a claim. It is also commonly used as a tactical device to make life difficult for claimants. This article will provide claimants with the knowledge they need to defeat a security for costs challenge.

For businesses, insolvency practitioners, and litigants involved in funded claims, understanding how security for costs works is essential, particularly where the claimant may be unable to pay or is based outside the jurisdiction.

This guide explains what security for costs is, when courts will order it, and how applications are made.

What is Security for Costs?

Security for costs is an order made by the court requiring a claimant to provide financial security to cover the defendant’s costs of defending the claim.

If the claimant loses, the defendant can recover their legal costs from the secured amount. If the claimant wins, the security is returned.

The main purpose is to ensure defendants are not left out of pocket where there is a real risk that the claimant will not be able to pay.

When Can a Defendant Apply for Security for Costs?

A defendant can apply for security for costs under the Civil Procedure Rules (CPR), most commonly CPR Part 25.

However, the court will not automatically grant such an order. Instead, it must first be satisfied that one or more of the recognised grounds applies.

Common grounds include:

• The claimant is a company and there is reason to believe it will be unable to pay the defendant’s costs
• The claimant is resident outside of the jurisdiction
• The claim is being pursued by a third party funded claimant
• The claimant has taken steps to avoid enforcement of a costs order
• The claimant’s financial position raises concerns about its ability to pay

Even where these conditions are met, the court will still exercise its discretion before deciding whether to order security for costs.

Key Scenarios Where Security for Costs Arises

1. Claimant is a Company

Where the claimant is a company, particularly one with limited assets, the court may order security if there is evidence that it would be unable to pay the defendant’s costs if ordered to do so.

This is common in insolvency-related litigation, where claims are brought by liquidators or special purpose vehicles.

2. Claimant is a Resident Outside the Jurisdiction

If the claimant is resident outside England and Wales, enforcement of a costs order may be more difficult.

In such cases, defendants often apply for security for costs on the basis that they should not bear the risk of cross-border enforcement.

3. Third Party Funded Claimant

Where a claim is backed by third-party funding, the defendant may argue that:

• The claimant itself has limited means
• The funder is not directly liable for adverse costs
• There is a risk that the defendant’s costs will not be paid

This does not automatically mean security will be ordered, but it is a relevant factor in many security for costs applications.

4. Claimant Unable to Pay

If there is credible evidence that the claimant is unable to pay the defendant’s costs, the court may consider it just to require security.

This often arises where:

• The claimant has no assets
• The claimant relies entirely on funding
• There are doubts about financial stability

How to Apply for Security for Costs

The process of applying for security for costs involves a formal application to the court.

Step 1: Making the Application

The defendant must apply for security by issuing an application notice supported by evidence.

This evidence should address:

• The claimant’s financial position
• The risk of non-payment
• The estimated amount of the defendant’s costs
• Any relevant circumstances of the case

Step 2: Evidence and Supporting Material

Strong evidence is critical for a security for costs application. Evidence required may include:

• Company accounts
• Credit reports
• Information about funding arrangements
• Details of the claimant’s residence
• Evidence of steps taken to avoid payment

The burden is on the defendant to show that there is reason to believe the claimant would be unable to pay.

Step 3: Court Decision

The court will consider:

• Whether the legal test is met
• The circumstances of the case
• Whether making the order would be just

The court has broad discretion and will balance fairness to both parties.

How the Court Exercises its Discretion

Even where grounds exist, the court must still exercise its discretion.

This involves considering factors such as:

• Whether the application is being used oppressively
• Whether ordering security would stifle a genuine claim
• The strength of the claim
• The conduct of the parties
• Whether the claimant has taken steps to mitigate risk

For example, if ordering security for costs would effectively prevent a legitimate claim from proceeding, the court may refuse the application.

What Form Does Security Take?

If the court decides to order security for costs, it will specify:

• The amount of security
• The method of providing it
• The deadline for compliance

Common forms of security include:

• Payment into court
• Bank guarantees
• Insurance-backed solutions (such as ATE insurance)

Payment into court is one of the most traditional methods, but it can tie up significant cash flow.

How is the Amount of Security Calculated?

The amount of security is typically based on the defendant’s estimated costs of defending the claim.

This will often be informed by the defendant’s costs budget, particularly in cases subject to costs management.

The court will not usually order security for the full anticipated costs. Instead, it may order a proportion, depending on the stage of proceedings and the level of risk.

What Happens if the Claimant Fails to Provide Security?

If the claimant does not comply with an order for security for costs:

• The claim may be stayed (paused)
• In some cases, the claim may be struck out

This means that failure to provide security can effectively end the claim.

Strategic Considerations for Defendants

From a defendant’s perspective, applying for security for costs can be a powerful tactic.

Benefits include:

• Reducing financial risk
• Applying pressure on the claimant
• Ensuring recoverability of legal costs

However, defendants should avoid making weak or speculative applications, as these may be refused and could result in adverse costs.

Strategic Considerations for Claimants

Claimants should be aware of the risks of security for costs applications, particularly where:

• They are based outside the jurisdiction
• They are a company with limited assets
• They are relying on third-party funding

To reduce risk, claimants may:

• Obtain ATE insurance
• Ensure transparency in litigation funding arrangements
• Demonstrate financial stability
• Show that they have taken steps to comply with potential costs orders

Security for costs (SfC) applications are best dealt with prior to a hearing. Get advice on insurance options and the most cost-effective way to meet a SfC challenge. It is much easier to secure an after-the-event (ATE) legal expenses insurance product that would meet the SfC needs in advance, rather than post-judgment. Make sure you understand the different ATE products and the potential requirement for an anti-avoidance endorsement (AAE) or Deed of Indemnity. The best time to explore these options is usually around the time a claim is issued and served, or before the SfC hearing.

Security for Costs in Funded Litigation

Security for costs is particularly relevant in funded claims.

Defendants often scrutinise:

• The structure of the funding
• Whether the claimant has real assets
• Whether adverse costs are covered

In many cases, ATE insurance is used to address these concerns, providing cover for the defendant’s costs if the claim fails.

How Annecto Legal Can Assist

Security for costs can create real challenges in litigation, particularly where funding or insolvency is involved. The right funding and insurance structure can make all the difference.

Annecto Legal works with solicitors, insolvency practitioners, and businesses to manage cost risk and keep claims moving.

For Claimants

We help you:

• Secure ATE insurance to cover adverse costs
• Arrange litigation funding
• Strengthen your position where security for costs may be raised

This is especially important if the claimant is a company, based outside the jurisdiction, or may be seen as unable to pay.

For Insolvency Practitioners

We support claims by:

• Providing funding with no upfront cost
• Arranging ATE insurance
• Assisting with asset recovery and director claims

For Solicitors

We work alongside law firms to:

• Source funding and disbursement finance
• Arrange ATE cover
• Support cases where security for costs is likely

Contact Annecto Legal today to find out more about how we can assist on your case.