Virgo Marine & Anor v Reed Smith LLP

An order for security for costs requires more than uncertainty about a claimant’s ability to pay, but less than proof on the balance of probabilities. The relevant question is whether there is reason to believe that the claimant will be unable to pay when the costs fall due, having regard to cash and readily realisable assets.

The presence of funds in a defendant’s client account may not provide adequate security where the defendant cannot presently access or transfer them. However, the court must assess realistically whether banking restrictions or foreign sanctions would prevent payment, particularly where an order of the English court could facilitate enforcement. Security for costs covering an additional claim may be ordered, but more than a mere possibility of the claimant becoming liable for those costs is required.

Virgo Marine and Nixie Marine brought proceedings against Reed Smith LLP concerning funds held under an escrow arrangement following the proposed sale of an oil tanker. Reed Smith alleged that its contractual and other liabilities were limited and that Barclays Bank’s refusal to process payment instructions was an intervening cause.

Reed Smith applied under CPR 25.27 for security for costs of its defence, its additional claim against Barclays, and possible liability for Barclays’ costs. The application sought approximately £6 million. The central issues were whether the claimants’ funds held in Reed Smith’s client account affected the jurisdictional threshold and whether it was just to order security.

1. Application dismissed. The court accepted that the claimants were bodies corporate and that there was reason to believe they might be unable to pay Reed Smith’s costs, applying CPR 25.27(b)(ii). Foreign incorporation, the absence of published accounts and the failure to provide financial information were sufficient. No stifling case was advanced.
2. The jurisdictional question concerns ability to pay when the costs fall due. It requires more than doubt, but does not require proof on the balance of probabilities. Illiquid assets may satisfy the threshold because eventual payment is insufficient if it cannot be made with reasonable promptness.
3. The court proceeded on the assumption that Reed Smith could not simply set off a costs order against its possible liability to pay the escrow balance. The proposed re-designation of funds in the client account did not provide a sufficiently secure basis for concluding that the claimants could discharge a costs order. The argument depended on unresolved questions about beneficial ownership, the SRA Accounts Rules 2019, acceptance of payment, and Reed Smith’s lack of an unconditional right to immediate use of the funds.
4. The decisions concerning payment into designated accounts, including Havila Kystruten and Gravelor, did not establish that a purported payment of a costs order had occurred. Those cases concerned contractually designated accounts and restrictions arising independently of the act of payment. Here, the restrictions arose before any transfer and were connected with the claimants’ characteristics.
5. At the discretionary stage, the evidence that Barclays would refuse to transfer funds to Reed Smith to satisfy an order of the English court was thin and unpersuasive. The correspondence did not establish real foreign legal jeopardy, and no expert evidence tested the alleged risk. The court should consider practical methods of enforcement, including orders concerning funds held in a bank account in the jurisdiction and the appointment of a receiver where necessary.
6. It was therefore not just to require the claimants, who had already transferred more than USD11 million into an English bank account, to provide a further £6 million. The court did not rely on the other discretionary factors raised.
7. Had security been appropriate, it could have included costs of the additional claim. More than a real possibility of an order requiring the claimant to indemnify the defendant for those costs is required. On the facts, if Reed Smith’s claim against Barclays failed, there was a high likelihood that Barclays would recover its costs from Reed Smith and that Reed Smith would recover them from the claimants.