What happens when a claimant is in financial difficulties, or becomes bankrupt, or goes into administration or liquidation during proceedings?

This is not an unusual question. This issue arises a lot.

An individual brings a claim in the courts of England and Wales, (known as a claimant, and previously a plaintiff). For a variety of reasons, they cannot continue because they have run out of funds, or have found themselves in financial dire straits.

If you think that this is going to happen, or the claimant has financial issues, a tool in litigation is to apply for security for costs, depending upon the particular circumstances of the financial concerns, pursuant to Part 25.12 of the Civil Procedure Rules 1998 (‘CPR’).

Security for costs are monies that are paid into court to cover part or all of the defendant’s legal costs, in case the claimant is unable if he/she/it loses a case.

What if a claimant is financially impecunious? The courts having regard to all the circumstances may still award a sum for security for costs, but it may be a reduced figure. The reasoning would be that an application for security for costs ought not to be used to scupper a claim from being brought. Access to justice should be for all.

The conditions that have to be satisfied are set out to make an application for security for costs are set out at CPR 25.13. One or more of these conditions needs to be satisfied:

  • If the claimant is resident outside of the jurisdiction of England and Wales, but not resident broadly speaking in a country where a reciprocal agreement is not in force with that resident country to enforce judgments.
  • If the claimant is a company and there is a reason to believe it will be unable to pay the defendant’s costs if ordered to do so.
  • If the claimant has changed his address since the claim was commenced with a view to evading the consequences of litigation.
  • If the claimant failed to give an address in the claim form, or gave an incorrect address in that form.
  • If the claimant has taken steps in relation to his assets that would make it difficult to enforce an order for costs against him.

A decision to make an order for security for costs is discretionary, having regard to all the circumstances.

If an individual is adjudged bankrupt (i.e. when a bankruptcy order is made), he/she no longer has any status to continue an action in court, because that right vests in their trustee-in-bankruptcy. See Section 306 Insolvency Act 1986.

The main case in point is that of Heath v Tang (1993) 3 All ER 694. If before a person is made bankrupt, he becomes bankrupt, the case is stayed until and unless the trustee in bankruptcy assigns the case to the bankrupt or agrees to be substituted.

What is the claimant is a company and the company goes into liquidation? A company is a separate legal entity to an individual and is governed by different rules to an individual.

If a company is placed into liquidation, then section 130(2) Insolvency Act 1986 applies. No action or proceedings can be proceeded with or commenced against the company or LLP or its property, except by leave of the court and subject to such terms and the court may impose.

What if a company is placed into administration? In such circumstances a moratorium is created and Schedule B1, paragraph 43 of the Insolvency Act 1986 applies.

Proceedings cannot progress without agreement by the administrator and leave of the court to do so. Proceedings are stayed and no one can bring a claim against the company, and the company, in turn, cannot bring a claim.

This blog post is for information purposes and should not be relied upon as legal advice because it does not consider or take into account your own personal circumstances. If in doubt, seek legal advice.

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Professor David Rosen is a solicitor-advocate, partner and head of litigation at Darlingtons Solicitors LLP. He is strategic legal advisor for Help4LiPs, a member of the Society of Legal Scholars amongst other memberships, and honorary professor of law at Brunel University where he regularly lectures on practical legal skills and procedure, and advocacy amongst other subjects.

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