CPR 25.27 | £6m Security For Costs Denied As Escrow Funds In UK Account Deemed Sufficient To Satisfy Any Costs Order

VIRGO MARINE & NIXIE MARINE INC. V REED SMITH LLP & BARCLAYS BANK PLC [2025] EWHC 1157 (Comm)

In Virgo Marine v Reed Smith LLP [2025] EWHC 1157 (Comm), the High Court considered Reed Smith UK’s (RSUK) application for security for costs against two claimants, Virgo Marine and Nixie Marine. Mr Justice Foxton declined to order security for costs, despite finding prima facie jurisdictional grounds under CPR 25.27(b)(ii), primarily due to the presence of USD 11 million held in RSUK’s client account. The judgment thoroughly explored the legal complexities surrounding stakeholder/escrow arrangements, potential payment mechanisms, and the discretionary considerations in security for costs applications. Key costs issues addressed included: (i) the test for “reason to believe” a claimant cannot pay costs; (ii) the potential availability of funds in a client account for costs satisfaction; (iii) the appropriateness of including additional claim costs within a security for costs order; and (iv) the quantification of recoverable costs. The court applied a nuanced approach, reducing RSUK’s claimed costs by 30% to reflect excessive Grade A fee earner involvement and high hourly rates. Had security been ordered, the court would have structured it in three tranches totalling approximately £4 million, covering RSUK’s own costs, its additional claim costs, and Barclays’ potential costs. Critically, the judgment highlights the court’s strong public policy of ensuring judgment enforcement and its willingness to deploy flexible remedies to overcome technical obstacles to costs recovery.

…the evidence that Barclays would face real legal jeopardy in making a payment from a bank account in this jurisdiction to RSUK to discharge a liability due to RSUK arising by reason of an order of this court is thin and unpersuasive. Further, to the extent a court order is necessary, there must be very strong prospects that, rather than throw up its hands in despair and do nothing, a court would be able to order relief, the effect of which would be to enable RSUK to discharge any costs order in its favour from a fund in a bank account in its name which neither RSUK nor Barclays contend is, for any relevant purposes, economically "theirs", and which would involve the use of an asset to discharge the Claimants' costs' liability in which the Claimants have the principal economic interest.

Citations

Sarpd Oil International Ltd v Addax Energy SA [2016] EWCA Civ 120 In security for costs applications, where the defendant faces potential liability to a third party in an additional claim, the defendant may obtain security from the claimant if it is highly likely that it will be indemnified by the claimant for those further costs. Al-Koronky v Time Life Entertainment Group Ltd [2005] EWHC 1688 (QB) A party seeking to resist an order for security for costs on the basis that it would stifle the claim must provide full, frank, clear and unequivocal evidence of its inability to comply with such an order. Chemistree Homecare Ltd v Teva Pharmaceuticals [2011] EWHC 2979 (Ch) Inability to pay for security for costs purposes refers to the claimant’s inability to pay when the costs fall due, having regard to liquid or readily realisable assets. - Longstaff International Ltd v Baker & McKenzie [2004] EWHC 1852 (Ch) If a claimant’s assets are illiquid and cannot be turned into cash within a reasonable time to meet a costs liability, the threshold for security for costs is satisfied. Thistle Hotels Ltd v Gamma Four Ltd [2004] EWHC 322 (Ch) The nature and liquidity of a claimant’s assets is a relevant factor when assessing whether there is reason to believe it would be unable to pay a costs order. Danilina v Chernukhin [2018] EWCA Civ 758 Where enforcement may eventually succeed but be subject to delay or difficulty, security for costs may still be ordered to cover potential delay costs and interest burdens. Jirehouse Capital v Beller [2008] EWCA Civ 908 The “reason to believe” threshold for security for costs lies between mere doubt and a finding on the balance of probabilities that the claimant cannot pay. Tenax Steamship Co Ltd v The Brimnes (Owners) (The Brimnes) [1973] 1 WLR 386 Payment is only effective when the payee receives the unconditional right to the immediate use of the funds transferred. Havila Kystruten AS v STLC Europe Twenty Three Leasing Ltd [2022] EWHC 3166 (Comm) Payment into a contractually designated account constitutes payment for contractual purposes even if the payee faces difficulties accessing the funds due to external sanctions. Gravelor Shipping Ltd v GTLK Asia M5 Ltd [2023] EWHC 131 (Comm) Payment into an account inaccessible to the payee due to sanctions may still amount to valid contractual payment, as the hindrance is external to the payment mechanism. Irwin Mitchell v Director of Revenue and Customs Protection Office [2008] EWCA Crim 1741 Money held by a solicitor in a client account is generally held on trust for the client, giving rise to fiduciary obligations enforceable in certain proceedings. Magner v Royal Bank of Scotland [2020] UKPC 5 A bank may be liable for dishonest assistance in a breach of trust when it facilitates improper application of monies held in a solicitor’s client account. Menzies v Oakwood Solicitors Ltd [2024] UKSC 34 A solicitor can only deduct costs from client monies in their account when the bill has been agreed to and the client is not disputing the deduction, such that payment is properly effected. Bristol Alliance Nominee No 1 Ltd v Bennett [2013] EWCA Civ 1626 Funds held by solicitors as stakeholders under an escrow agreement are not held on trust unless expressly provided; the solicitor’s obligation is typically contractual. Potters v Loppert [1973] Ch 399 A stakeholder who holds a deposit paid on contract is generally not a trustee unless the agreement provides otherwise; the arrangement creates contractual, not fiduciary, obligations. Manzanilla Ltd v Corton Property and Investments Ltd [1996] Lexis Citation 3767 A stakeholder’s obligation is founded on contract, requiring payment in accordance with events defined in that contract; they are not a trustee and retain rights accordingly. PDVSA Servicios S.A. v Clyde & Co LLP [2020] EWHC 2819 (Ch) An escrow arrangement involving solicitors generally does not create a trust unless clearly intended; the stakeholder’s responsibility is typically administrative and contractual. Petrosaudi Oil Services (Venezuela) Ltd v Clyde & Co LLP [2021] EWHC 444 (Ch) A solicitor may not be in breach if it refuses to release funds held in escrow when legal uncertainty or sanctions concerns practically impede compliance with an arbitral award. Bluewaters Communications Holdings LLC v Bayerische Landesbank Anstalt des Öffentlichen Rechts [2018] EWHC 78 (Comm) The court should order security for the amount the applicant is likely to recover on assessment if awarded costs on the standard basis, adopting a realistic and proportionate view. Vald Nielsen Holding AS v Baldorino [2017] EWHC 1033 (Comm) In determining the amount of security for costs, the court must estimate what will be reasonably recovered on a standard basis at detailed assessment. Phones 4U Ltd v EE Ltd [2020] EWHC 1943 (Ch) A real prospect or significant possibility that a party will be awarded indemnity costs may justify awarding security on that basis, but mere theoretical possibilities are insufficient. Maroil Trading Inc v Cally Shipholdings Inc [2020] EWHC 3041 (Comm) Security for the costs of an additional claim may be ordered where it is likely that the claimant will be ordered to indemnify the defendant for its third-party costs if the claim fails.

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Key Points

In determining whether to award security for costs against a corporate claimant, the court assesses whether there is reason to believe the claimant will be unable to pay an adverse costs order when it becomes payable, by reference to the claimant’s likely liquidity at that time, not its ultimate ability to pay. [50–51]
The presence of substantial funds within a solicitor’s client account does not necessarily defeat an application for security for costs, particularly where there are legal or practical obstacles to the realisation of those funds for the purpose of satisfying a costs order. [33, 69–70, 75]
Where significant uncertainty exists over whether a third party (such as a bank) will permit the use or transfer of funds to satisfy a costs order, the court must scrutinise the strength of that risk based on concrete evidence, rather than speculation or generalised concerns about foreign legal risk or reputational damage. [65–68, 75]
The court may order security for additional costs liabilities that a defendant may incur in related third-party or additional claims, provided there is a sufficient prospect that such liabilities will be the responsibility of the claimant if the defence succeeds. A mere possibility is insufficient. [79–87]
In assessing the appropriate amount of security for costs, the court will estimate what the applicant is likely to recover on a detailed assessment of costs on the standard basis, applying a broad-brush approach and taking into account factors such as guideline hourly rates, reasonable staffing levels, and likely reductions on assessment. [81–82, 94–95]

"...the argument that Barclays would resist making a payment from the Balance to RSUK for the purposes of satisfying a costs order of this court in RSUK's favour appears thin, and its ability to resist such a payment in the face of an order of this court requiring transfer of the relevant part of the Balance for this purpose particularly so."

Key Findings In The Case

The Claimants, Virgo Marine and Nixie Marine Inc., are both foreign corporate entities with opaque financial circumstances and no published accounts, and they failed to respond to requests to verify their financial positions. The court found there was reason to believe they may be unable to pay RSUK’s costs if ordered to do so, satisfying the threshold for an application for security under CPR 25.13(2)(c) [31].
Although over USD 11 million stood to the credit of RSUK’s client account with Barclays in relation to the escrow arrangement, the court found that these funds were not clearly or readily available to the Claimants for satisfying any future adverse costs order, due to unresolved legal uncertainties about beneficial ownership, potential contractual limitations, and Barclays’ refusal to process payment instructions in the present circumstances [33, 45, 59–60].
The court found that the evidence provided by RSUK as to Barclays’ unwillingness to release or re-designate the Balance for the satisfaction of a costs order was not robust or specific, and that Barclays’ general expressions of concern regarding sanctions or reputational harm lacked persuasiveness and were insufficient to justify treating the funds as unavailable without stronger evidential support [52, 68].
The court found that RSUK’s additional claim against Barclays arose entirely as a consequence of the main action brought by the Claimants, and that if RSUK were successful in defending the claim and Barclays were awarded costs, there was a sufficient prospect that RSUK would recover those costs from the Claimants as part of the overall costs liability in the proceedings [79–87].
The court found that RSUK’s projected litigation costs as presented in its schedule were excessive in terms of hourly rates and the level of senior fee earner involvement. A 30% broad-brush reduction was applied to RSUK’s stated figures to reflect realistic recoverable costs on a standard basis, had a security award been granted [94–95].

"The strong public policy of the English court that its orders (or awards of arbitral tribunals in that context) should be enforced is frequently identified as a factor justifying the appointment of a receiver (e.g. Cruz City 1 Mauritius Holdings v Unitech Ltd (No.2) [2014] EWHC 3131 (Comm), [21] and [47(a)] and Bacci v Green [2022] EWCA Civ 1393, [25]-[26]). It has been noted that the jurisdiction will normally not be exercised "unless there is some hindrance or difficulty in using the normal processes of execution" (B Football Assets v Blackpool Football Club (Properties) Ltd (formerly Segesta Ltd) [2019] EWHC 530 (Ch), [7])."

Background

The case of Virgo Marine & Nixie Marine Inc v Reed Smith LLP & Barclays Bank PLC ([2025] EWHC 1157 (Comm)) arose from a dispute concerning escrow arrangements related to the sale of an oil tanker. The First Claimant, Virgo Marine, entered into a Memorandum of Agreement (MOA) with Kibaz Shipping LP to purchase the vessel, with Reed Smith LLP (RSUK) acting as Kibaz’s legal representative. An Escrow Agreement was subsequently executed, under which Virgo paid a deposit and balance totalling approximately USD 13.3 million into RSUK’s USD client account with Barclays. The agreement stipulated that RSUK’s duties were administrative and limited to instructing Barclays to release funds upon specified conditions.

Following Virgo’s designation under US sanctions, RSUK instructed Barclays to freeze the escrow funds. Despite later retracting its position on being a “US person” under the sanctions regime, Barclays refused to release the balance to Virgo, citing potential breaches of US sanctions. The Claimants subsequently brought proceedings against RSUK for breach of contract, duty of care, and fiduciary duty, while RSUK issued an Additional Claim against Barclays for failing to comply with its payment instructions.

Costs Issues Before the Court

The primary costs issue before the court was RSUK’s application for security for costs under CPR 25.27, seeking £6 million to cover its defence costs, the costs of its Additional Claim against Barclays, and any potential liability for Barclays’ costs in defending that claim. The key question was whether the presence of the escrow balance in the RSUK USD Client Account negated the need for security, given RSUK’s contention that the funds might not be accessible to satisfy a costs order.

The Parties’ Positions

RSUK’s Submissions: RSUK argued that there was “reason to believe” the Claimants would be unable to pay its costs if ordered to do so, given their foreign incorporation and lack of financial disclosure. It contended that the escrow balance was not “readily realisable” due to Barclays’ refusal to process payment instructions, citing correspondence in which Barclays expressed concerns about reputational and legal risks under US sanctions. RSUK also sought security for its Additional Claim costs, asserting that if its defence succeeded, it would likely recover Barclays’ costs from the Claimants.

Claimants’ Submissions: The Claimants argued that the escrow balance, held in a UK bank account, was sufficient to satisfy any costs order. They contended that RSUK could re-designate the funds to discharge a costs liability without requiring Barclays to transfer the money, relying on authorities such as Havila Kystruten AS v STLC Europe and Gravelor Shipping Ltd v GTLK Asia, which held that payment into a restricted account could still constitute discharge of a debt. They also challenged the proportionality of RSUK’s costs budget.

The Court’s Decision

Foxton J dismissed RSUK’s application for security for costs. The court held that:

Jurisdictional Threshold: While the Claimants’ foreign incorporation and lack of financial transparency satisfied CPR 25.27(b)(ii), the presence of the escrow balance in a UK account weighed against ordering security.
Availability of Funds: The court was not persuaded that Barclays would refuse to comply with a court order to transfer funds to RSUK to satisfy a costs liability. The evidence of legal jeopardy was “thin and unpersuasive,” and the court highlighted its broad powers under s.37 of the Senior Courts Act 1981 to appoint a receiver if necessary.
Discretionary Factors: It would not be just to require the Claimants to provide additional security when they had already paid over USD 13 million into a UK account, particularly where neither RSUK nor Barclays disputed that the funds economically belonged to the Claimants.
Costs of the Additional Claim: Had security been ordered, the court would have included Barclays’ costs, given the high likelihood of RSUK recovering them from the Claimants if its defence succeeded. However, the court reduced RSUK’s claimed costs by 30% to reflect excessive Grade A fee-earner involvement and rates above Guideline figures.

Ultimately, the court concluded that the escrow balance provided adequate security, rendering a further order unnecessary. The decision underscores the importance of assessing the practical availability of funds held in jurisdiction when considering security for costs applications.

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