Insolvency: Security for Costs Refused Because It Would Stifle an Insolvent Company’s Claim

31st July, 2018 by Sarah Lee

The court will be cautious about refusing security for costs on the grounds that it would stifle a serious or genuine claim. Sarah Lee considers why the court was willing to do so in the recent decision to do in Absolute Living Developments Limited v DS7 Limited.

In a judgment that will be of interest to insolvency office holders contemplating litigation, Mr Justice Marcus Smith has declined to make an order for security for costs against Absolute Living Developments Limited (in Liquidation) (“ALDL”) because to do so would stifle a genuine claim.

The Defendants had applied under rules 25.12 to 25.13 of the Civil Procedure Rules for an order that ALDL provide security of £500,000 on the basis that ALDL was a company which would be unable to pay the Defendants’ costs if ordered to do so.

There was no dispute that ALDL would be unable to pay the Defendant’s costs if ordered to do so. The “entry requirement” for the application was met. The Judge then had to consider, having regard to all the circumstances of the case, whether it was just to order security:

The Defendant had accepted that the claim was bona fide, although disputed on good grounds. The Judge was, therefore, prepared to accept that the claim was a bona fide one, genuinely brought and not a sham.
This was a complex claim and, as it could not at this preliminary stage be said with sufficient certainty that the Claimant’s likely inability to pay costs had been brought about by the Defendants’ conduct, this was not a basis upon which security for costs could be denied.
The Judge was not persuaded by the Claimant’s arguments in respect of the lateness of the application, the Defendants’ funding arrangements or conduct during the litigation.
The Judge concluded that there was no source of funding available to ALDL that would enable it to finance any order for security for costs and as a result there was more than a clear risk that, were he to order security for costs, the claim would be stifled and a bona fide and genuine claim would not be brought. The application for security for costs was dismissed.

Determining whether an application for security for costs was being used to stifle a serious or genuine claim involved the court carrying out a balancing exercise. On the one hand, it had to consider if this would result in an injustice to the Claimant (and in this case its creditors) if it was ordered to provide security but, being unable to do so, was forced to abandon a genuine claim. This had to be weighed against the possible injustice to the Defendant if the claim failed and the Defendant was unable to recover its legal costs incurred in defending the claim.

The balance in this case clearly favoured the Liquidator continuing to bring the claims on behalf of ALDL for the benefit of its creditors. The particular matters that led to this conclusion were that:

There were no funds in the insolvent estate: the Liquidator, her solicitor and Counsel and the forensic accountants instructed by her were all acting on a contingent basis and would only be paid if the claim succeeded.
The Liquidator had been unable to secure any offer of after the event (ATE) insurance cover.
The Liquidator’s firm had been obliged to fund certain expenses in the region of £65,000, but was not prepared to fund any security. The Judge stated that it would be entirely unusual and contrary to the public interest and the insolvency regime to require a liquidator to provide security, noting that it is well established that a liquidator will not be obliged to pay costs by way of a third party costs order unless there is a degree of impropriety or misconduct in bringing of the proceedings of which there was no suggestion in this instance.
The Liquidator had determined that she could not reasonably ask the creditors to provide funds to stand as security for costs: the largest creditor was the First Defendant, DS7 which could not be asked to provide security for its own costs; and the remaining creditors were individual investors owed less substantial amounts who were not wealthy and had already lost considerable sums. The Judge observed that it is not for the court to look behind the funding decisions of a liquidator regarding the progression of a claim. These were matters for the Liquidator alone. The Judge could not determine whether creditor funding would be forthcoming if sought. In any event, this would not be funding from the company itself. Further, creditors were likely to be deterred from funding the claim because in doing so they might expose themselves to a risk of a third party costs order if the claim were lost.

The case demonstrates that in the right circumstances, an insolvent company, acting by its appointed office holder may be able to litigate a claim even if ATE insurance or other funding options are not available.

Please contact [javascript protected email address] (Sarah Lee) for more information on this subject, or to ask a question. Alternativley, for more immediate information, visit our Insolvency Law page.

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Insolvency: Security for Costs Refused Because It Would Stifle an Insolvent Company’s Claim

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