Litigation: Security for Costs and ATE – Good news for Liquidators

Background

The rules regarding security for costs are found in Civil Procedure Rule (“CPR”) 25.12 and 25.13. The extracts relevant to this article are as follows:

Rule 25.12(1)

“(1) A defendant to any claim may apply under this Section of this Part for security for his costs of the proceedings."

Rule 25.13

“(1) The court may make an order for security for costs under rule 25.12 if –

(a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and

(b)

(i) one or more of the conditions in paragraph (2) applies, or

(ii) an enactment permits the court to require security for costs.

(2) The conditions are –

…..

(c) the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so;”

Key facts

The claimants, acting by their joint liquidators, had claimed around £50 million from the defendants, who denied the claim in full. Prior to the applications, the claimants had obtained After The Event insurance (“ATE”) in 5 layers totalling £5 million.

The defendants applied for security of costs on the basis that there was reason to believe that the claimants would be unable to pay their costs if ordered to do so within the meaning of CPR 25.13(c) because they were in compulsory liquidation without any substantial assets. The defendants submitted that the ATE policies did not guarantee payment of their costs since there were significant risks attached to them where (i) the ATE policies might be avoided, rescinded or cancelled in the event that the defendants won; (ii) two of the ATE insurers were based in Gibraltar and could not be accepted as credit-worthy.

When considering the matter, the judge had to consider two separate lines of authorities. The first suggested that ATE would rarely defeat an application for security for costs and focused on the question of whether an ATE policy was a suitable alternative form of security to cash or a bank guarantee. The second suggested that ATE would commonly defeat an application for security for costs.

Judgment

The applications were heard by Mr Justice Snowden who dismissed them, following the second line of authorities. His judgment set out several findings of which the following are the key points:

1. As a matter of logic, the starting point of any analysis is to ask the threshold jurisdictional question posed by CPR 25.13, i.e. whether there was reason to believe that the claimants would be unable to pay their costs if ordered to do so.
   
2. The court should have regard to the assets which the claimant company would have available to meet an adverse costs order, including an ATE policy. The fact that a company was in liquidation or administration did not necessarily mean that it would have insufficient assets to meet an adverse costs order. Even insolvent companies could have substantial assets, and an adverse costs order made against the company in litigation would rank for payment in the insolvency ahead of the claims of other creditors.
   
3. The Court did not need to consider whether ATE provided equivalent security to a more traditional form of security or a deed of indemnity but rather whether having regard to the terms of the ATE policy, the nature of the allegations in the case and all the other circumstances, there was reason to believe that the ATE policy would not respond so as to enable a defendant's costs to be paid.
   
4. There was a public interest in allowing ATE insurance on appropriate terms to provide access to justice for insolvent companies under the control of responsible insolvency office-holders. In this case, the ATE policies had been arranged and the proposals to insurers had been made by joint liquidators who were independent professional insolvency office-holders. They had arranged the ATE policies after having conducted an investigation into the claimants' case with the assistance of experienced solicitors and counsel, and had every incentive to ensure that the terms and conditions of the ATE policies would be adhered to. There was no reason to believe that the ATE policies would fail to respond if required.
   
5. The “reason to believe” test is unlikely to be satisfied simply because the ATE could be cancelled, or avoided or otherwise not pay out. The defendants had to persuade the court that there was a reason to believe, on the facts of the case, that the policy would actually be cancelled or avoided or not respond.
   

The judge was also not persuaded by the arguments in respect of the Gibraltar insurers.

Conclusion

The court must balance the interests of impecunious claimants seeking access to justice against the rights of defendants who have reason to believe that they may not be able to recover their costs if they win. This decision suggests that the court will favour the interests of the impecunious claimant. As long as they have ATE from a reputable insurer, they should be able to defeat an application for security for costs.

In particular, this decision also suggests that it is in the public interest to allow ATE as a mechanism for allowing insolvent companies access to justice.

Whilst this decision is bad news for defendants who it seems will have to point to a specific reason why they believe that an ATE policy will be avoided, it is better news for liquidators with claims to bring.

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