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:
“(1) A defendant to any claim may apply under this Section of this Part for security for his costs of the proceedings."
“(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
(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;”
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payment of their costs since there were significant risks attached to them where (i) the ATE policies might be avoided, rescinded or cancelled in the event that the defendants won; (ii) two of the ATE insurers were based in Gibraltar and could not be accepted as credit-worthy.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.
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:
The judge was also not persuaded by the arguments in respect of the Gibraltar insurers.
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.