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Avoidable ATE insurance policy is not sufficient security for costs rules the Court of Appeal

An after-the-event (ATE) insurance policy taken out by claimant companies (both in insolvent liquidation) could not stand as security for the defendants' costs, the Court of Appeal has ruled. This overturns the High Court's much reported 2016 decision in Premier Motorauctions Ltd v PwC.

Insolvency Practitioners may now see an increase in security for costs applications from defendants where the claimant company is insolvent.  The wording of any existing ATE insurance policies should be reviewed if defendants seek proposals for security for costs.  Future policies will need to be carefully negotiated to minimise the risk of having to provide defendants with additional security.

Background

The claimants were two companies in liquidation.  They alleged that the defendants, a bank and an accountancy firm, had conspired to force the claimant companies into administration in order to sell their business and assets at an undervalue for the benefit of the bank.  The defendants denied these allegations and told the claimants that they would be seeking security for their costs.

Security for costs

A defendant may apply to court for security for his costs of the proceedings.  The court may make an order if it is satisfied, having regard to all the circumstances of the case, that it is just to do so.  One or more preconditions must also be satisfied.  These include circumstances where the claimant is a company and there is reason to believe it will be unable to pay the defendant's costs if ordered to do so.

It may be possible for a claimant to rely upon ATE insurance to demonstrate that the claimant will be able to pay the defendant's costs and so to defeat a security for costs application.  Whether or not a policy is sufficient is a question of fact in each case.

The ATE insurance policy

The claimants in this case notified the defendants that they had obtained ATE insurance, and provided a copy of the policy.  The policy could be avoided by the insurers for non-disclosure or misrepresentation by the claimants.  It also included terms excluding payment of costs relating to orders for costs security.

The judge at first instance refused the application for security for costs.  He held that the ATE insurance provided sufficient security for the defendants' costs.  The defendants appealed.

Decision

The Court of Appeal allowed the appeal, and ordered the claimants to provide security for costs of £4 million.

The court held that ATE insurance can be taken into account when deciding whether or not there is reason to believe a claimant would be unable to pay a defendant's costs if ordered to do so.  However, the insurance in this case did not provide sufficient protection.  The defendants were entitled to some assurance that the policy was not liable to be avoided, but the wording of the policy did not provide this.

It was noted that the Judge at first instance did not consider that an order for security for costs would stifle the claim in this case.

The impact of the decision for Insolvency Practitioners

The earlier High Court decision was useful for claimants seeking to defeat applications for security for costs.  In general, where ATE insurance was available this was often enough to deter defendants from making a security for costs application against insolvent claimant companies. 

It is likely that Insolvency Practitioners will now see an increase in the number of security for costs applications from well informed defendants.  While ATE insurance will still be considered in such applications, the courts will look closely at the wording of each policy.  If the policy does not contain anti-avoidance provisions there is a real risk, depending upon the surrounding circumstances, that claimants will be ordered to provide another form of security for defendants' costs.

Insolvency Practitioners will need to review the wording of any existing ATE insurance policies before responding to defendants seeking security for their costs.  Terms should be carefully considered when negotiating new ATE insurance policies.

If you are an Insolvency Practitioner dealing with an actual or potential security for costs application and would like further advice please contact a member of the Restructuring and Insolvency team.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

 

 

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