In an important judgment, the High Court has tackled the question of whether an impecunious claimant can defeat a defendant’s application for security for costs on the basis that it has ATE insurance in place.

Judgments on the interrelationship of security for costs and ATE insurance entail difficult balancing acts. On the one hand, impecunious claimants should not be denied access to justice simply because of their want of funds. On the other hand, defendants should not be dragged through litigation where there is reason to believe that they will not be able to recover their costs if they win.

Snowden J recently handed down judgment on the defendants’ security for costs applications in Premier Motorauctions Limited (in liquidation), Premier Motorauctions Leeds Limited (in liquidation) v PricewaterhouseCoopers LLP, Lloyds Bank plc [2016] EWHC 2610 (Ch).

The High Court refused the defendants’ applications because the claimants had ATE insurance in place and there was no reason to believe that insurance would not respond as/when necessary. The judgment highlighted “the public interest in permitting ATE insurance… to provide access to justice for insolvent companies”.

The Applications

The claimants (“Premier”), both in insolvent liquidation, claim around £50m from the defendants (“PwC” and “Lloyds”). PwC and Lloyds deny Premier’s allegations and estimate that their combined costs of defending the claim will well exceed £7m. PwC and Lloyds are concerned that if they win the litigation, Premier, being impecunious, will be unable to meet the normal order that the “loser” pays the “winner’s” costs.

PwC and Lloyds therefore applied for security for costs on the grounds that:

  1. Premier were companies and there was reason to believe they would be unable to pay PwC and Lloyds’ costs if ordered to do so (CPR 25.13(2)(c)) (the “jurisdictional test”); and
  2. Having regard to all the circumstances of the case, it was just to make such an order (CPR 25.13(1)(a)) (the “discretionary element”).

Prior to the applications, Premier had arranged ATE insurance providing cover of £5m. The real question for the High Court was whether Premier’s ATE insurance could defeat PwC and Lloyds’ applications.

Key Authorities

The High Court’s task was complicated by the existence of two contradicting lines of authority on the interrelationship of security for costs and ATE insurance:

  1. A line that suggests that ATE insurance will rarely defeat an application for security for costs (key case: Michael Phillips Architects Ltd v Riklin [2010] BLR 519, in which Akenhead J said that “It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the defendant, and because the promise to pay under the policy will be to the claimant”).
  2. A line that suggests that an ATE insurance policy may commonly defeat an application for security for costs (key case: Geophysical Services Centre v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC), in which Stuart-Smith J said that “In the absence of evidence to the contrary, the court’s starting position should be that a properly drafted ATE policy provided by a substantial and reputable insurer is a reliable source of litigation funding”).

The Decision

The High Court opted to follow the second line of authorities and refused PwC and Lloyds’ applications. It considered that the applications did not pass the jurisdictional test in CPR 25.13(2)(c), meaning that the discretionary element in CPR 25.13(1)(a) was not called into play.

The following key points may be taken from the judgment:

  • When considering the jurisdictional test, the court should take into account any ATE insurance obtained by a claimant. That insurance counts amongst a claimant’s assets.
  • The court does not need to consider whether the ATE insurance provides equivalent security to a traditional form of security (e.g. a cash payment or a bank guarantee) or a copper-bottomed form of security (e.g. a deed of indemnity). It simply needs to consider whether there is reason to believe that the ATE insurance will not respond as/when necessary.
  • This “reason to believe” test is unlikely to be satisfied simply because the ATE insurance may be cancelled or avoided or otherwise not respond to a claim (e.g. in the case of misrepresentation or non-disclosure). Instead, the defendant must persuade the court that there is reason to believe, on the facts of the case, that the insurance actually will be cancelled or avoided or not respond (e.g. because there has been a misrepresentation or a non-disclosure).

Commentary

The High Court acknowledged that its judgment was policy driven, at least in part: “There is a public interest in permitting ATE insurance on appropriate terms to provide access to justice for insolvent companies”.

As explained in our introduction, judgments on the interrelationship of security for costs and ATE insurance entail difficult balancing acts. On the one hand, impecunious claimants should not be denied access to justice simply because of their want of funds. On the other hand, defendants should not be dragged through litigation where there is reason to believe that they will not be able to recover their costs if they win.

The High Court’s judgment in this case falls in favour of the impecunious claimant. As long as that claimant can obtain standard-form ATE insurance with a reputable insurer, he should be able to resist an application for security for costs. The judgment will encourage such claimants and provide a boost to the ATE insurance market.

The judgment places a heavy burden on the defendant facing litigation brought by the impecunious claimant. If that defendant is to obtain security for his costs, he must now point to a specific reason to believe that the claimant’s ATE insurance will be avoided, cancelled or will not respond as necessary in order to “pass” the jurisdictional test. This will be no easy task for the defendant, particularly considering he has no way of knowing what has or has not been disclosed to the insurer by the claimant.

The judgment suggests that defendants should not be overly concerned about the risk that insurers will seek to deny liability under ATE insurance policies (a problem that has previously been seen in cases such as Persimmon Homes v Great Lakes Reinsurance [2011] Lloyd’s Rep IRLR 101). In this regard, defendants’ concerns have in the past been addressed by the provision of a deed of indemnity or the inclusion in the policies of anti-avoidance provisions. Whilst these solutions involve additional premiums, they are often accessible to claimants because they do not necessarily involve up-front payments. In the present case the High Court approached the matter differently, anticipating that Premier had every incentive to ensure that they complied with the policies so that they would respond, and also that insurers “are unlikely to have a commercial incentive to take an unusually defensive line in seeking to avoid liability”.

Naturally, defendants will be disappointed to be left to “wait and see” if claimants' ATE policies respond in due course. This judgment indicates that, absent specific concerns, defendants ought to be content to do so. Subject to an appeal which tips the balance once again, one can see the battleground moving to the adequacy of defendants’ concerns. One way or another, this remains an area to watch.