Case Alert - [2016] EWHC 2610 (Ch)

Judge decides security for costs application where the claimant has ATE insurance/policy proceeds post-liquidation.

Hausfeld & Co for claimants, DLA Piper and CMS Cameron McKenna for defendants

The defendants applied for a security for costs order on the basis that the claimant is a company and there "is reason to believe that it will be unable to pay the defendant's costs if ordered to do so" (CPR r25.13(2)(c)). The defendants had acted for the claimants before the claimants were placed into administration (and subsequently compulsory liquidation). After the claim form was issued, the claimant took out ATE insurance cover. The issue in this case was whether the security for costs order should be made in light of the ATE insurance cover.

Snowden J held that although earlier caselaw focused on whether an ATE policy was a suitable alternative form of security to cash or a bank guarantee, the starting point is to ask whether there is reason to believe that the claimant will be unable to pay an adverse costs order (ie the threshold jurisdictional question). The judge saw no reason why the existence of an ATE policy should not be taken into account (together with the company's other assets) at this stage. Accordingly, the judge in Geophysical Service v Schlumberger had been correct to find that the question was not whether the ATE policy is as good as cash or a bank guarantee, but, rather, whether there was reason to believe that the ATE policy would not respond.

Although that meant that the test was different where a security for costs order has already been made and the ATE policy then taken out (in which case it must be shown that the policy is as good a cash/a bank guarantee), the judge saw no principled reason for ignoring a policy when considering if the CPR r25.13 test has been met: "Moreover, I think that it must be acknowledged that there is a public interest in permitting ATE insurance on appropriate terms to provide access to justice for insolvent companies under the control of responsible insolvency office-holders".

The judge then went on to consider possible criticisms of the particular ATE policy in issue in this case (and therefore whether there was reason to believe that insurers would not pay):

  1. Whether the insurers would be able to avoid for misrepresentation/non-disclosure. Although the underlying case involved doubts about the credibility of the claimant's managing director, of key importance, here, was the fact that the liquidators and their advisers were unlikely to have placed "unquestioning reliance" on him when completing the proposal form. Nor could it be said that the ATE insurers would fight "tooth and nail" to deny liability if an adverse costs order was made: "the ATE market in the UK is now a substantial and mature one, and a significant part of that market relates to the funding of insolvency cases. It is also one in which the relevant professionals such as insolvency practitioners and solicitors are well-informed as to the reputations of the rival ATE insurers. In this situation, whilst ATE insurers are of course entitled to take a stand on their policy terms and conditions, they are unlikely to have a commercial incentive to take an unusually defensive line in seeking to avoid liability under the policies they issue. If they were to do so, this would soon become known in the market, and potentially profitable future business would be placed elsewhere".

Nor could the managing director's knowledge be attributed to the claimant: under English law, the appointment as director comes to an end on the appointment of a compulsory liquidator, and so the director's knowledge will not be attributed to the company in relation to an insurance policy taken out after he as ceased to be a director.

  1. Although the policy had a non-standard condition precedent that the insurer would not be liable if the case is abandoned because the claimant runs out of funding, the judge found that it would be "commercially absurd" for an ATE insurer to avoid liability simply by cancelling the policy before a court order was actually made covering costs. Nor was it likely on the facts that the funding put in place by the liquidators was inadequate.
  2. Would any payment under the ATE policy go to the defendants? An argument was raised that any insurance proceeds might form part of the claimant's insolvent estate and so be divided between unsecured creditors. That argument was rejected by the judge: adverse costs order rank for payment ahead of other claims in a liquidation.

Although he left open the question whether the defendants could rely on the Third Parties (Rights against Insurers) Act 1930 if the ATE policy is taken out after the company is put into liquidation, the judge said there was a "clear case" for saying that, where a liquidator takes out ATE insurance in order to cover an adverse costs order in a particular case, any insurance proceeds would be paid and received by the liquidator upon an implied trust for the sole purpose of paying that costs order (and not for the purpose of distribution to other creditors).

  1. However, the judge did agree with the defendants that the credit-worthiness of the ATE insurer can be taken into account. One of the insurers was a Gibraltarian company and did not have a credit rating but the judge accepted that it had an established track record and there was no reason to believe it would not pay. One of the other Gibraltarian companies involved did not have such a record and the judge had doubts about its financial standing. However, he concluded that that insurer's layer was unlikely to be reached.

Accordingly, the security for costs order was refused.

COMMENT: This case (together with the earlier decision in Geophysical) will provide support for the ATE insurance market, insofar as it covers insolvent companies. Such companies will not need to show that the policy is as good as cash. Furthermore, the types of argument raised here to question the chances of the claimant eventually recovering under the policy are the types of argument which are frequently run in such cases. Accordingly, the judge's robust approach to dealing with them will encourage claimants to believe that their ATE policy will be accepted as a reason to avoid a security for costs order.