The Court of Appeal overturns the High Court decision concerning an ATE insurance policy lacking anti-avoidance provisions as adequate security for costs.

In an important recent decision in Premier Motorauctions Limited (in liquidation) et anr –v- PricewaterhouseCoopers LLP et anr [2017] EWCA Civ 1872, the Court of Appeal overturned an earlier High Court decision and granted the Defendants' application for security for costs holding that the after-the-event ("ATE") insurance policies taken out by the insolvent Claimant companies did not provide the Defendants with sufficient costs protection in circumstances where the policies were avoidable for material non-disclosure and misrepresentation.

Background

The Defendants had acted as advisor and bank respectively for the Claimant companies before the companies were placed into administration (and subsequently liquidation).

Following the issue of the claim, the Claimants took out ATE insurance policies which contained standard provisions permitting insurers to avoid the policy for material non-disclosure or misrepresentation.

The Defendants applied for security for costs order under CPR 25.13 on the grounds that: (1) there was reason to believe that the insolvent Claimants would be unable to pay the Defendants' costs if ordered to do so (CPR 25.13(2)(c)); and (2) in all the circumstances it was just to make the order (CPR 25.13(1)(a)).

The Claimants resisted the applications on the basis that they had ATE insurance to cover the Defendants' costs in the event that the claim failed at trial.

The High Court decision

The judge at first instance found that there was no reason why the existence of an ATE insurance policy should not be taken into account, together with the company's other assets, when deciding whether there is reason to believe that a claimant will be unable to pay an adverse costs order.

On the important question of whether the fact that the ATE insurance policies were avoidable for material non-disclosure or misrepresentation meant that there was reason to believe that the Claimants would be unable to pay the Defendants' costs, the Court held that the test was not whether the ATE insurance policies provided the same security as cash or a bank guarantee but whether there was reason to believe that the ATE policies would not respond (and whether the Defendants could point to this reason).

In considering various aspects of the specific ATE insurance policies, Snowden J considered that, despite the ATE insurance policies permitting avoidance, it was unlikely that insurers would seek to avoid the policies for misrepresentation/non-disclosure (with such a risk being no more than theoretical).

Consequently, the Court found that the Defendants had failed to establish that there was reason to believe that the Claimants would be unable to pay the Defendants' costs if ordered to do so. As the jurisdictional threshold under CPR 25.13 had not been met, the Defendants' application for security for costs was refused.

Snowden J commented in his judgment 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 Court of Appeal decision

The Court of Appeal held that whilst the limited authorities "support the proposition that an appropriately framed ATE insurance policy can in theory be an answer to an application for security"…"there may be a tendency (I put it no higher than that) for judges at first instance to accept that an ATE can stand as security for costs."

The Court of Appeal considered that any decision as to whether a particular ATE insurance policy gave the Defendants sufficient protection needed to carefully consider the wording of the policy and in particular the impact of the absence of an anti-avoidance provision particularly in circumstances where the Defendants (or indeed the court) had no access to any placing information put before insurers.

Given that the Claimant's underlying case would turn upon the evidence of their managing director, the Court also disagreed with Snowden J that "it was something of a leap" that a finding of a lack of credibility could provide insurers with a basis to avoid the ATE insurance policies. While the Court of Appeal noted that it did not necessarily follow that in such circumstances the insurers would avoid the policies, it was "unsatisfactory" for the Court to speculate as to the likelihood of such an action.

Reference was also made to the recent case of Holyoake v Candy [2017] 3 WLR 1131 in which, on a different point, it was concluded that an ATE insurance policy which provided for avoidance only in cases of fraud was not suitable to stand as fortification for a cross-undertaking in damages as there "remained an objectively reasonable apprehension of risk of avoidance".

Giving the leading judgment, Lord Justice Longmore found that:

"…it is unlikely that the court could be satisfied that the prospect of avoidance is illusory. Even at the jurisdictional stage of considering security for costs, the defendants must, as Mance LJ said in Nasser "be entitled to some assurance that [the insurance] was not liable to be avoided for misrepresentation or non-disclosure." I cannot see that on the facts of this case these defendants have that assurance. It follows that there is reason to believe that the Companies will be unable to pay the defendants' costs if ordered to do so and that the jurisdictional requirement of CPR 25.13 is satisfied.""Once one is satisfied that the Companies are insolvent, that there is jurisdiction to order security for costs and that ordering security will not stifle the claim, it is normally appropriate to order security and I see no reason not to do so in this case."

The Court of Appeal agreed with the Defendants that it did not have to remit the question of discretion to make the order for security back to the High Court, and ordered security in the sum of £2million for each Defendant.

Comment

While the absence of anti-avoidance provisions in an ATE insurance policy will not necessarily be fatal to the ability of such policies to respond to a security for costs application, this was clearly an important factor in the Court of Appeal decision and is likely to be a key consideration in the future given the importance that the Court of Appeal attached to looking closely at the individual arrangements in place to ensure there is a "level playing field" between the parties in relation to costs risk.