The Court of Appeal raises the bar for insolvent claimants on security for costs

In the highly anticipated first appellate court decision focussing on the adequacy of ATE policies for security of costs, the Court of Appeal in Premier Motorauctions Ltd & Ors v (1) PricewaterhouseCoopers LLP (2) Lloyds Bank PLC [2017] EWCA 1872 overturned the High Court decision and held that the Claimants' ATE policy without anti-avoidance provisions was not sufficient for the Defendants' security of costs. The Claimants are now required to put up 4million to continue with the claim - a useful reminder that security for costs applications can be a powerful weapon for defendants in litigation.

Background

The claim is rather a salacious one, previously appearing in Private Eye. The Claimants were a car auction business, headed by principal shareholder and managing director, Keith Elliott. The Claimants' bank, Lloyds (the Second Defendant), introduced Mr Elliott to PwC (the First Defendant), who conducted a review of the Claimants' business and identified a need for additional lending. The lending terms were breached and Lloyds therefore appointed PwC as administrators, who sold the Claimants' business.

The Claimants, now acting by different liquidators, issued proceedings against PwC and Lloyds alleging that they conspired to obtain control of the Claimant companies and sell them for their own benefit. The Claimants claimed losses of 45 million - 54 million. PwC and Lloyds denied the allegations.

The ATE Policy

The Claimants' liquidators obtained (pre Insurance Act 2015) ATE policies from various insurers with a total sum insured of 5 million. The ATE policies contained numerous exclusions and conditions, including conditions that the insurers could avoid the polices for material non-disclosure and misrepresentation.

PwC argued that the ATE policies were insufficient security, given that they could be avoided for non-disclosure/misrepresentation and requested that the Claimants procure a deed of indemnity without any avoidance provisions from ATE insurers to cover their costs instead. The Claimants' liquidators refused.

PwC and Lloyds therefore issued applications for security for costs, seeking security of over 7 million in total. A key argument to their applications was that Mr Elliott's evidence was central to the case against them and, if his evidence was not believed or unreliable, it would provide potential grounds for the ATE insurers to avoid the policies or deny liability.

Security for Costs

Under CPR 25.13(2)(c), a Court can order security for costs if there is reason to believe that a claimant company will be unable to pay the defendant's costs. The Court of Appeal found that there were reasons to believe that the Claimants would be unable to pay PwC's and Lloyds' costs, given that:

+ A properly drafted ATE policy may be sufficient protection for security for costs, depending on the terms of the policy;

+ The ATE policies in question did not contain "anti-avoidance" provisions, which would restrict the insurers' rights to avoid the policies for non-disclosure/misrepresentation and give the Defendants greater assurance;

+ Mr Elliott's evidence was essential to the Claimants' case and, unless he was believed, the Claimants would not "get to first base" in their claim. There was no information available before the Court to assess the likelihood of insurers avoiding the policies. Whilst the placing information put before the ATE insurers was not made available to the Court, even if it had been, it is unlikely that the Court could be satisfied that the prospect of avoidance was "illusory";

+ Whilst the insurance proposals to the ATE insurers were made by the Claimants' liquidators (who were independent professionals and who had investigated the claims with the assistance of solicitors and counsel) this did not cater for the possible non-disclosure of matters known by Mr Elliott which the professionals did not know.

+ Security for costs would not stifle a genuine claim in this case, which was not argued by the Claimants (or their funders). In any event, the Court was not particularly impressed by the Claimant's liquidators' refusal to procure a deed of indemnity, particularly given that the possibility of such a deed was referred to in the ATE policies.

The Court of Appeal therefore ordered that the Claimants provide a total of 4million security in order to continue with their claim.

Comment

Where does this leave defendants and their insurers? Every case will depend upon the facts, but it appears that ATE policies without anti-avoidance provisions will now face severe difficulties in security for costs applications, particularly where there is disputed witness evidence which could conceivably give grounds for non-disclosure/misrepresentation or denial of cover. Where ATE policies have avoidance provisions, defendants should therefore be optimistic in demanding a deed of indemnity from insurers, a bank guarantee or cash for security for costs.

The Court of Appeal's decision seems to have now pushed the buck more to claimants to provide satisfactory evidence that avoidance or other terms that could deny ATE cover will not bite, as opposed to defendants having to identify a specific reason why the ATE policy will likely not respond. This could be a high bar to overcome: the Court of Appeal indicated that even a review of the ATE policies' placing information would likely not be enough in this case.

The Court of Appeal also appear to have done away with the argument that succeeded in Geophysical1 that the ATE proposals were completed objectively by independent insolvency practitioners, supported by legal advice , so the risk of avoidance was low. This is now not sufficient.

Finally, what is the impact of the Insurance Act 2015? Premier Motorauctions was decided on the basis of the old law of material non-disclosure, as the ATE policies were issued prior to the 2015 Act applying, as opposed to the new law of a duty of fair presentation and proportionate remedies. The 2015 Act's restrictions on avoidance will certainly mean claimants are in a stronger position to argue that their ATE policies are sufficient security, although this should still be a high bar for claimants to overcome given that avoidance is still a remedy where the breach of the duty of fair presentation is deliberate or reckless or the ATE insurer would not have agreed to insure at all. Security for costs applications therefore remain a potentially useful weapon for defendants and their insurers facing claims from insolvent claimants.