Threatening to get a Court order that the claimant must provide a payment bond or even pay money into Court (security for costs) to cover a defendants’ costs can be a useful litigation tactic. For unfunded claimants, the threat is sometimes enough to make sure that worthy claims never even get to Court.
How does this apply to claims an Insolvency Practitioner brings? IPs often find themselves with plenty of claims available but with empty estates and creditors who no appetite for spending more of their money to fund litigation.
The Civil Procedure rules, generally, only allow Courts to award security for costs where the claimant is a limited company or other corporation – not an individual (except where the individual is a resident overseas). What about where a liquidator brings a claim in his own name (for example, under section 212 Insolvency Act 1986), even though the proceedings are for the benefit of the company?
In a recent appeal case*, the Court confirmed that it cannot order liquidators of a company to provide security for costs where the liquidator brings an action in his own name. The only exception to this rule is where the Court wants to punish liquidators if they ignore the timetable for the proceedings.
A company’s liquidators brought claims, in their own names, against the former directors of a company to recover money that the company had paid them (while insolvent) and for damages for breaches of their fiduciary duties. The directors argued that the Court had a general power to order security for costs outside of the categories set out in the Civil Procedure Rules (and be extended to catch liquidators (as individuals) in these circumstances).
The Court rejected this claim stating that new categories could only be created by parliament or the rules committee. The Court’s power to order security for costs was limited to what was contained in the Civil Procedure Rules. The directors’ application failed and the claim against the directors continued to a successful conclusion.
A word of caution
Where the insolvent company itself is the claimant and the liquidator chooses to bring or continue any court proceedings, the Court can make an order for security for costs against the insolvent company. Until the security has been provided, the claim is in limbo. You can’t pick and choose though – some claims can be brought by the company or its liquidators (for example for breach of duty), but other claims are the company’s alone. Recently, some liquidators tried (and failed) to get round the security for cost rules by bringing a company’s debt claim in their own names. Remarkably, no-one realised for a year or so… but when they did this approach was given short shrift!
And finally, security for costs is only the beginning. Although a liquidator might be able to avoid security for costs by bringing a claim in his own name, if he is unsuccessful then the liability to pay the winning party’s costs is all his. The liquidator’s right to be paid back out of the insolvent company’s assets is usually of little comfort in this situation.
*Wu -v- Hellard – unreported, 25 November 2013