Security for costs – three little words that bring even the most ferocious of insolvency litigators to a halt…

Back in December 2014, we talked about security for costs (paying money into court or providing a bond for a potentially successful defendant’s costs). Back then, one defendant had tried to get security for his costs where the liquidators were litigating in their own name – and was, rightfully, unsuccessful.

A recent case has shown that where liquidators bring the action in the company’s name – robust ATE insurance should be enough to see the application off.

The background to the case is not relevant – but it’s familiar. A company experienced financial troubles and their bank introduced a leading firm of accountants to the company to do a review and provide advice to the board. Unfortunately, the company did not survive and around 4 months after the first contact, two administrators from that leading firm sold the company’s business via a pre-pack.

The company’s liquidators, presumably the choice of the unsecured creditors, brought a claim for losses of between £45 to 54 million against the accountants and the bank. They claimed this was all just a conspiracy designed to cause the company’s failure so the bank could, through unlawful means, get hold of the company’s business at an undervalue. These allegations are hotly denied – the defendants say the failure was down to mismanagement and the director stifling the company of cash as he needed it to fund his extravagant lifestyle.

Anyway – back to round 1. After receiving the letter before action, the bank responded in the usual way by confirming it would seek security for costs. The liquidators then bought a layered ATE policy with various insurers offering total cover of £5m. The liquidators disclosed the policies to the defendant bank and firm.

The Judge (an experienced litigator in the insolvency field) gave a detailed analysis of the security for costs regime and how ATE insurance has historically developed as a grounds for denying security for costs.

There was no real argument that, without the ATE,  the claimant would be unable to pay costs if ordered to do – it couldn’t. Without the ATE, the threshold for making the order was easily met.

The defendants argued that what is needed to avoid having to provide security is something equivalent to cash or a first-class bank guarantee. They said the ATE policies didn’t do this because:

  • there is a real risk the ATE policies might be avoided, rescinded or cancelled if the Defendants win, and
  • two of the insurers were based in Gibraltar and could not be accepted as creditworthy.

On the first point, the defendants relied on the central role of the former director in the case, and their aim to put his credibility in issue. The Defendants said the Liquidators will inevitably have relied on what he told them when putting the case to the ATE insurers.  There is a real prospect that if the defendants won, his evidence will have been discredited. In those circumstances, the insurers would have grounds to cancel the policies.

The Judge had to decide whether the policies would not respond, considering the policy terms, the nature of the allegations in the case and all the other circumstances. It was relevant that:

  • the liquidators were experienced insolvency professionals and had taken out the policy with advice from experienced solicitors and counsel
  • the liquidators have every incentive to insure the ATE policy was robust as without it they could face personal liability for their opponents’ costs
  • the ATE insurers operated in the insolvency litigation market and commercially they were unlikely for reputational reasons, if no other, to take an unusually defensive line to try to avoid cover
  • one of the Gibraltan insurers had an established track record and the liability of the second was not likely to be needed for some time.

The Judge noted that ATE policies provided an important and cost-effective means of ensuring insolvency litigants had access to justice. He decided the policies in this case meant the threshold for security for costs had not been met.

This case is being appealed.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.