Court of Appeal—ATE insurance relevance to security of costs (Premier Motorauctions v Pricewaterhousecoopers)

Court of Appeal—ATE insurance relevance to security of costs (Premier Motorauctions v Pricewaterhousecoopers)

The Court of Appeal allowed a defendants’ appeal that the insolvent claimant company's after-the-event (ATE) insurance was not sufficient in respect of an application for security for costs. Matthew Weaver, of St Philips Stone, examines the Court of Appeal's answer in Premier Motorauctions v Pricewaterhousecoopers.

Original news

Premier Motorauctions Ltd (in liquidation) and another v Pricewaterhousecoopers LLP and another [2017] EWCA Civ 1872, [2017] All ER (D) 197 (Nov)

ATE insurance could, in principle, be taken into account in determining an application for security of costs if it gave a defendant sufficient protection. However, the Court of Appeal, Civil Division, held that, on the facts, the defendants did not have the assurance that the insurance had not been liable to be avoided for misrepresentation or non-disclosure and ordered the claimants to provide security of £4m.

What are the practical implications of this case? Can we expect to see an increase in defendants to claims brought by insolvent companies bringing security for costs applications?

Plainly, this decision, in reversing the decision below, will be disappointing to insolvency practitioners (IPs) as applications for security for costs are now a commonplace first line of defence for defendants facing claims from insolvent companies. However, it is right to point out that claims by office-holders in their own name are not impacted by this—only claims by insolvent companies are susceptible to security for costs applications.

In practical terms, insolvent companies will still be able to rely on ATE policies to oppose applications for security for costs and may well be able to do so successfully. As the Court of Appeal reinforced, it is the precise terms of each policy that will determine whether it is sufficient to remove the reason to believe that the company will be unable to pay a costs order. To this end, insolvent companies and their lawyers will need to be careful about the terms of an ATE policy. A policy which excludes avoiding the policy, save for in instances of fraud, is more likely to satisfy a court than one which does not. Further, companies should be ready to disclose the information that was itself disclosed to the ATE provider so that a view can be taken on the risk of a policy being avoided.

In addition, this case was not concerned with a claim being stifled by security being ordered. That will not be the case in many claims by insolvent companies and, as such, the courts may still be slow to accede to applications for security in such cases. The extent to which a company may be insolvent but may still have assets from which a costs order could be met is another issue which will remain potentially relevant to some applications, but was not addressed here.

That said, defendants to claims by insolvent companies will undoubtedly be boosted by this decision and companies can expect to see more and more defendants threatening and issuing such applications. However, such defendants would be foolish to assume that an ATE policy can simply be ignored: the Court of Appeal has made it clear that the courts will not take that approach.

What was the background to the case?

The claimants are both companies in liquidation, having previously been in administration. Prior to liquidation, the claimants traded as a car auction business, a seller of unique registration plates for the Driver Vehicle Licensing Agency and, to a lesser extent, a commercial land developer. Two years before administration, the claimants experienced cash flow problems and sought additional funding from their bank, the second defendant. At the same time, the first defendant introduced the claimants to a person who, the first defendant said, would act as a non-executive director to assist with the claimants’ cash flow problems. The claimants traded on for around two more years, during which the second defendant continued to provide additional facilities and both defendants attempted to help sell the businesses. No deals to sell the businesses could be concluded and the claimants were eventually put into administration with two partners of the first defendant appointed as joint administrators. The claimants’ businesses and assets were sold by the administrators by way of a pre-pack sale.

The claimants, through their liquidators (not the former administrators), issued claims against the defendants seeking damages of about £50m, arguing that the defendants had breached numerous duties they owed to them and had conspired to cause them loss by unlawful means. In short, the claimants alleged that the defendants had obtained internal information from them during the non-executive director’s time with them, allowing the defendants to increase the claimants’ borrowing, giving the second defendant effective control over them and allowing the defendants to place them into administration to effect a pre-pack sale of the businesses and assets at an undervalue for the benefit of the second defendant.

The defendants applied for security for costs, seeking an order for payment of security of about £7.2m. The liquidators had obtained various ATE policies from a number of insurers (two of which were Gibraltar-based insurers) up to a total of £5m. As part of that cover, a payment of £350,000 by way of premium was due after disclosure.

At first instance, the judge, Snowden J, refused the applications on the basis that the jurisdictional threshold of there being a reason to believe that the claimants could not pay a costs order if required to do so had not been established in light of the ATE policies and, as such, no order for security could be made.

For further reading on the Snowden J's decision, see blog post: Insolvency, ATE insurance and paying an adverse costs order (Premier Motorauctions Ltd (in liquidation) v PricewaterhouseCoopers LLP).

The defendants appealed against that decision.

What issues arose for the Court of Appeal's consideration?

The Court of Appeal had to determine whether the presence of an ATE policy meant that the court’s jurisdiction to make an order for security for costs did not arise under CPR 25 and, even if it did not, the relevance of an ATE policy on an application for security for costs.

What did the Court of Appeal decide, and why?

Longmore LJ, with whom Kitchin LJ and Floyd LJ agreed, concluded that while an ATE policy was relevant to the questions before a court on an application for security for costs, and could not simply be ignored as the defendants suggested, the position was not as simple as concluding that an ATE policy automatically defeated such an application, as was becoming the theme of the first-instance decisions in this area. The terms of the ATE policy were relevant, as was the information put before the court as to the material disclosed to the ATE provider.

The ATE policy in question had to be considered in the round when determining whether there was reason to believe that a claimant company would be unable to pay a defendant’s costs if ordered to do so. As such, the terms of the ATE policy would be important, in particular any terms which might prevent the policy being avoided for non-fraudulent non-disclosure. The court was not persuaded that the professionalism of the lawyers and IPs involved in obtaining the ATE policies in this case meant that the risk of those policies being avoided for non-disclosure could be considered to be too remote to be relevant. The risk existed as the liquidators had no way of knowing whether the information available to them which had originated from the claimants and their former officers (and passed on to the ATE provider) was accurate. As such, there remained a risk that the claimants would be unable to pay the defendants’ costs in the event of the ATE policies being avoided.

Security was therefore ordered in favour of the defendants.

To what extent is the judgment helpful in clarifying the law in this area? Are there still any unresolved issues practitioners will need to watch out for?

The decision is helpful in clarifying security for costs applications generally, it reinforced the view that all that was required was a reason to believe that the claimant could not pay a costs order, and the court did not have to be satisfied of this on the balance of probabilities.

However, more significantly, it quashed the suggestion from the previous first-instance decisions that standard form ATE policies obtained by competent lawyers and IPs could be said to be an automatic defence to a security for costs application. The policies needed to be considered according to their terms and conditions and if a risk of avoidance remained, security could still be ordered.

Interestingly, some issues that arise on security for costs applications were not expressly addressed in the judgment. In this case, it was conceded by the liquidators that the claim would not be stifled by having to pay security. This issue of stifling claims is a real one for insolvent companies and it remains to be seen what impact the prospect of a claim being stifled by security whilst an ATE policy is in place might have on an application.

In addition, the point made by the judge at first instance—that an insolvent company might still be able to pay a costs order from the assets it had given the 'super priority' afforded to adverse costs orders in formal insolvencies—was not addressed by the Court of Appeal, presumably because it did not arise as a matter of fact here, and could be relevant for some insolvent companies.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

This analysis was first published on LexisPSL Restructuring and Insolvency.

Further Reading

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Ways in which an IP can fund litigation and investigations where there are no assets in the estate

Security for costs—what is it, its use and the court's discretion

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.