Insolvency, ATE insurance and paying an adverse costs order (Premier Motorauctions Ltd (in liquidation) v PricewaterhouseCoopers LLP)

Insolvency, ATE insurance and paying an adverse costs order (Premier Motorauctions Ltd (in liquidation) v PricewaterhouseCoopers LLP)

The fact of a company’s insolvency will not, where an after-the-event (ATE) insurance policy exists, be sufficient for a court to automatically conclude that a company will be unable to pay any adverse costs order, the High Court has ruled. Matthew Weaver, a barrister at St Philips Stone Chambers, analyses the case and outlines lessons it provides for practitioners.

Original news

Premier Motorauctions Ltd (in liquidation) and another v PricewaterhouseCoopers LLP and another [2016] EWHC 2610 (Ch), [2016] All ER (D) 154 (Oct)

The Chancery Division, in dismissing the defendants’ application for security of costs in respect of proceedings brought by the claimant insolvent companies, held that where there was an ATE insurance policy in place, the question, under CPR 25.13, was simply whether there was reason to believe that the insurer would not pay under the policy when called upon to do so. In the present case, the claimants had obtained ATE insurance policies and the defendants had failed to satisfy the court that there was reason to believe that they would be unable to pay the defendants’ costs already incurred and of the initial stages of the proceedings if ordered to do so. Accordingly, the jurisdictional threshold under CPR 25.13 had not been crossed.

What was the background to this application?

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

The companies, through their liquidators (not the former administrators), issued claims against PwC and Lloyds seeking damages of circa £50m on grounds that PwC and Lloyds breached numerous duties they owed to the companies and conspired to cause the companies loss by unlawful means. In short, the companies alleged that PwC and Lloyds had obtained internal information from the companies during Mr Warren’s time with them, allowing them to increase the companies’ borrowing, give Lloyds effective control over the companies and allow them to place the companies into administration to effect a pre-pack sale of the businesses and assets at an undervalue for the benefit of Lloyds.

Within these claims, PwC and Lloyds issued applications for security for costs, seeking an order for payment of security of circa £7.2m. The liquidators had obtained various ATE insurance 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.

What were the issues before Snowden J?

Lloyds and PwC asserted that CPR 25.13 was triggered as there was a reason to believe that the companies would be unable to pay costs if ordered to do so. This being the case, what was required from the companies was security equivalent to cash or a first-class guarantee. They contended that the ATE insurance policies did not offer this level of security because:

  • there was a real risk that the policies could be avoided, rescinded or cancelled, and
  • two of the insurers were Gibraltar-based and so could not be considered credit-worthy

The risks to the policies meant that the companies had not negated the ‘reason to believe’.

The companies, on the other hand, maintained that CPR 25.13 was not in play as the existence of ATE insurance policies negated any presumption that they would be unable to pay a costs order. They pointed out that Lloyds and PwC had not been able to point to specific risks to the policies and so the risks relied upon were no more than theoretical. They also contended that there was no reason to doubt the credit-worthiness of the Gibraltar insurers simply due to their location outside of the UK.

What did Snowden J decide, and why?

The judge declined to order security for costs. He concluded that the jurisdictional threshold (there being a reason to believe that the companies could not pay a costs order if ordered to do so) had not be established and, as such, no order for security could be made.

The judge’s reasoning followed some of the previous cases addressing the relationship between security for costs applications and ATE insurance policies. His starting point was that any consideration of whether there was reason to believe that a claimant might be unable to pay a costs order must consider all assets available to the claimant including the right to claim on an ATE insurance policy. Given that adverse costs orders rank above other creditors in insolvencies, insolvent companies cannot be said to be automatically likely not to be able to pay a costs order simply because they are insolvent for the purposes of the Insolvency Act 1986. He endorsed the view of Stuart-Smith J in Geophysical Service Centre co v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC), [2013] All ER (D) 81 (Mar) that the question was not whether an ATE insurance policy provided the same security as cash or a bank guarantee but whether, on its terms, and having regard to the nature of the allegations in the case, there is reason to believe that the ATE insurance policy will not respond so as to enable the defendant’s costs to be paid. The judge also identified that there was a public policy (in times when ATE insurance is becoming more and more common, particularly for office-holders and companies in formal insolvency) to consider ATE insurance policies when determining whether the threshold in CPR 25.13 was triggered.

While accepting that the terms of each individual ATE insurance policy are relevant to whether sufficient protection for the defendant exists, the judge confirmed that where a policy has been taken out with the assistance of experienced lawyers and, as in this case, by professional office-holders (who were likely to be pursued for any adverse costs under section 51 of the Senior Courts Act 1981 if the policy failed and, therefore, keen to avoid a policy which could be easily avoided by the insurer), this was a factor in favour of concluding that the ATE insurance policies provided sufficient cover. The judge also observed that it was unlikely in his view that the insurers would ‘fight tooth and nail’ to avoid the policy if called upon on the grounds that the ATE insurance market was sufficiently competitive that to do so could be seen as being against the insurers’ commercial interests.

The judge also rejected the suggestion that the companies’ application for insurance would be said to be subject to the knowledge of its former director (whose evidence, it was said, is likely to be discredited) and therefore found to have been a false or fraudulent application, rendering the policy void or voidable. As to the companies’ ability to pay the premium, and therefore keep the policies in place, the judge was content with the liquidators’ assertions that this funding was in place from a third party. No binding agreement from the funder had been provided but this was not necessary.

The judge was also content that while there was no express requirement on the liquidators to pay any monies recovered from the ATE insurers to Lloyds and PwC if an adverse costs order were made, the fact that such costs would take priority over other claims in the liquidation rendered this irrelevant. In any event, the liquidators had agreed to enter into an undertaking to this effect to provide Lloyds and PwC with comfort in this regard.

As for the credit-worthiness of the two Gibraltar insurers, the judge was satisfied that one of the two had a sufficient track record within the UK to dismiss non-specific concerns about its credit-worthiness. However, the other one had no real information about its financial status and, as such, the judge dismissed from his decision the top-up cover of £500,000 provided by that insurer. This top-up cover, however, was not relevant at this stage to the application which was only dealing with security in stages as the case progressed. The judge did comment that as the claims proceeded, this may become more relevant if the application for security was restored.

To what extent is the judgment helpful in clarifying the law in this area?

The issue of security for costs and the impact of ATE policies was first addressed in any detail by the courts in 2010. As such, there has been a limited amount of case law to assist such applications. In addition, as some of the later authorities have observed, the ATE insurance market in the UK is a much more mature one now and it might be said that ‘public policy’ considerations are more acute now than previously might have been the case.

This case has helped to clarify that an ATE insurance policy should be considered as an asset of a claimant company and should be considered when assessing whether the claimant would be unable to pay an adverse costs order. The simple fact of a company’s insolvency will not, where an ATE insurance policy exists, be sufficient for a court to automatically conclude that a company will be unable to pay any adverse costs order.

The judgment is also helpful in clarifying that an equivalent of cash or a bank guarantee is not required when considering a claimant’s ability to meet an adverse costs order and that where an ATE insurance policy has been obtained by professional office-holders with the assistance of experienced lawyers, the court can be satisfied (unless shown specific evidence to the contrary) that the policy will remain in place and is unlikely to be easily avoided, rescinded or cancelled.

What are the practical lessons that those advising can take away from this decision?

This is a helpful case for insolvency practitioners and their lawyers. Previous cases dealing with security for costs and ATE insurance had not involved companies in formal insolvency and the judge here made a point of relying on the professionalism of office-holders, their incentive to obtain credible and robust policies of insurance and the nature of the market of ATE insurance (specifically providing it to insolvency practitioners) as reasons to dismiss uncorroborated challenges to the policies.

Insolvency practitioners can rely on this case to dismiss the suggestion that a company’s status as being in a form of insolvency is sufficient, on its own, to establish that it would be unable to pay an adverse costs order (as is commonly asserted by defendants) and, assuming that the policies are standard form and obtained from reputable insurers, can be content that only in unusual circumstances will the court determine that the ATE insurance policy is not sufficient to defeat an application for security for costs.

For defendants to claims by insolvency companies, the practical lesson to take away is that simply relying on the companies’ insolvency will not automatically trigger the jurisdiction to make an order for security and unless there is evidence of specific and real threats to the policy in question, general observations about potential risks to a policy and reliance on the alleged dishonesty of a company’s former director are unlikely to carry sufficient weight with the court to obtain security for costs.

Interviewed by Lucy Trevelyan.

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

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