Kieran Coleman examines the security for costs against an insolvent company and the relevance of ATE insurance

Premier Motorauctions Ltd (in liquidation) & Another v Pricewaterhousecoopers LLP & Another [2016] EWHC 2610 (Ch).

The case concerned an application for security of costs brought by the Defendants pursuant to CPR 25 and specifically whether the existence of ATE insurance was a relevant consideration in making such an order, particularly where the Claimants were insolvent companies.

Facts

The Claimants were two companies, one of which was the parent company of the other, concerned in auctions in the car industry. The Defendants were PWC and a bank which had lent money to the Claimants. On the 22 December 2008 two partners of PWC were appointed as administrators for the companies, and the main business and assets of the companies were sold by way of a pre-pack sale. The Claimants alleged the Defendants, in conspiracy with each other, breached various duties to them with regard to an assessment of the companies’ affairs with a view to forcing them into administration. The claim was denied by the Defendants. The Claimants’ primary loss was estimated to be £45 million – £54 million.

In response to the letter before claim the bank indicated it would be seeking security for costs in the region of £250,000 – £500,000. In March 2015 the Claimants solicitors wrote to PWC indicating they were in the process of obtaining ATE insurance.

In response to service the Defendants asserted that given the Claimants were in liquidation and that the joint liquidators had communicated to creditors that there were no assets to be realised in the liquidations, they had reason to believe the Claimants would be unable to pay the Defendants’ costs if so ordered which gave rise to an entitlement to substantial securities.

Law

CPR 25.13 provides:

“(1) The court may make an order for security for costs under rule 25.12 if,

(a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and

(b) (i) one or more of the conditions in paragraph (2) applies…

(2) The conditions are…

(c) the claimant is a company…and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so.”

The court referenced Jirehouse Capital v Beller [2009] 1 WLR 751 noting the test was not whether on the balance of probabilities the Claimants would be unable to pay the Defendants’ costs, but only that the court had to be satisfied that it had reason to believe the Claimants would not be able to do so. Further that in reaching its decision the court would need to consider all the circumstances and evaluate the risk of the non-payment occurring.

The court noted the authorities on ATE insurance and security for costs referencing in particular Geophysical Service Centre v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC) in which it was stated that the question was not whether the assurance by an ATE policy is better security than cash or its equivalent, but whether there is reason to believe that the Claimants’ will be unable to pay the Defendants’ costs despite the existence of the ATE policy.

Decision

The Defendants had argued that the reason to believe the Claimants would be unable to pay their costs was on account of their being insolvent and that there was a real risk the ATE policies might be avoided, rescinded or cancelled and that the ATE insurers were based in Gibraltar and could not be considered creditworthy.

The court considered the starting point for any analysis was whether there was reason to believe that the companies would be unable to pay the Defendants’ costs if ordered to do so and in answering that question the court would naturally have regard to the assets the company had. It followed that the insolvency of the company is relevant, but that it did not necessarily mean that it had insufficient assets to meet an adverse costs order, as even insolvent companies could have substantial assets.

Further that the contractual rights a company had under an ATE policy were property of the company like any other asset, as such the existence of the policy should be taken into account in the assessment of whether the company can pay the Defendants’ costs. The question was then whether, with regard to the terms of the policy, the nature of the allegations in the case and all other circumstances there was reason to believe the ATE policy would not enable the costs to be paid.

On the facts of the case the court considered there was no reason to believe that the companies would be unable to pay the costs. In particular citing that one of the ATE insurers was an established company. Further that the ATE market was substantially more mature than it had been previously and it was unlikely that the ATE insurers would have a commercial incentive to take an unusually defensive line in seeking to avoid liability under the policies they issued.