Premier Motorauctions Ltd & Anor v Pricewaterhousecoopers LLP & Anor

This is an application by the Defendants for security for costs pursuant to CPR 25. It raises issues relating to the use of After-the-Event (ATE) Insurance to provide security for the costs of an action by two insolvent companies. The application is made by the defendants at the first CMC after the close of pleadings in proceedings against them by the two claimant companies which went into administration on 22 December 2008 and then into compulsory liquidation on 18 June 2010.

The First Claimant (“PMA”) is the parent company of the Second Claimant (“PMAL”) (together “the Companies”). Mr Keith Elliott (“Mr. Elliott”) owns 97% of PMA and prior to administration was the managing director of both Companies. At all material times the Second Defendant (“the Bank”) was the Companies’ bank. The circumstances in which the First Defendant (“PwC”) came to act for or in relation to the Companies prior to their going into administration is disputed.

Prior to going into administration, PMAL had two main business operations, a car auction business in Leeds, and an auction business selling unique registration plates for the DVLA at various locations around the UK. As well as being the holding company for PMAL and other group companies, PMA also owned the Leeds property from which PMAL traded, together with a piece of land in Birmingham which was acquired in July 2006 with the benefit of lending from the Bank, and which was intended for commercial development.

In April 2008 a proposed sale of PMAL, and certain interests in PMA's properties fell through, and at about the same time capital loan repayments became due on the loan from the Bank for the purchase of the Birmingham site. This led to Mr. Elliott communicating with the Bank about the need for additional lending facilities, and his proposal to secure a joint venture partner to assist in the management, development and operation of the Birmingham site. In early July 2008 the Bank increased the overdraft facility available to the Companies from £1m to £1.5m; and on 28 July 2008 the Bank agreed a further increase in the overdraft facility to £1.75m and agreed to postpone capital repayments required on the Birmingham loan.

At this point in late July 2008 the Bank introduced a Mr. Warnett of PwC to Mr. Elliott as, so the Claimants allege, a person who might be willing to act as a non-executive director of the Companies, and Mr. Elliott and Mr. Warnett had a meeting on 11 August 2008 to discuss whether and if so, on what basis Mr. Warnett might be willing to act. The precise purpose, contents and outcome of this meeting is disputed, but it led to PwC being engaged to conduct a review of the Companies’ cash-flow needs pursuant to an engagement letter dated 15 August 2008 that was signed both by the Companies and by the Bank.

On 21 August 2008 PwC issued a draft Business Review report which indicated that the Companies needed an immediate injection of £2 million and identified that receipts in a DVLA Client Account should be treated as trust monies. At a meeting on 29 August 2008 attended by the Companies, PwC and the Bank, the Bank orally confirmed that it would increase the Companies’ overdraft facility with immediate effect by £2m on terms which included that the monies in the DVLA Client Account could not be set-off against the overdraft with the Bank. The Companies drew down on that increased overdraft facility and Mr Elliottt signed a further guarantee in relation to the £2m additional funding.

The other terms stipulated orally by the Bank are disputed, but on 5 September 2008 PwC issued the Bank with an engagement letter proposing to provide services to the Bank in relation to a proposed sale of PMAL and its businesses, and on 11 September 2008 the Bank issued a facility letter to the Companies in relation to the increased overdraft which stated, as a condition, that the Companies should engage in a sales process in conjunction with PwC, to be completed by 31 December 2008. The Companies obtained legal advice from Walker Morris in September 2008 and declined to sign either the PwC letter of 5 September or the facility letter of 11 September 2008.

From September to December 2008 PwC continued to carry out review work for the Bank and during that period various proposals and offers were made and considered for investment in the Companies or for sale of some or all of the Companies' businesses or assets. Many of the facts surrounding such proposals and offers are disputed, as are allegations that the Bank thwarted at least one advantageous offer. None of the deals came to fruition, and on 22 December 2008, two partners of PwC (Messrs. Ellis and Green) were appointed as administrators of the Companies and the main business and assets of the Companies were sold by way of a pre-pack sale. The consideration included the provision of a share warrant in favour of the Bank.

The essential claim of the Companies, now acting by their joint liquidators, Messrs. Khalastchi and Atkins of Menzies LLP (“the Joint Liquidators”) is that Mr. Warnett was introduced to the Companies on false pretences and that he had no intention of performing a role of non-executive director. It is said that Mr. Warnett was used by the Bank and PwC as part of a conspiracy to obtain an internal assessment of the Companies' affairs, to identify a fictitious need for additional finance that could then be provided by the Bank on terms that gave it effective control over the Companies and the means to force them into administration so that their business and assets could be sold at an undervalue by the administrators for the benefit of the Bank. The Companies allege that the Defendants thereby breached various duties to them and conspired to cause them loss by unlawful means.

Those allegations are denied by the Defendants, who contend that in reality the Companies were “run into the ground” by Mr. Elliott, who mismanaged the Companies, their assets and their finances, and who drew heavily on their funds to support his own extravagant lifestyle. They contend that the allegations concerning Mr. Warnett make no sense, that the need for additional finance that he identified was genuine, and that the change of treatment of the DVLA Client Account was backed up by independent legal advice and did not cause the Companies’ financial difficulties. The Defendants say that the allegations of conspiracy are spurious and implausible, that there were no breaches of any duties (some of which duties are in any event denied) and that the insolvency of the Companies has caused the Bank significant loss.

The Companies' primary loss claim is for losses estimated to total between about £45million - £54million. In addition to denying liability, the Defendants deny this primary case as to quantum on the basis that if the Bank had not provided the additional £2million overdraft facility the Company would not have been able to carry on trading.

The Claim Form was originally issued on a protective basis in July 2014 and included Mr. Elliott as a claimant. In response to a letter before claim sent in September 2014, the Bank indicated that it would be seeking security for costs and indicated that its costs were likely to be between £250,000 and £500,000 (or more). In March 2015 the Companies’ solicitors wrote to PwC indicating that they were in the process of obtaining ATE cover of £4.5 million.

On 17 June 2015 the Claim Form was amended pre-service to remove Mr. Elliott and the Amended Claim Form and Particulars of Claim were served on 19 June 2015. On 29 June 2015, solicitors acting for the Companies served notice that ATE policies had been issued to the Joint Liquidators and the Companies (as co-insureds) by QBE Insurance (Europe) Limited (“QBE”) (the primary layer of £250,000 and a tertiary layer of £1,750,000 in excess of £1 million) and by Elite Insurance Company Limited (“Elite”) (the secondary layer of £750,000 in excess of £250,000). A premium of £75,000 had been paid on inception of the QBE policy, and a further £350,000 is payable within 4 weeks of disclosure.

When the Defendants acknowledged service in early July 2015, they also asserted that by reason of the Companies being in liquidation and the Joint Liquidators’ communications to creditors to the effect that there were no assets to be realised in the liquidations, they had reason to believe that the Companies would be unable to pay the Defendants’ costs if ordered to do so. The Defendants contended that this gave them an entitlement to substantial security, and they asked for the Companies’ proposals in that respect, including the provision of copies of any ATE insurance policies upon which the Companies proposed to rely.

Redacted copies of the QBE and Elite policies were provided to the Defendants in August 2015. I shall return to some of the terms of the ATE policies in due course. In October 2015 the Bank’s solicitors sought details of how the Companies intended to pay the further premium of £350,000 due after disclosure under the QBE policy, and in December 2015 PwC’s solicitors wrote to the Companies’ solicitors raising the objection that unlike the payment of money into court, a bank guarantee, or a deed of indemnity, the ATE policies were not adequate security because they could be avoided in certain circumstances by the insurers. PwC sought the provision of a deed of indemnity for its costs that was not subject to the risk of avoidance.

The response from the Companies’ solicitors was that the risks of avoidance raised by PwC’s solicitors were contingent and no more than theoretical, and that the provision of a deed of indemnity was unnecessary. This refusal caused PwC and the Bank to indicate that they intended to issue applications for security for costs. In response to a request for details from the Companies’ solicitors, they indicated that their estimated costs would be in the region of £4.4 million and £3.35 million respectively. PwC and the Bank issued their applications for security for costs on 5 and 27 April 2016 respectively. The amounts sought were revised to £3.52 million and £3.69 million respectively, giving a total sought of about £7.2 million.

In early April 2016, the Companies arranged further layers of ATE insurance. These were a fourth layer with Elite (£750,000 in excess of £2,750,000), a fifth layer with Acasta European Insurance Company Limited (“Acasta”) (£500,000 in excess of £3.5 million) and a sixth layer with DAS Legal Expenses Insurance Company Limited (£1 million in excess of £4 million). In total, therefore, the Companies have obtained ATE insurance cover for £5 million. The relevant policies were disclosed to the Defendants in June 2016.

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.”

In Jirehouse Capital v Beller [2009] 1 WLR 751 the Court of Appeal accepted that this test did not require the court to be satisfied on the balance of probabilities that the claimant would be unable to pay the defendant’s costs. It only needed reason to believe that it would not be able to do so. Arden LJ indicated, at paragraphs 33-34, that since such non-payment of an order for costs is a future event, what the court has to do is to consider all of the circumstances and evaluate the risk of that occurring. She also indicated that it would be preferable for the court not to paraphrase the relevant words of CPR 25.13(2)(c). That observation was endorsed by Moore-Bick LJ in his short judgment in the case and was subsequently repeated in SARPD Oil v Addax Energy [2016] BLR 301, where Sales LJ commented, at paragraphs 13-14,

“13.

It follows that it is not sufficient for the court or the defendant to be left in doubt about a claimant's ability to pay the defendant's costs if the claimant loses. Nor is it sufficient as the first instance judge in Jirehouse had done to paraphrase the wording of the rule by saying that there was a significant danger that the claimants would not be able to pay such costs. The court must simply have reason to believe that the claimant will not be able to pay them.

14.

That is, as Arden LJ said, a matter of evaluation…”

The effect of a claimant taking out an ATE insurance policy to cover the possibility of being ordered to pay the defendant’s costs has been considered in a number of cases. One of the earliest comments was that of Mance LJ in Nasser v United Bank of Kuwait [2002] 1 WLR 1868 at para. 60, where Mance LJ said, obiter,

“The interesting possibility was raised before us that a claimant or appellant who has insured against liability for the defendants' costs in the event of the action or appeal failing might be able to rely on the existence of such insurance as sufficient security in itself. I comment on this possibility only to the extent of saying that I would think that defendants would, at the least, be entitled to some assurance as to the scope of the cover, that it was not liable to be avoided for misrepresentation or non-disclosure (it may be that such policies have anti-avoidance provisions) and that its proceeds could not be diverted elsewhere.”

The first detailed analysis of the relevance of use of ATE policies in relation to security for costs was by Akenhead J in Michael Phillips Architects v Riklin and another [2010] BLR 569. Akenhead J was faced with an application by the defendants for security for costs which was met, in part, by the claimant taking out an ATE policy which was backdated to cover any liability in respect of the defendants’ costs from a time prior to the issue of proceedings. Akenhead J considered Nasser and two other cases in which the question of the use of ATE insurance had been considered, obiter, namely Al-Koronky v Time-Life Entertainment Group Ltd and another [2006] EWCA Civ 1123 at paras 33-36 per Sedley LJ, and Belco Trading v Kondo [2008] EWCA Civ 205 at paras 3-8 per Longmore LJ. At para 18, Akenhead J concluded,

“18.

These three cases are not absolutely determinative as to whether ATE insurance can provide adequate or effective security for the defending party's costs. That is not surprising because it will depend upon whether the insurance in question actually does provide some secure and effective means of protecting the Defendant in circumstances where security for costs should be provided by the Claimant. What one can take from these cases, and as a matter of commercial common sense, is as follows:

(a)

There is no reason in principle why an ATE insurance policy which covers the Claimant's liability to pay the Defendant's costs, subject to its terms, could not provide some or some element of security for the Defendant's costs. It can provide sufficient protection.

(b)

It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the Defendant, and because the promise to pay under the policy will be to the Claimant.

(c)

It is necessary where reliance is placed by a Claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the Defendant's costs.

(d)

There is no reason in principle why the amount fixed by a security for costs order could not be somewhat reduced to take into account any realistic probability that the ATE insurance would cover the costs of the Defendant”.

Akenhead J went on to consider the specific terms of the ATE policy which had been obtained. He noted, in particular that a number of clauses gave the insurer a ready opportunity, if it so wished, to avoid paying. In particular, he noted the possibility that if the claimant’s claim for fees for time spent was found to be exaggerated, the policy might be avoided under a clause referring to fraudulent or false claims, and that the insurer also had a right to cancel the policy if it formed a belief that the claim was unlikely to be successful or at any time on the giving of 21 days’ notice. Akenhead J therefore indicated that he had, “formed a very clear view that this ATE Insurance provides no real security for the defendants’ costs let alone any real comfort for the defendants.”

Having found the ATE policy which had been obtained to be inadequate, Akenhead J also went on to address the jurisdictional question under CPR 25.13. He said, at para 30,

“30.

It is accepted, that, subject to any issues raised by the ATE Insurance, there is reason to believe that the Claimant will be unable to pay the Defendants' costs if ordered to do so, for the purposes of CPR Part 25.13(1) and (2). It is argued that, in the light of the ATE insurance and given that the burden of establishing that the Claimant will be unable to pay the Defendants' costs is on the Defendants, the Defendants have not established the threshold necessary to give the court jurisdiction and discretion to order security for costs. That argument must fail in my view at least in the circumstances of the ATE Insurance in this case. I do not see how it can be said that an insurance policy which does not provide direct benefits to the Defendants and under which they are not amongst the insured parties and which does provide for cancellation of the policy either for a large number of reasons or for no reason provides any appreciable benefit or raises any presumption or inference that the Claimant will be able to pay the Defendants' costs if ordered to do so.”

The decision in Michael Phillips was considered by Stuart-Smith J in Geophysical Service Centre v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC), 147 Con LR 146. The case arose out of an alleged breach of a contract for co-operation in bidding for a contract from BP for the provision of seismic services in Jordan. In paragraph 13 of his judgment, Stuart-Smith J referred to and adopted Akenhead J’s summary in paragraph 18 of the judgment in Michael Phillips of the principles to be drawn from the earlier cases, expressing only potential reservations as to paragraph 18(d). Stuart-Smith J also went on, at para 15, to comment upon Mance LJ’s dictum in Nasser as follows,

“15.

I make two observations. First of all, Lord Justice Mance was there commenting in the abstract, since there was not in fact an ATE policy in existence. Second, Nasser dates from 2001 when the ATE market was considerably less mature than it is now. It must be recognised both that the market is now more mature and that Brit, who provided the insurance which is going to be considered in this case, is to be regarded as a reputable insurer within the market. It is also to be recognised in my judgment that the funding of litigation by ATE policies is, and has for some years now, been a central feature of the ability of parties to gain access to justice. In the absence of evidence to the contrary, the court's starting position should be that a properly drafted ATE policy provided by a substantial and reputable insurer is a reliable source of litigation funding.”

After quoting paragraph 18(c) of Akenhead J’s summary, Stuart-Smith J then said,

“19.

In my judgment, this inevitably requires the court to form a view at this stage on the meaning of the policy and on how readily it may be avoided legitimately and contractually, and also to form a view of the likelihood of circumstances arising which will enable the policy to be readily, legitimately and contractually avoided.

20.

Ultimately, on an application such as this, the question is not whether the assurance provided by an ATE policy is better security than cash or its equivalent, but whether there is reason to believe that the claimant will be unable to pay the defendant's costs despite the existence of the ATE policy. It must now be recognised, in my judgment, that depending upon the terms of the policy in question, an ATE policy may suffice so that the court is not satisfied that there is reason to believe that the claimant will be unable to pay the defendant's costs.”

(my emphasis)

Stuart-Smith J then went on to consider the terms of the ATE policy in the case. He first referred to a clause under which the insurer limited its rights to avoid the policy for non-disclosure or misrepresentation to cases of fraud, and continued,

“26.

The defendant refers to, and relies upon, the pleading of specific representations at paragraphs 3.3 and 3.4 of the amended particulars of claim, all of which are roundly denied by the defence. The defendant submits that it is ‘entirely conceivable’ that the court will find in the defendant's favour in relation to all of those representations. If it does, submits Mr Fraser, the information provided to insurers must have included or been based on the same account as the court was rejecting. In consequence, it is submitted that there is reason to believe that insurers may seek to avoid the policy.

27.

I reject that submission. There is, in my judgment, no material that raises anything more than a theoretical chance that insurers might seek to avoid the policy on this basis. It is not the defendant's case that the claim is fraudulent or a sham, and there is no basis for the court, on this application, to assume that there is a significant risk that the court would find that it was, or that the findings made by a court would provoke such a reaction from insurers.

28.

Even if the claimant's account were rejected, it is a giant step from finding that evidence is incorrect and to be rejected to finding that it is fraudulent. Unlike Al-Koronky this is not a case where a finding of facts in the defendant's favour on the issue of these representations would necessarily or even probably carry an implication of fraudulent misrepresentation by the claimant in proposing for insurance.”

Stuart-Smith J then dealt with further contract conditions, breach of which would allow insurers to avoid or cancel the policy. He concluded at para [29] that on the evidence before him, there was no reason to suppose that this was anything more than theoretical, and stated,

“30.

The following features lead me to this conclusion. First, the conditions themselves are not onerous. Second, the claimant has no commercial interest in breaching the conditions. The policy has been taken out for the claimant's protection, and no sensible reason has been offered as to why the claimant would deliberately, or even inadvertently, breach the conditions. Indeed, Mr Fraser accepted that it was not in the claimant's commercial interest to do so. Third, the claimant is represented by very experienced and competent legal representatives who are there to make plain to the claimant its obligations under the policy if any doubt exists. For these reasons, it seems to me that there is no reason to believe that there is more than a theoretical risk of breach.”

The decisions in Michael Phillips and Geophysical were considered in NGM Sustainable Developments Limited v Wallis [2015] EWHC 461 (Ch) by Mr. Mark Anderson QC (sitting as a Deputy High Court Judge). After referring to paragraphs 19 and 20 of Stuart-Smith J’s judgment, the Deputy Judge continued, at paragraph [43],

“..it is the claimant's actual or potential insolvency which provides the "reason to believe" that the claimant will be unable to pay. The question is whether the insurance displaces the reason for that belief. As Stuart-Smith J observed, where the policy contains the usual provisions which entitle the insurer to refuse to pay out in certain circumstances, there will nevertheless be no reason to believe that the claimant will be unable to pay the defendant's costs if the prospect of such a refusal is merely a theoretical possibility.”

On the facts, and having examined the terms of the policies, the Deputy Judge concluded that the prospect that the ATE insurer might refuse to pay was merely theoretical and accordingly held that the existence of the ATE policies in the case meant that the jurisdictional threshold for an order for security for costs under CPR 25.13 had not been satisfied.

The Defendants contend that there is “reason to believe that the Companies will be unable to pay their costs if ordered to do so” within the meaning of CPR 25.13 because the Companies are insolvent and in compulsory liquidation without any substantial assets. They say that as the jurisdiction to award security has been established in this way, what is required by way of security is something equivalent to cash or a first-class bank guarantee. They contend that the ATE policies do not provide this (i) because there is a real risk that the ATE policies might be avoided, rescinded or cancelled in the event that the Defendants win, and (ii) because two of the insurers (Elite and Acasta) are based in Gibraltar and cannot be accepted as credit-worthy. Alternatively the Defendants say that the Companies have not negated the “reason to believe” by obtaining the ATE insurance policies which are subject to the risks that they have identified.

As to the risk of avoidance, rescission or cancellation, the Defendants cite a number of examples from other cases where ATE insurers have refused to accept liability to illustrate what they say are the risks inherent in such policies for defendants. On the facts, the Defendants also point to what they say is Mr. Elliott’s central role in the case, and to their intention to put his credibility in issue. The Defendants say that the Joint Liquidators will inevitably have relied upon what they have been told by Mr. Elliott when putting the case to the ATE insurers and that there is a real prospect that in the event that the Defendants win, Mr. Elliott’s evidence will have been discredited. In such circumstances, they say, the insurers will have grounds to rescind the policies for misrepresentation. The Defendants also suggest that for the purposes of the law on material non-disclosure, it is not clear that Mr. Elliott’s knowledge will not be attributed to the Companies, raising a further risk of avoidance by insurers in the event that the Defendants win at trial.

On the issue of the credit-worthiness of the insurers, the Defendants point to the fact that both Elite and Acasta are Gibraltar companies with no credit rating that are not regulated by the FCA and do not have substantial assets in the UK. The Defendants say that there is a worrying number of Gibraltar insurers who have become insolvent in recent times, and that they should not be at risk of having to go to Gibraltar to enforce any claim against such companies.

Overall, the Defendants say that there are significant risks attaching to the ATE policies which the Companies have arranged. They support this contention by pointing to the evidence from the Companies that the purchase of a “deed of indemnity” from the insurers which did not include the right to avoid or cancel the contract might cost an additional premium of £500,000 to £1 million. The Defendants say that this is a good indication of the value that the insurers in question place upon giving up their rights to avoid or cancel the current ATE policies. The Defendants say that such risks are not something that they should be forced to bear, and hence the court ought to order security for their costs by requiring a payment into court, the provision of a guarantee from a UK clearing bank, or a deed of indemnity from ATE insurers based in the UK with an equivalent credit rating.

In contrast, the Companies contend that the existence of the ATE policies displaces any presumption that, because they are in liquidation, they would be unable to pay the Defendants’ costs if ordered to do so. The Companies submit that the Defendants have not been able to point to any specific risks of avoidance, rescission or cancellation of the ATE insurance policies, and they contend that there is nothing more than a theoretical risk that the policies would not respond if required to do so. The Companies say that the policies have been arranged by the Joint Liquidators who, as insolvency office-holders, have thoroughly investigated the case with the assistance of advice from solicitors and counsel, and who have every incentive to ensure that the ATE policies will respond if the Companies were to lose the case. They also submit that because Mr. Elliott was displaced from office as a director when the Companies went into liquidation, his knowledge will not, as a matter of law, be attributed to the Companies for the purposes of the law on non-disclosure.

On the issue of the credit-worthiness of the insurers, the Companies say that there is no reason to suggest that Elite and Acasta will not be able to meet their liabilities under the policies in full; they are regulated by the authorities in Gibraltar; and it is not for the court to pass judgment on the efficiency of the Gibraltar regulators or otherwise to discriminate against non-UK insurers.

Overall, therefore, the Companies contend that the court has no jurisdiction to order security for costs, and that in any event it should not do so because it would stifle a good claim.

The Companies contend that in the modern era, ATE insurance policies, such as the ones they have arranged, provide an important and cost-effective means by which claimants (particularly those under the control of insolvency office-holders) can obtain access to justice. They contend that to require such claimants to provide bank guarantees or deeds of indemnity would be an expensive and unwarranted barrier to the pursuit of meritorious claims for the benefit of creditors. In that regard they also deny that the evidence that insurers would require an additional premium for providing a deed of indemnity reflects the value that the insurers place upon the ability to avoid or rescind the ATE policies in the instant case; they say that it simply reflects the industry’s generic pricing of the two different products.

As I read them, the early cases such as Nasser tended to focus on the question of whether an ATE policy was a suitable alternative form of security to cash or a bank guarantee on the assumption that the court had already decided that security for costs should be provided. That was particularly the case in Belco Trading in which the appeal was against an order that security be provided by the payment into court of money or the provision of an insurance policy which gave the defendants “equal or better security”. That also seems to me to have been the emphasis in Akenhead J’s summary in paragraph 18 of his judgment in Michael Phillips, which he prefaced by stating,

“These three cases are not absolutely determinative as to whether ATE insurance can provide adequate or effective security for the defending party's costs. That is not surprising because it will depend upon whether the insurance in question actually does provide some secure and effective means of protecting the Defendant in circumstances where security for costs should be provided by the Claimant...”

(my emphasis)

As a matter of logic, however, and having regard to the approach in the authorities such as Jirehouse and SARPD Oil, the starting point of any analysis of whether to order the provision of security for costs must be to ask the threshold jurisdictional question posed by CPR 25.13, namely is there “reason to believe that [the claimant company] will be unable to pay the defendant’s costs if ordered to do so”?

In answering that question, the court will naturally have regard to the assets which the claimant company will have available to meet an adverse costs order. In that respect, although the fact that a claimant is in an insolvency procedure is plainly relevant, it does not, of itself, get the defendants over the jurisdictional line. The fact that a company is in liquidation or administration does not necessarily mean that it will have insufficient assets to meet an adverse costs order. Even insolvent companies can have substantial assets, and an adverse costs order made against the company in litigation will rank for payment in the insolvency ahead of the claims of other creditors: see Norglen v Reeds Rains Prudential [1998] BCC 44 at 56.

Further, if a claimant company is insured under an ATE policy giving it contractual rights which it could enforce in the event of an adverse costs order being made, its contractual rights are the property of the company like any other asset. I therefore see no reason in principle why the existence of that policy should not be taken into account together with its other assets at the first stage when deciding whether the jurisdiction to make an order for security for costs under CPR 25.13 is engaged. That must be so where the very purpose of such a policy is to provide the means by which the claimant company “is able to pay the defendant’s costs if ordered to do so”.

Accordingly, I think that in a case in which a claimant has obtained an ATE policy specifically to cover the bringing of a claim, and relies upon it to resist an application for security for costs, the approach taken by Stuart-Smith J in paragraph 20 of Geophysical is correct. The question is not whether the ATE policy provides the same security as cash or a bank guarantee, or indeed whether the ATE policy provides the same security as might a deed of indemnity from the same or another insurer. It is whether, having regard to the terms of the ATE policy in question, the nature of the allegations in the case and all the other circumstances, there is reason to believe that the ATE policy will not respond so as to enable the defendant’s costs to be paid.

The Defendants contend that this approach results in an illegitimate distinction between (i) cases in which an ATE policy is entered into before the application for security for costs is considered; and (ii) cases in which the court has already decided to order security for costs to be provided and the claimant then offers to enter into an ATE policy. In the first situation the burden will essentially be on the defendant to show that there is reason to believe that the insurer will not pay under the ATE policy; whereas in the second situation, the onus will be on the claimant to show that the ATE policy is the equivalent of cash or a first-class bank guarantee. The Defendants say that the test should be the same irrespective of when the ATE policy is entered into, that the safeguard for a claimant is in the discretion of the court not to order provision of a bank guarantee or deed of indemnity if to do so would stifle a legitimate claim, and that the court should not have to speculate about the risk of an ATE policy being avoided or cancelled in circumstances in which (for obvious reasons) it will not have any visibility of the confidential proposals made to insurers by the claimant.

Those are powerful points that were well made. But I see no principled basis upon which the court should simply ignore the existence of an ATE policy when applying the jurisdictional test in CPR 25.13. Moreover, I think that it must be acknowledged that there is a public interest in permitting ATE insurance on appropriate terms to provide access to justice for insolvent companies under the control of responsible insolvency office-holders.

I therefore turn to the criticisms that have been levelled by the Defendants at the terms of the Companies’ ATE policies in the instant case.

Misrepresentation and non-disclosure The first set of criticisms relate to whether full disclosure of material facts has been made to the ATE insurers and will be made to their own lawyers by the Joint Liquidators and the Companies. The Defendants point, for example, to clauses 3.1.1 and 3.2 of the ATE policies, which appear to be standard form and which contain, respectively, a condition precedent to the effect that all matters relevant to the provision of cover have been included in the proposal, and a warranty that the insureds will make all relevant information and documents available to the solicitors acting for them on the case.

The Defendants - who have not seen the proposal documents - do not identify any specific matters that have not been disclosed, but they point to a number of relevant factual disputes in the case which they suggest will turn on the veracity of evidence given by Mr. Elliott. They submit that if they succeed in attacking Mr. Elliott’s credibility, there will be real issues about what might have been said (or not said) by the Joint Liquidators in reliance upon Mr. Elliott in the proposals to the insurers. In this respect, whilst not questioning the bona fides of the Joint Liquidators or their professional advisers, the Defendants refer to the comments of Lord Drummond Young in Monarch Energy v Powergen Retail [2006] CSOH 102 at para [28] to the effect that even a conscientious solicitor cannot be certain that he has unearthed all material facts about an action before applying for ATE insurance.

Lord Drummond Young’s comments in Monarch Energy about a risk of inadvertent non-disclosure are a useful warning that a court should have in mind when assessing the risks attached to ATE policies. But I do not think that they can be taken as determinative of every case, and on the facts of this case I do not think that such concerns provide me with any identifiable reason to believe that the ATE policies will not respond if called upon to do so.

On the basis of the pleadings I have real doubts that the disputed evidence of Mr. Elliott will be as central to the case as the Defendants suggest. The case involves much more than an evidential dispute as to what went on between Mr. Elliott and Mr. Warnett on 11 August 2008, and notwithstanding Mr. Elliott’s central role in the affairs of the Companies, I cannot in any event imagine that the Joint Liquidators and their advisers will have placed unquestioning reliance upon him when making proposals to the insurers. I would regard it as something of a leap to conclude that if Mr. Elliott’s evidence was to be disbelieved or found unreliable, that would provide grounds for the insurers to avoid the policies or deny liability.

In that regard, I note that in Geophysical at paragraph 30, Stuart-Smith J was obviously impressed by the argument that the ATE policy had been taken out with the assistance of experienced lawyers and that the claimant would have no commercial interest in acting so as to breach its conditions. I think that the circumstances of this case justify a similar approach, and if anything point more strongly to such a conclusion.

In the instant case, the ATE policies taken out to cover the Companies’ exposure to adverse costs orders have been arranged and the proposals to insurers have been made by the Joint Liquidators who are independent professional insolvency office-holders. They have arranged the ATE policies after having conducted an investigation into the claims against the Defendants with the assistance of experienced solicitors and counsel. This level of objective professional scrutiny is likely to exceed that undertaken in cases such as Monarch Energy or Geophysical where, although the claimant companies were in financial difficulties, professional insolvency office-holders had not been appointed.

Moreover, as Mr. Sims QC submitted, the Joint Liquidators have every incentive to ensure that the terms and conditions of the ATE policies will be adhered to and that they will respond. The Companies have no assets, so that the Joint Liquidators must be well aware that if the Companies were to lose and the ATE policies were not to respond as a consequence of any failure on their part, there would at least be a significant prospect of the Defendants applying for a costs order against them personally under section 51 of the Senior Courts Act 1981.

I would add that although the Defendants suggested that an ATE insurer faced with an adverse costs order against the Companies would be likely to fight tooth and nail to deny liability under the policies, I think that point was rather overplayed. As alluded to by Stuart-Smith J in paragraph 15 of his judgment in Geophysical, the ATE market in the UK is now a substantial and mature one, and a significant part of that market relates to the funding of insolvency cases. It is also one in which the relevant professionals such as insolvency practitioners and solicitors are well-informed as to the reputations of the rival ATE insurers. In this situation, whilst ATE insurers are of course entitled to take a stand on their policy terms and conditions, they are unlikely to have a commercial incentive to take an unusually defensive line in seeking to avoid liability under the policies they issue. If they were to do so, this would soon become known in the market, and potentially profitable future business would be placed elsewhere.

Attribution of the knowledge of Mr. Elliott The Defendants supplement their arguments as to the risk of non-disclosure by suggesting that they are at greater risk of avoidance of the ATE policies in this case because of the position of Mr. Elliott. Although the Defendants say that they would, if they won the case and were seeking to enforce a claim under the ATE policy, argue that a sharp distinction should be drawn between the Companies and Mr. Elliott, nevertheless they are concerned that the insurers might seek to argue that Mr. Elliott’s knowledge should be attributed to the Company for the purposes of the disclosure rule, irrespective of what the Joint Liquidators had actually been told. In that regard they point to a statement in McPherson’s Law of Company Liquidation (3^rd ed) at para 7-049 that there is doubt as to whether the office of a director comes to an end on the making of a compulsory winding-up order; and they submit that there are some cases in which the knowledge of an ex-director has been attributed to a company: see e.g. Sudarshan Chemical Industries v Clariant Produkte [2014] RPC 6.

Whilst I am of course aware that I have not heard argument from the insurers, I regard such arguments as extremely weak, if not simply unfounded. Under English law, as the full extract from McPherson makes clear, the appointment as a director comes to an end on the appointment of a compulsory liquidator: see Measures Brothers v Measures [1910] 2 Ch 248. Moreover, in Meridian Global Funds Management v Securities Commission [1995] 2 AC 500 at 506-507, Lord Hoffmann made it clear that for most purposes, a company’s primary rules of attribution in its constitution, supplemented by general principles of agency, are sufficient to determine whether the knowledge of a person is to be attributed to a company so as to determine its rights and obligations. On that footing, Mr. Elliott’s knowledge would not be attributed to the Companies in relation to ATE policies taken out after the Joint Liquidators had been appointed and he had ceased to be a director.

Further, even if the general principles identified by Lord Hoffmann were not to be applied and the courts were instead to look to the underlying purpose of the disclosure rule in order to fashion a special rule of attribution, I very much doubt that any different result would be reached. The case which the Defendants relied upon in that respect, Sudarshan, involved the question of whether a company that had brought a claim upon a patent that turned out to be invalid was able to mount a statutory defence to a claim of making unjustified threats. Section 70(2A)(b) of the Patents Act 1977 denied it a defence if it knew or ought to have known or suspected that the patent was invalid at the time that it made the threat of infringement action. For that purpose it is not surprising that the state of mind of the company was held to be that of a properly informed patent attorney who would have informed himself of what was known to the inventor even though the latter had left the company some years earlier.

In contrast, ATE policies for companies in liquidation are very often arranged by the office-holders for the purposes of proceedings against the ex-directors and third parties who have either caused loss to the company by a breach of duty, or profited from some breach of duty to the company. In such cases, (unlike the policy underlying the Patents Act which discourages unjustified claims of infringement and places an onus upon the holders of a patent to make a proper investigation of the history of the patent that they own before making a claim to infringement), the policy underlying the attribution rule in cases of ATE policies sold to companies in insolvency proceedings must recognise that insolvency office-holders come to an insolvent company as strangers, and that they frequently encounter a lack of co-operation or candour from the ex-directors. In such circumstances, to hold that the insolvent company should be attributed with the undisclosed knowledge of its ex-directors so as to put it at risk of avoidance of the ATE policy for non-disclosure would defeat the commercial purpose for which the policy was sold to such companies by the insurer.

Incurred costs The Defendants also complain that the ATE policies in the instant case contain a non-standard condition precedent that the insurer will not be liable for a claim under the policy where the case is abandoned because the Companies do not have the funding to continue the claim. The Defendants pointed out, for example, that payment of a further premium of £350,000 is due after disclosure under the QBE policy, and that the policies do not cover the payment of counsel’s fees (to the extent not covered by a CFA) or expert’s fees. They suggested that this gives rise to a risk that “if the Defendants start winning” the dispute, the third-party funder who the Joint Liquidators have approached to provide such monies would decline to advance further funding, with the result that the case would be abandoned and the ATE policy would not cover the costs that the Defendants had already incurred.

The Defendants also suggest that if the policy were to be cancelled by the insurer because of adverse advice on the merits at any stage, the insurer might argue that, upon cancelling the policy, it would have no liability to pay any of the Defendants’ costs unless they had already been the subject of a court order made by that stage. That argument flows from clause 6.2 of the policies, which provides that if the insurer cancels the policy, it will not be liable to pay any “Insured Liability” incurred after the date of cancellation. The Defendants point to the definition of “Insured Liability” as meaning the insured’s legal liability to pay “Opponent’s Costs”, which in turn are defined as “the reasonable costs in connection with the Dispute which the Insured is ordered to pay or agrees to pay to the Opponent with the Insurer’s Approval”.

I do not think that either of these grounds gives me, at this stage, any reason to believe that the ATE policies will fail to respond to cover the Defendants’ incurred costs.

On the first point, the evidence of the Joint Liquidators is that they have arranged sufficient funding to cover the payment of the premium due after disclosure and the further costs of the proceedings in stages. Although the evidence does not suggest that the third party funder is irrevocably committed, the Defendants cannot point to any tangible reason to believe that the arrangements made by the Joint Liquidators are inadequate or that their assessment that the money will be forthcoming in stages is misplaced. I have already referred above to the weight that I think I am entitled to place upon the Joint Liquidators and their professional advisers in arranging effective ATE cover, and I regard it as most unlikely that they would entertain significant risks in this regard.

As to the second point, whilst again I acknowledge that I have not heard argument from the insurers, I regard the points made by the Defendants on the interpretation of the ATE policies as unrealistic. The manifest commercial purpose of the ATE policies is to provide for the payment of any adverse costs orders against the Companies arising from the claims made. In complex commercial litigation such as the present, it must be expected that a substantial amount of costs will be incurred by the parties that will not be covered by individual costs orders as the case progresses. To suggest, for example, that an ATE insurer could avoid liability by the simple expedient of cancelling the policy with immediate effect before a court order was actually made covering such costs would defeat the obvious purpose of the contract and would, to my mind, be a commercially absurd result. I read the ATE policies as covering the Companies’ liability for all costs incurred by the Defendants up to the date of cancellation, albeit that the obligation to pay and the amount of such liability needs to be fixed at some point by a court order or by agreement.

Deeds of Indemnity I have referred above to the point made by the Defendants in reliance upon evidence led by the Companies from a broker in the ATE insurance and security for costs bond markets that he would expect that the Companies would be charged between £500,000 and £1 million extra by way of an up-front premium for a “deed of indemnity”. Although it was not entirely clear what the terms of such a deed would be, it was understood that they would not include the type of clauses permitting avoidance of the policies or imposing conditions to payment found in the ATE policies to which I have referred. Such a deed would therefore be functionally equivalent to a bank guarantee of the Companies’ liabilities in favour of the Defendants.

Although the Defendants suggested that this evidence indicated just how much of a risk there was that the ATE policies in this case would not respond, I do not think that is a fair reading of the evidence and nor do I think that this is the right question to ask. Taken as a whole, the evidence is that the additional premium would simply be based upon a percentage of the amount secured by the deed of indemnity, reflecting market practice for this type of product. I do not read the evidence as suggesting that this differential is a reflection of the particular risks thought to be attached to the ATE policies in any individual case.

Moreover, in the same way as the court does not ask whether an ATE policy is as good a security as cash or a bank guarantee, I do not think that I am assisted to answer the jurisdictional question under CPR 25.13 by asking how much more it would cost to have the equivalent of a bank guarantee than the ATE policies in this case.

Will payment under the ATE policies go to the Defendants? In the passage from Nasser that I have referred to above, Mance LJ raised the point that a defendant should have some assurance that the proceeds of an ATE policy “could not be diverted elsewhere”; and in Michael Phillips Akenhead J indicated that one of the shortcomings of the policies with which he was concerned was that they did not provide “direct benefits” to the defendant. Those are of course legitimate concerns in circumstances in which it is asserted by an insolvent claimant company that the existence of an ATE policy means that it will have the funds available to pay the costs of the defendant if ordered to do so. That would not be the case if the funds payable under the ATE policy were simply to form part of the company’s insolvent estate to be divided pari passu between unsecured creditors.

I do not think that is a real risk. As I have indicated above, adverse costs orders rank for payment ahead of other claims in a liquidation in any event. Moreover, quite apart from an interesting argument as to whether, on its wording, section 1 of the Third Parties (Rights against Insurers) Act 1930 would apply to an ATE policy effected after a company goes into liquidation rather than before, it would seem to me that there is a clear case for saying that where a liquidator has arranged an ATE policy to cover an adverse costs order in a particular case, any payments made by the insurer under the policy would be paid and received by the liquidator upon an implied trust for the sole purpose of paying that costs order and not for the purpose of distribution to other creditors. That was the conclusion tentatively reached by Judge Roger Berner in GSM Export (UK) v HMRC [2014] UKUT 0457 (TCC) at paragraphs 34-38, referring to Barclays Bank v Quistclose Investments [1970] AC 567, and I respectfully agree with him.

In any event, when the point was raised, Mr. Sims QC indicated that the Joint Liquidators would put the matter beyond doubt by giving an express undertaking or entering into a trust deed to receive and hold any proceeds of the ATE policies for the sole purpose of making payment to the Defendants. I see no reason why that cannot be done pursuant to the Joint Liquidators’ statutory powers under Schedule 4 to the Insolvency Act 1986, and think that it eliminates any potential objection in this regard.

Apart from their criticisms of the terms of the ATE policies that the Joint Liquidators have obtained for the Companies, the Defendants say that no reliance can be placed upon the policies with Elite (the provider of the second and fourth layers) and Acasta (the provider of the fifth layer), whose policies account for £2 million of the total cover. The basis for that contention is that in contrast with, say QBE which is based in the UK, regulated by the PRA and has a published credit-rating, Elite and Acasta are based and regulated in Gibraltar, and have no credit-rating. The Defendants say that the normal requirement for the provision of security for costs is by way of a guarantee from a first-class UK-based bank, and that they should not be at risk of having to go to Gibraltar to enforce any rights under the ATE policies.

In relation to the financial position of Elite, the Companies have adduced evidence to the effect that Elite has been trading in the UK for over 10 years, has operations in a large number of EU countries, and has an established record of paying claims. There is, however, no comparable evidence in relation to Acasta. The Defendants point out (among other things) that the most recent published financial statements for Acasta are now very dated (being for the year to 31 July 2014), that Acasta extended its accounting reference period until 31 December 2015 and that its balance sheet was largely supported by “premiums due from intermediaries”, which was over three times its gross written premiums for the year in question. The Defendants also draw attention to media reports and concerns over the collapse into insolvency of a number of unrated Gibraltarian insurers in recent years.

For the reasons that I have already discussed, and reflecting what Stuart-Smith J said in paragraph 20 of Geophysical, I think that a comparison between an ATE policy and the traditional requirements for the provision of cash or a “first class” bank guarantee where security for costs is ordered is not appropriate when applying the threshold jurisdictional test under CPR 25.13. Where there is an ATE policy in place, the question is simply whether there is reason to believe that the insurer will not pay under the policy when called upon to do so.

In that regard, whilst the absence of a credit-rating and concerns over the failure-rate of Gibraltarian insurers do suggest that there might, in general terms, be greater risk of Elite or Acasta defaulting on their obligations than, say, QBE, at least in relation to Elite there is evidence that it has an established track record, and there is nothing that gives me any particular reason to believe that it will not pay if called upon to do so under the policies that it has issued.

That is not the case in relation to Acasta. The reality is that I have seen little or no evidence about its history or current operations, and the lack of any recent financial information and the points made by the Defendants as to its balance sheet do give me reason to doubt its financial standing and ability to pay under the policy that it has issued. If Acasta stood alone, I would, on the basis of the evidence that I have seen to date, be inclined to think that the jurisdictional threshold under CPR 25.13 had been crossed.

As it is, however, Acasta is the provider of only one layer of ATE insurance, of £500,000 in excess of £3.5 million. On the basis of the current estimates, this layer of assessed costs will not be reached until well after disclosure and possibly much later. Accordingly, and consistently with the practice of the court to order the provision of security for costs in stages as a case progresses, I do not think that it would be appropriate, at least at this juncture, to order the provision of security for costs in place of the Acasta layer.

For the reasons that I have explained, the Defendants have failed to satisfy me that there is reason to believe that the Companies will be unable to pay the Defendants’ costs already incurred and of the initial stages of the proceedings if ordered to do so. As the jurisdictional threshold under CPR 25.13 has not been crossed, I therefore refuse the Defendants’ applications for security for costs.

That conclusion makes it unnecessary for me to consider the questions that would have arisen had I found that the jurisdictional threshold had been crossed under CPR 25.13. Suffice to say that had the threshold been crossed, on the current (lack of) evidence as to the efforts made by the Joint Liquidators to seek alternative sources of funding for the case, I would have been unlikely to have refused an order for security for costs on the basis that to do so would have stifled the claim.

I should, however, make it clear that I have determined the application on the basis of the evidence as currently presented to me. As is conventional the Defendants have liberty to apply as the case progresses. In particular they may do so once the costs incurred and to be incurred at the next stage of the proceedings threaten the ATE layer currently provided by Acasta. They may also do so if subsequent events or information obtained casts a materially different light on the risks of the ATE policies not responding, or of any of the insurers defaulting on their obligations thereunder.