Ever since Stuart-Smith J’s decision in Geophysical Service Centre v Dowell Schlumberger…
Ever since Stuart-Smith J’s decision in Geophysical Service Centre v Dowell Schlumberger (ME) Inc  EWHC 147 (TCC), impoverished claimant companies have sought to rely on the existence of an ATE insurance policy as a reason why a Court should not make an order for security for costs. In Premier Motorauctions the Court of Appeal was required to decide whether, and to what extent, the existence of ATE cover really could defeat an application for security for costs.
The Court of Appeal’s decision is considered by David Turner QC of 4 New Square.
In 2008, the Claimants sought additional facilities from Lloyds Bank (the Second Defendant). The bank introduced the Claimants to a partner in PwC who was appointed to act as a non-executive director of the Claimants; PwC was also engaged to conduct a review of the Claimants’ cash-flow needs. Following that review, the bank agreed to increase the Claimants’ overdraft facility by £2m.
Unfortunately, the Claimants’ financial troubles continued. In December 2008, two partners of PwC were appointed as administrators and the main businesses and assets of the companies were sold by way of a pre-pack. Thereafter liquidators were appointed.
Acting through their liquidators, the Claimants brought proceedings alleging – amongst other things – that the bank and PwC had conspired to obtain control over the Claimants in order to force them into administration and enable the sale of their assets at an undervalue.
In June 2015, in response to a threatened application for security for costs, the Claimants notified the Defendants that ATE policies had been issued to the Joint Liquidators and the Claimants jointly with a total sum insured of £5m. Following the provision of redacted copies of the policies, PwC pointed out that the policies could be avoided for non-disclosure or misrepresentation and asked a deed of indemnity to be provided as security for their costs. Following the Claimants’ refusal to provide such a deed, in April 2016 the Defendants issued applications for security totalling £7.2m.
At first instance, Snowden J decided that the correct approach was that adopted by Stuart-Smith J in Geophysical, and was therefore to ask whether there was reason to believe that the ATE policy would not respond so as to enable the Defendants’ costs to be paid. He concluded that since the defendants had failed to satisfy him that there was reason to believe that the Claimants would be unable to pay the defendants’ costs, he had no jurisdiction to make an order for security.
The Defendants appealed.
PwC contended that the judge was wrong to conclude that he had no jurisdiction under CPR Part 25.13 to make an order for security, since it was obvious that – in the absence of the ATE cover – the Claimants would not be able to pay the Defendants’ costs. The bank contended that ATE cover was no more than a contingent asset and could therefore not be taken into account at all at the jurisdictional stage.
THE COURT OF APPEAL’S DECISION
The leading judgment of the Court of Appeal was given by Longmore LJ. He started by setting out the jurisdictional basis of an order for security under CPR Part 25.13 which, so far as is relevant, 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 SARPD Oil v Addax Energy  BLR 301, the Court of Appeal (which included Longmore LJ) referred to its earlier decision in Jirehouse Capital v Beller  1 WLR 751 and commented that:
“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…”
Having recited the competing arguments in the present case, Longmore LJ expressed regret that the court’s jurisdiction to order security for costs should depend on a detailed analysis of a claimant’s ATE insurance policies into which the defendants have had no input and which they have no direct right to enforce; all the more so in circumstances where the Courts have disapproved security for costs applications being blown up “into a large interlocutory hearing involving great expenditure of both money and time,” see Porzelak v Porzelak  1 WLR 420, 423e per Sir Nicholas Browne-Wilkinson VC.
Longmore LJ rejected the bank’s suggestion that ATE cover could not be taken into account at the jurisdictional stage. In doing so he noted that in both Nasser v United Bank of Kuwait  1 WLR 1868 and Al-Koronky v Time-Life Entertainment Group Ltd  EWCA Civ 1123 the Court of Appeal had indicated that the existence of ATE cover might enable a claimant to resist an application for security. Longmore LJ drew comfort from the fact that, in his view, it would be inevitable that the question whether ATE insurance gives sufficient protection to the defendant has to be decided at the discretionary stage in any event.
In Nasser Mance LJ had said:
“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.”
In Al-Koronky, Sedley LJ had noted that:
“… since the outcome of this case will depend entirely upon which side is telling the truth, one wonders what use the insurance cover is”.
Longmore LJ observed that ATE insurers do on occasion seek to avoid their policies, citing Persimmon Homes Ltd v Great Lakes Reinsurance (UK) Plc  EWHC 1705 (Comm),  Lloyd’s Rep IR 101 as an example of a case in which a successful defendant was unable to recover its costs from ATE insurers. He further noted that – unlike the position in Geophysical – the policies in the present case did not include an anti-avoidance clause. Since neither the Defendants nor the Court had been provided with the placing information put before insurers, the Court could not be satisfied that the prospect of avoidance was illusory; even if the Joint Liquidators – who made the proposals to the ATE insurers – could be relied on as independent professional office-holders assisted by experienced solicitors and counsel, that would not provide a sufficient answer as “the best professional advice cannot cater for cases of non-disclosure of matters which the professionals do not know”.
Longmore LJ concluded that, in such circumstances:
- There was reason to believe that the Companies would be unable to pay the defendants’ costs if ordered to do so; and
- The jurisdictional requirement of CPR 25.13 was therefore satisfied.
In the light of this conclusion, it fell to the Court of Appeal to exercise its discretion as to whether to order security and, if so, in what amount. As there was no suggestion that an order for security would stifle the claim, Longmore LJ considered that an order for security was appropriate and fixed the amount to be provided as £2m for each Defendant, making £4m in total.
The Court of Appeal’s approach in Premier Motorauctions effectively conflated the question of jurisdiction (which was, I would suggest, central to the approach of Stuart-Smith LJ in Geophysical) with the question of whether ATE cover amounts to sufficient protection for a defendant’s costs; it is also difficult to reconcile with the Court of Appeal’s decisions in Jirehouse and SARPD Oil by using a real risk that the policies would not respond as the basis for a conclusion that the claimants “will not be able to pay” the defendants’ costs.
The practical consequence of this approach is that it reverses the burden of proof: instead of the defendant having to prove that (despite the existence of ATE cover) the jurisdictional threshold for making an order for security is satisfied, it is for the claimant to prove that there is no real prospect that the ATE cover might be avoided at some later date.
Some might also criticise Longmore LJ’s analysis on the basis that it glossed over the fundamental principle that the obligation to disclose facts material to the risk is restricted to facts known to “the insured” in the sense of being either a directing mind or someone sufficiently concerned with insurance transactions (The Eurysthenes  2 Lloyd’s Rep. 171 at 179 col.2), and would not extend to facts known to a former director.
However, Defendants will undoubtedly welcome the Court of Appeal’s decision and be emboldened to pursue applications for security which they might previously have shied away from making.