Security for Costs in Insolvency Proceedings – Shifting Sands

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Security for Costs in Insolvency Proceedings – Shifting Sands

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There are a number of recent cases that have influenced office-holders when deciding whether to commence proceedings in respect of claims vesting in an insolvent company when met with a threat of an application for security for costs in pre-action correspondence. These decisions have ‘swung the pendulum’ both in the Claimant’s and the Defendant’s favour which has ultimately caused uncertainty and regrettably, stymied meritorious claims.

However, the recent decision in Absolute Living Limited (in liquidation) v DS7 Limited has provided clarification of circumstances when the court will award an order for security for costs in situations where the claimant is insolvent and should provide a welcome fillip for insolvency practitioners wanting to bring proceedings in these circumstances.

 

In the Claimant’s favour…


Following the decision in Michael Phillips Architects Ltd v Riklin, and the first instance decision in Premier Motorauctions Ltd (in liquidation) and another v PricewaterhouseCoopers LLP and Lloyds Bank Plc, a defendant knew that provided the company had an ATE insurance policy, a security for costs application was unlikely to succeed. Correspondence between the parties could identify the existence of an ATE policy and the threat of a security for costs application would not normally prevent a claim.


In the Defendant’s favour…


The Court of Appeal reversed the decision in Premier Motorauctions by focusing on the terms of the ATE policy and how it could be avoided or rendered ineffective by applying those terms to the hypothetical future conduct of the claimant rather than by considering evidence of the actual conduct of the claimant and whether that was likely to cause the insurer to cancel the policy. This decision placed the ball firmly back in the defendant’s court who can now request sight of the policy, its terms and details of the insurer and insist that any provision that enables the insurer to avoid liability (which are contained in most policies as standard clauses) render it ineffective and inadequate as security for costs.


Absolute Living Limited (in liquidation) v DS7 Limited


The Chancery Court has recently held that it was not appropriate to make an order for security for costs where it would ‘stifle a serious or genuine claim’, despite it being clear that the claimant was unable to fund the security or provide ATE insurance.


The claimant issued proceedings and the defendant issued an application for security for costs in the amount of £500,000.


A successful security for costs application requires consideration of the two-stage test under the Civil Procedure Rules (CPR) 25.13(1) and (2)(c);

 

  • There must be a reason to believe that the claimant would be unable to pay the defendant’s costs; and 
  • Whether it is, in all the circumstances, just that an order for security of costs be made.


Although the claimant had gone into liquidation, so the first limb of the test was satisfied, it argued that the application should fail on the second limb, as ‘in all the circumstances’, it would not be just for this order to be made.


Decision


Marcus Smith J followed the test set out in Sir Lindsay Parkinson & Co v Triplan [1973] to reach his decision. In such circumstances, the Court must consider each of the following:

 

  • Whether the claim is bona fide and not a sham; 
  • Whether the application for security of costs is being used oppressively to stifle a serious or genuine claim; 
  • Whether the claimant’s want of means has been brought about by the conduct of the defendant;
  • Whether the application for security of costs has been brought too late; and
  • Other miscellaneous features.


As there was no prospect of the claimant being able to pay any sum by way of security and proceedings were brought on a no win-no fee basis (as there was no prospect of the claimant being able to pay its own legal fees), the application focused in particular on whether the claim would be stifled if security were to be ordered.


Marcus Smith J deemed that it would be inappropriate for the Court to make an order that would either result in the claim being stifled, or the liquidator having to fund the security, and stated it would be “entirely contrary to the public interest in the insolvency regime that exists in this jurisdiction. It is critical in the public interest that liquidators proceed in a manner that is uninhibited in terms of deciding how to bring actions, including how those actions are framed and funded”. He went on to state that the court must carry out a ‘balancing exercise’ between the injustice to the claimant for being hindered in pursuing his claim, and injustice to the defendant who may not recover his costs from the claimant. As a result, no order for security for costs was granted.


Do not be put off


This case illustrates that security of costs will not always be ordered against an insolvent company that does not have the ability to pay any costs order made against it. This is encouraging for office-holders who have a good claim yet may be unable to obtain ATE insurance in circumstances where insurers may deem the proceedings uneconomical especially now the premium cannot be claimed from the losing party if the claim succeeds.


We have experience of working with office holders, insurers and funders to find solutions in these circumstances. For example, some funders will make funds available to cover an adverse costs order if a defendant applies and succeeds with an application for security for costs. This should flush out the defendants who use the threat of applying for security for costs oppressively and as a device to prevent the claim from being issued.


If you consider you have a good claim but insufficient funds to cover your own legal fees and provide security for costs, please contact William or any of the insolvency litigation team to see if we can help you get the claim up and running.

The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. PDT Solicitors LLP accepts no responsibility for the content of any third party website to which this webpage refers.

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