When reviewing a security for costs application under CPR 25.12, the courts are faced with the challenge of striking a balance between an impecunious claimant’s access to justice and the possibility of a successful defendant being unable to recover their costs. This is because the general rule in relation to costs under CPR 44.2 is that the unsuccessful party will pay the costs of the successful party.

However, a recent decision in the UK Chancery Division of the High Court has tipped the scales in favour of claimants with ATE insurance in security for cost applications – the case of Premier Motorauctions Limited (in liquidation) v PWC LLP.

The case has given some welcome clarification to the inter-relationship between security for costs applications and the provision of after the event (“ATE”) insurance. There are two particularly significant aspects of the judgment:

1. a claimant company’s insolvency will not of itself provide the defendant with sufficient grounds successfully to argue that there is ‘reason to believe that the claimant company would be unable to pay their costs if ordered to do so’ under CPR 25.13(2)(c) (the “Jurisdictional Test”);

2. an ATE policy issued from a reputable insurance company will likely defeat an application for security for costs as long as there is no real threat that the policy will be avoided.

The case 

The two claimant companies, acting through their joint liquidators, claimed around £50 million in damages from the defendants to compensate for the defendant allegedly pushing the companies into unnecessary administration, with the aim of profiting from the subsequent sale of the claimant companies’ assets.

The defendants responded by applying for security for costs on the grounds that the Jurisdictional Test had been met and the claimants would be unable to pay their costs if ordered to do so. The claimants had obtained a number of ATE insurance policies in the sum of £5 million and it was queried whether these policies would be sufficient for the court to dismiss the application for security for costs.

The defendants argued that the ATE policies were not sufficient and that there was a real risk the ATE policies (unlike cash or a first class bank guarantee) could be avoided, rescinded or cancelled by the insurance companies, meaning that defendants would not be compensated for their costs if they won the case. The defendants sought further security from the claimants in the form of cash, a guarantee or a deed of indemnity from the ATE insurance providers.

The decision 

Prior to this decision, there were two conflicting cases on the relationship between security for costs and ATE insurance:

1. Akenhead J in Michael Philips Architects Ltd v Riklin [2010] BLR 519 suggested that an ATE insurance policy will rarely provide as good a security as a payment into court, bank bond or a guarantee. One of the reasons he gave for his conclusion was that insurance policies are voidable by the insurers and subject to cancellation.

2. In contrast, Stuart-Smith J in Geophysical Services Centre v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC) suggested that a properly drafted ATE policy provided by a reputable insurer is a reliable source of litigation cost funding.

In the present case, Snowden J followed the second line of authority and accordingly refused the defendants’ application for security for costs on the grounds that the Jurisdictional Test had not been met. In adopting this approach, Snowden J applied a more literal interpretation of CPR 25.13 and placed a great deal of confidence in ATE insurance providers. The relevant consideration was not whether an ATE policy was as good a security as cash or a guarantee, but whether the ATE insurance policies were large enough assets of the insolvent companies to prevent the Jurisdictional Test from being met. In this case, the judge held that they were.

The court dismissed the defendants’ argument that ATE insurance providers may not honour their policies by stating that (1) the insurance market is very competitive and (2) experienced office holders risk personal liability under the Senior Courts Act 1981 for any adverse costs if the insurance policies were to fail.

Moreover, the theoretical possibility of an ATE policy being avoided, rescinded or cancelled (e.g. through misrepresentation or non-disclosure on behalf of the insured) was not enough to meet the Jurisdictional Test, and whilst the risk of avoidance of a specific ATE insurance policy is a relevant consideration for the purposes of CPR 25.12, the risk must be actual rather than theoretical.

Ramifications for the insolvency profession 

This case is significant as regards the relationship between ATE insurance policies and security for costs, particularly for insolvent claimant companies and has provided much needed clarity.

The decision was based partly on public policy interests, including considerations that (1) ATE insurance policies provide an opportunity for insolvent companies to seek justice against parties who have caused them harm and (2) the ATE insurance market is a maturing market and is heavily supported by the business of insolvent companies. If the judge had concluded that ATE insurance policies were not sufficient security to fend off an application for security for costs, it would have negatively affected the ATE insurance market.

For claimants, this decision is probably most significant for insolvent companies seeking to bring a claim as they have been provided with reassurance that if they obtain an ATE insurance policy with a reputable insurance company, it is unlikely that the defendant can pass the Jurisdictional Test and obtain security for costs.

For defendants, the judgment has placed a greater burden to be satisfied by a defendant seeking security for costs where a claimant has ATE insurance. It is clear that the defendant cannot rely solely on the claimant’s insolvent status to obtain security – they must draw the court’s attention to specific risks in the claimant’s individual ATE insurance policy in order to pass the Jurisdictional Test.