The appeal of Premier Motorauctions Ltd & Anor v Pricewaterhousecoopers LLP & Anor [2017] EWCA Civ 1872 was recently heard by Lord Justices Longmore, Kitchin and Floyd. The decision at first instance was heard by Mr Justice Snowden over a year previously; he considered that a valid ATE insurance policy was sufficient grounds to refuse a security for costs application on the basis that he said it was unnecessary given that there was no reason to believe that the insurer would not satisfy its liabilities under the terms of the policy. A full summary of the judgement at first instance can be found here. The Defendants in the action appealed and the decision was overturned.
Facts of the case
The Claimants (a car auction company and a company dealing in unique registration plates) came into financial difficulty in April 2008. Mr Keith Elliot, the director of both companies, asked the companies’ bank (the Second Defendant) for additional facilities to assist with the financial difficulties. The bank also introduced Mr Warnett (an employee of the First Defendant) as someone who could act as a non-executive director of the companies. This led to a review of the companies’ cash flow needs which resulted in advice that the companies required an immediate cash injection of £2 million. The bank agreed to increase the companies' overdraft accordingly.
Nothing then came of the various proposals for investment and on 22 December 2008 two partners of the First Defendant were appointed as administrators. The companies' assets were disposed of by way of a pre-pack sale. The Claimants allege 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 alleged that this was for the purpose of identifying a fictitious need for additional finance which was provided by the bank, giving it effective control over the companies and the means to force them into administration. The Claimants allege that the Defendants breached various duties and conspired to cause them loss by unlawful means.
Proceedings were issued and on 29 June 2015 the Claimant’s notified the Defendant that ATE policies had been issued (the total amount insured stood at £5 million). The Defendant noted that these policies could be avoided for non-disclosure or misrepresentation and considered that the ATE policy was not security in the same way that a deed of indemnity or a payment into court would be. The Defendants subsequently issued applications for security for costs totalling around £7.2 million. As noted above, Snowden J heard the application at first instance in November 2016 and held that security for costs was unnecessary due to the cover provided by the ATE policies.
Submissions on appeal
Mr Justin Fenwick QC for the First Defendant submitted that the Judge at first instance had clearly erred in his findings regarding the ATE insurance as he should have asked himself whether it gave the Defendants the same security as a payment into court, which it clearly did not. Mr Adam Zellick QC for the Second Defendant submitted that the ATE insurance was a contingent asset and could therefore not be taken into account at all at the jurisdictional stage. Both Defendants considered that Snowden J was wrong to have relied upon the judgement of Geophysical Service Centre v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC), in which Stuart-Smith J had said that ATE insurance was a central feature of parties' ability to gain access to justice on the basis that, where insolvent companies were concerned, the key question was whether an Order for security for costs would stifle the claim.
Jurisdiction to order security for costs
Lord Justice Longmore commented that it was unfortunate that a Court's analysis for jurisdiction to order security for costs should include a detailed analysis of the Claimant's ATE policy however such analysis is inevitable due to the very nature of the application.
The terms of the ATE insurance were considered and it was noted that the policy was voidable in the event that any costs liability stemmed from a finding that the Claimants had been untruthful. He noted that the outcome of the case was likely to depend entirely on which side were telling the truth. Therefore, whether the ATE cover provided sufficient protection, was an issue to consider at the discretionary stage.
Longmore LJ however dismissed the argument raised regarding contingent assets on the basis that an asset of this nature would mature before an Order for costs was made in any event.
Sufficient protection
Longmore LJ considered the content of the pleadings and noted that the bulk of the Claimants’ case rested on the evidence of Mr Elliot. He disagreed with Snowden J’s comments that "it was something of a leap" to conclude that disbelief of Mr Elliot would be grounds to void the policy and noted that it is a known fact that ATE insurers do seek to avoid their policies where it is right to do so.
He commented that the Defendants were entitled to an assurance that the policy would not be avoided and, on the facts of the case, he could not see that this assurance had been provided. He concluded that it therefore followed that there was good reason to believe that the Claimants would be unable to pay the Defendants' costs, satisfying the requirement of CPR 25.13.
The Court also considered the case of Holyoake v Candy [2017] 3 WLR 1131 which did not consider an ATE policy for the purpose of security for costs but it did consider that an ATE policy, which provided for avoidance only in cases of fraud, was not suitable to stand as fortification for a cross-undertaking in damages which supported an injunction of a kind analogous to a freezing injunction.
Discretion
Lord Justice Longmore commented that:
“Once one is satisfied that the Companies are insolvent, that there is jurisdiction to order security for costs and that ordering security will not stifle the claim, it is normally appropriate to order security and I see no reason not to do so in this case.”
Quantum
The Court noted that, whilst the original applications were submitted some time prior, no further costs had been incurred. At the time the applications were made, the Defendants requested security for costs amounting to £3,520,000 and £3,910,000, reflective of 80% of their estimated costs overall. He considered these were very high figures and ordered that security for costs be provided in the sums of £2m and £4m for the First and Second Defendants' costs respectively.
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