Court of Appeal sets out the principles to be considered when assessing whether ATE insurance can satisfy an application for security for costs

Facts

The claim related to allegations of conspiracy against the defendants in order to force the claimants into administration to allow the business to be sold at a considerable undervalue for the benefit of the defendant bank. The claimants' liquidators took out an ATE insurance policy in the amount of £5 million but the policy contained no anti-avoidance provisions and the defendants were concerned that they were not adequately protected in the event they were successful and an order for costs was made against the claimant. The defendants and the court had no information with which to judge the likelihood that an insurer would attempt to avoid the policy should such an order be made. The defendants therefore sought security for costs in the amount of £7.2 million.

High Court decision

The High Court took the view that the ATE insurance policy could be taken into account in order to satisfy the jurisdictional test set out in CPR 25.13(2)(c), namely that "there is reason to believe that [the claimant company] will be unable to pay the defendant's costs if ordered to do so". At this initial stage the terms of the policy needed to be considered together with the nature of the allegations in the case and all the other circumstances to see whether there was "reason to believe that the ATE policy will not respond" and therefore whether the defendant's costs will be paid[2].

Despite the absence of any anti-avoidance provisions contained in the relevant ATE insurance policy (the insurance policy could be avoided for non-disclosure or misrepresentation), the High Court found that there was no specific reason why the policy did not afford sufficient protection to the defendants and refused the defendant's application on the grounds that the jurisdictional test under CPR 25.13 had not been met.

Court of Appeal

The Court of Appeal disagreed with the High Court and granted the defendant's appeal. In doing so, the court took into account previous authorities on the issue and on the one hand agreed that a 'properly drafted' ATE insurance policy could be taken into account when deciding whether or not an order for security for costs should be made[3]. On the other hand, the court went further and stressed that an analysis of the ATE policy itself is necessary to establish whether or not 'sufficient protection' is afforded to a defendant seeking security. If it does give 'sufficient protection' then there will not be 'reason to believe' that the company will be unable to pay the defendant's costs and there will be no jurisdiction under CPR 25.13(2) to make the order.

The Court of Appeal also noted that the absence of anti-avoidance provisions in itself would not render an ATE policy ineffective in terms of security for costs if it gave the defendant "sufficient protection[4]". However, in this case the evidence of the managing director of the claimant was critical to the claimant's claim and the case itself would effectively be determined primarily on whether or not he was telling the truth. If he was found to be unreliable, the claimants would be unsuccessful and be liable for the defendant's costs. The court and the defendants were clearly in the dark as to what the insurers had been told when they issued the ATE policy so they did not have the necessary knowledge to assess the likelihood of the insurers avoiding the policy for misrepresentation or non-disclosure.

Interestingly, the Court of Appeal quoted the Al-Koronky case, in which Sedley LJ warned against relying entirely on ATE cover to avoid an order for security for costs if the ATE policy is voidable or can be rendered ineffective if liability for costs is dependent on whether or not a claimant is telling the truth. On this issue, he 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. If the claimants win, they will have no call on their insurers. If they lose, it is overwhelmingly likely that it will be on grounds which render their insurance cover ineffective".

The Court of Appeal therefore took the view that the policy did not afford the defendants "sufficient protection" in terms of costs. Since the defendants did not have the assurances they were entitled to, i.e. that the policy would not be avoided, then there was reason to believe the claimants would be unable to pay the defendant's costs if they were ordered.  Accordingly, the Court had the requisite jurisdiction to grant an order for security for costs and ordered the claimants to provide security of £4 million (£2m to each Defendant).

Comment

The Court of Appeal has provided some much needed guidance as to when an ATE insurance policy may be deemed appropriate security for costs. Unsurprisingly, it seems the answer lies in an analysis of the underlying terms of the policy itself which the Court of Appeal found need to be scrutinised on a case by case basis in order to ensure that a defendant facing a claim against an insolvent company is afforded the right protection in terms of its costs of defending a claim.

The Court of Appeal appears to be taking a pragmatic and more balanced approach to this issue in contrast to previous differing decisions of the High Court. As a result, a claimant can still rely on its ATE insurance in order to avoid an order for security for costs particularly when such policies are properly drafted, obtained from a reputable insurer and provide sufficient protection to a defendant in the circumstances (for example, restricting avoidance in some way in order to provide adequate assurance that the defendant's costs will be paid).

Conversely, in circumstances where the necessary protection cannot be provided by the terms of the ATE policy e.g. where a policy does not contain an anti-avoidance clause, it is likely that the policy will not be deemed to provide sufficient protection and a court will be more likely to meet the jurisdictional hurdle of CPR 25.13 and make an order for security for costs against an insolvent claimant. 

Interestingly this case comes hot on the heels of Holyoake v Candy[5] in which the High Court considered that ATE insurance which only could be avoided for fraud was not suitable fortification for a cross undertaking in damages in support of a freezing injunction.  It shows that the use of ATE insurance policies for security is being considered more widely and the terms of such policies will continue to be the subject of considerable scrutiny.

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