Premier Motorauctions Ltd & Anor v Pricewaterhousecoopers LLP & Anor

On an application for security for costs under Civil Procedure Rules 1998, the court must first ask whether there is reason to believe that the claimant will be unable to pay an adverse costs order. Insolvency alone does not establish that threshold. An after-the-event insurance policy is an asset which must be assessed with the claimant’s other resources.

The relevant question is whether, having regard to the policy terms, the allegations, and all the circumstances, there is reason to believe that the policy will not respond. The court need not compare the policy with cash, a bank guarantee, or a deed of indemnity. A properly arranged policy may therefore prevent the jurisdiction arising, even though it offers less certain protection than traditional security.

Two insolvent companies in compulsory liquidation brought substantial claims against their former professional advisers and bank. The defendants applied at the first case management conference for security for costs under Civil Procedure Rules 1998, relying on the companies’ insolvency and contending that their after-the-event insurance was vulnerable to avoidance, cancellation, non-payment, or insurer default.

The companies relied on several layers of after-the-event cover arranged by their joint liquidators. The central issues were whether the jurisdictional threshold under rule 25.13 was satisfied and, if so, whether security should nevertheless be refused because it would stifle the claims.

1. Applications refused. The defendants had not established that there was reason to believe that the companies would be unable to pay their costs already incurred and arising from the initial stages of the proceedings if ordered to do so.
2. Under rule 25.13, the court must evaluate the future risk of non-payment. Insolvency or liquidation is relevant but does not, without more, satisfy the jurisdictional threshold. An adverse costs order ranks ahead of other unsecured claims in the liquidation and is an asset of the company for that purpose.
3. An after-the-event policy obtained specifically to cover the claim must be considered as part of the company’s assets. The question is whether, having regard to the policy terms, the nature of the allegations and all the circumstances, there is reason to believe that the insurer will not respond. The comparison is not with cash, a first-class bank guarantee, or a deed of indemnity.
4. The risks identified by the defendants concerning alleged non-disclosure, misrepresentation, cancellation, staged premiums and incurred costs were theoretical on the evidence. The policies had been arranged by independent professional liquidators assisted by experienced lawyers, who had strong incentives to ensure compliance with the policy conditions.
5. The court rejected the suggested attribution of the former director’s knowledge to the companies for policies obtained after the liquidators’ appointment. Under the ordinary rules of attribution, his knowledge was not attributable after he ceased to be a director. A special attribution rule would also undermine the commercial purpose of after-the-event insurance for insolvent companies.
6. The court had doubts about Acasta’s financial standing, but its cover was only one later layer which was unlikely to be reached until substantially later. It was therefore premature to order security in substitution for that layer. Payments under the policies would, in any event, be held for the purpose of satisfying adverse costs, and the liquidators offered an undertaking or trust deed to remove any possible diversion risk.
7. The defendants retained liberty to apply if later costs approached the Acasta layer or subsequent information materially changed the assessment.