Civil practice – Security for costs – “After the event” (ATE) insurance – Claimants starting action against defendant concerning property development – Defendant applying for security for costs – Whether claimant’s ATE insurance constituting adequate security for defendant’s costs – Whether ATE policy adequate security where possibility of claimant becoming insolvent – Whether appropriate case for ordering security for costs – Application granted
The first claimant was a company incorporated in St.Vincent and the Grenadines (SVG). The second claimant was incorporated in Grand Cayman. The claimants commenced proceedings concerning a property development in SVG known as “Buccament Bay” (the resort). Investors in the development were mainly British and had paid deposits of up to 30% of the purchase price of a room or apartment in the resort. Construction works were significantly delayed and were still ongoing and some investors had attempted to put the claimant companies into liquidation. The Serious Fraud Office had launched an investigation into the investment scheme underlying the project. The defendant had provided accountancy and auditing services in respect of the resort. The claimants contended essentially that the defendant was responsible for the delays and cost overruns and for the claimants’ losses as a result of alleged fraudulent conduct on the part of the main contractors employed to carry out the construction works. The defendant applied for security for costs.
It was not disputed that the claimants should provide security in the sum of £2.75m. The remaining dispute was whether the “after the event” (ATE) insurance policy into which the claimants had entered with its insurer (DAS), provided sufficient security for the defendant’s costs. The claimants submitted that it did and relied on DAS’ good reputation and the fact that the policy stated that the insurer would “your opponent’s legal costs and disbursements you are liable for” if the claimants lost their claim. The defendant said that, on analysis, the ATE policy did not provide proper security in the circumstances of the case, in particular, bearing in mind the defendant’s status as a third party under the policy, and the risk that it might not recover anything under the policy if the claimants were wound up or put into liquidation. The UK court had already concluded that it did not have the necessary jurisdiction to deal with insolvency proceedings would have to be commenced in SVG and it was highly likely that some or all of those who sought to put the claimants into liquidation in the UK would bring insolvency proceedings in SVG.
Held: The application was granted.
(1) As a matter of principle, adequate security for costs could be provided to a defendant by means other than a payment into court or a bank guarantee. Depending on the terms of the insurance and the circumstances of the case, an ATE insurance policy might be capable of providing adequate security. There might be provisions within the ATE insurance policy which a defendant could point to and say that, on the happening of certain events, those provisions might reduce or obliterate the security otherwise provided. In that event, the court should approach such objections with care. In order to amount to a valid objection that an ATE policy did not provide appropriate security, the defendant’s concern had to be realistic, not theoretical or fanciful: Al-Koronky v Time-Life Entertainment Group Ltd [2006] EWCA Civ 1123, Belco Trading CO v Kondo and another [2008] EWCA Civ 205, Michael Phillips Architects Ltd v Riklin [2010] EWHC 834 (TCC) and Verslot Dredging v HDI Gerling Industrie Vesicherungag AG [2013] EWHC 658 applied.
(2) The defendant’s objection was not fanciful but was a legitimate and realistic concern. The particular circumstances in which the ATE policy would not provide proper cover in the event of insolvency would not depend on DAS deliberately deciding not to pay out to the defendant; the lack of security would arise because DAS might be legally required to pay out to somebody else. The starting point for analysis concerned the financial position of the claimants. For the purposes of the present application only, it was not disputed that the application for security for costs should be dealt with on the basis that the claimants would be unable to pay the defendant’s costs if ordered to do so. If there were insolvency proceedings in SVG, the defendant’s position might be significantly compromised. The Third Parties (Rights Against Insurers) Act 1930, which conferred rights against insurers by third parties in the event of the insured becoming insolvent, did not apply in SVG. Thus the pre-1930 Act position, where the money was paid to the insured’s insolvency practitioner, continued to apply there. On that basis, the defendant might find that any sums due under the ATE policy, which would otherwise have constituted its security, had been paid out to the claimant’s insolvency practitioner, and the defendant would have no greater claim than any of the other numerous creditors of the claimants. Thus, there was a real risk that, if the claimants were the subject of insolvency proceedings in SVG, any sums under the ATE policy might have to be paid out by DAS, not to the defendant, but to the claimants’ insolvency practitioner in SVG. That would be significantly detrimental to the defendant’s rights and could even make the ATE cover worthless for it. That concern was realistic, given the claimants’ financial position: Geophysical Service Centre Co v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC) considered.
(3) In all the circumstances, the defendant’s objection to the ATE policy had been made out. Security for costs could be dealt with either by the provision of a direct indemnity or by an endorsement which provided that any costs ordered to be paid to the defendant would be paid directly, without set-off.
Nicholas Davidson QC and Hefin Rees QC (instructed by ELS Legal LLP) appeared for the claimants; Justin Fenwick QC and George Spalton (instructed by Kennedys Law LLP) appeared for the defendant.
Eileen O’Grady, barrister
