by Elizabeth Taylor

Security for costs – a sea change for insolvency claims?

Third party litigation funders are regularly asked to fund security for costs payments as well as legal costs and disbursements, particularly in insolvency cases where security applications are commonplace. Such cases tend to be less attractive to funders because of the large capital outlay and the length of time for which funds are deployed. However, on 24th May 2018 Mr Justice Marcus Smith handed down his judgment in the case of Absolute Living Developments Ltd [2018] EWHC 1432 (Ch) in which he dismissed the Defendant’s application on grounds that would appear to apply to most insolvency cases.

In this case, the Defendant sought an order for payment of security in the sum of £500,000 on the basis that the Claimant would be unable to pay the Defendant’s costs if an adverse costs order was made against it. Such applications are commonplace in cases such as this where proceedings are brought by the liquidator in the name of the company.

CPR 25.13(1) and(2)(c) set out the conditions that must be satisfied for a court to order payment of security. These rules say

(1) The court may make an order for security for costs under rule 25.12 if –

(a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and(b) (i) one or more of the conditions in paragraph (2) applies.

(2) The conditions are –

(c) the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so;

As such the court has a discretion when it comes to ordering payment of security and guidance on the exercise of that discretion is set out in the case of Sir Lindsey Parkinson & Co v Triplan 1973 QB 609 to which Smith J referred in his judgment.

The key issues for the court to consider are:

  1. Whether the claim is bona fide and not a sham.

In this case Smith J concluded that the claim was bona fide and even the Defendants conceded that it was, albeit that they disputed the claim on substantial grounds. Smith J also concluded that in deciding whether the claim was bona fide it was not appropriate for him to undertake a detailed analysis of the merits of the claim at an interlocutory stage.

  1. Whether the Claimant’s want of means was brought about by the Defendant’s conduct.

Although in this case the claim involved an allegation of payment away of the company’s money in breach of fiduciary duty, a finding that the Defendant’s conduct caused the Claimant’s impecuniosity required an assessment of the merits which the judge had already decided was inappropriate and therefore no weight could be attached to this factor.

  1. Whether the security for costs application is being used to stifle a serious and genuine claim.

In his judgment Smith J quoted from the judgment of Peter Gibson LJ in the case of Keary Developments Ltd v Tarmac Construction Ltd 1995 3All ER 534 in which Gibson LJ noted that in giving the court discretion whether to award security it must have envisaged the possibility that genuine claims would be stifled but that the court needed to carry out a balancing exercise between the injustice to the Claimant of not being able to pursue a claim and the injustice to the Defendant of not being able to recover its costs if the defence is successful.

In Absolute Living Developments the solicitors, counsel, liquidator and forensic accountant were all on 100% CFAs and the liquidator had caused her firm to pay £65,000 in respect of other costs and disbursements. However, unsurprisingly, the liquidator’s firm was unwilling to pay £500,000 into court as security. It was not possible for creditors to provide security and the liquidator had been unable to obtain a quote for ATE.

Given that the Claimant was a company in liquidation Smith J found that there was a presumption that the Claimant would be unable to satisfy an adverse costs order but in this case he was also satisfied on the evidence that there was no prospect of the Claimant company making any payment whatsoever by way of security. Therefore, if he made an order for security, one of three possible outcomes would follow.

  1. The claim would not proceed.
  2. The liquidator’s firm would have to pay the security.
  • The liquidator would have to persuade the creditors to pay the security.

Outcome (i) meant the claim would have been stifled by the order for security.

Outcome (ii) he described as theoretical and fanciful. A liquidator will only be subject to a third-party costs order under Section 51 of the Senior Courts Act if there is held to be a degree of impropriety or misconduct in the bringing of the proceedings which was not the case here. Consequently, Smith J found that it would be contrary to public interest to create a regime where a liquidator is required to provide security, because a liquidator must be uninhibited in deciding how and when to bring proceedings.

As regards outcome (iii) Smith J found that he was not in a position to say whether the creditors would provide the security if he ordered it and the fact that a company may have creditors in the background willing to provide security was not a factor that he should take into account in reaching his decision.

The judge concluded that it was clear that the Claimant (as distinct from the Claimant’s liquidator or creditors) was not in a position to provide security and therefore there was a clear risk that if he ordered security a bona fide and genuine claim would be stifled.

Therefore, having undertaken the required balancing exercise, Smith J concluded that it was in the interests of the Claimant’s creditors to whom he must have regard, for the claim to proceed and as such he dismissed the application for security.

In the light of the general principles set out in this judgment and given that there was nothing unusual in the factual matrix, it is difficult to see how this decision can be distinguished. Therefore, in the future it looks as though it will be more difficult for applications for security to succeed against a liquidator. This will inevitably make insolvency claims more attractive for third party litigation funders.