ATE policies: CA decision serves as warning to robustly negotiate terms

Recently the Court of Appeal (“CA”) handed down its much anticipated judgment in Premier Motorauctions Ltd (in Liquidation) v PricewaterhouseCoopers LLP and Lloyds Bank Plc, which overturned the first instance decision and ordered the Claimant (a company in liquidation with an ATE policy in place) to give security for the Defendants’ costs in the sum of £4m.

What are the lessons to be learned from this decision?

The lesson to be learned is this: if there is ATE insurance in place, the starting position in assessing whether the court has jurisdiction to order security for costs is the terms of the ATE policy. In principle, a properly drafted ATE policy ought to provide a viable defence to a security for costs application. The key is ensuring that the terms of the ATE policy provide sufficient comfort that insurers will not avoid the policy for non-disclosure or misrepresentation unless the non-disclosure is fraudulent. Prudent IPs and lawyers will pay careful consideration to anti-avoidance terms when negotiating ATE policies, to avoid falling foul of the Premier Motorauctions decision.

The facts

The CA’s judgment has, understandably, caused concern amongst the insolvency and restructuring community, leaving IPs wondering what further precautions they can take to fend off security for costs applications. At first blush, the CA’s decision appears heavy-handed and against the grain of a number of High Court decisions, which confirmed that a properly drafted ATE policy offers a viable defence to security for costs applications.

However, on proper consideration, the CA’s decision is not all bad news for those who find themselves defending security for costs applications. The decision largely turned on the absence of anti-avoidance terms in the Claimant’s ATE policy and the particular facts of this case. With a bit of care, IPs and lawyers ought to be able to avoid the pitfalls highlighted in the CA’s decision, by ensuring that the terms of ATE policies are properly negotiated.

The matter before the CA involved a claim brought by a company in liquidation (Premier Motorauctions) against Lloyds and PwC on the grounds of conspiracy  to force the company into administration and sell the business and assets at an undervalue.

The company was in the business of car auctions and selling unique registration plates for the DVLA. In April 2008, the company was in difficulty and approached Lloyds for additional facilities. Lloyds introduced the company to Mr Warnett of PwC as someone who might act as a non-executive director of the company. This led to PwC being engaged to conduct a review of the company’s cash-flow needs. PwC reported that the company needed an immediate cash injection of £2m and that the receipts in a DVLA client account should be treated as trust monies. A few months later, in December 2008, PwC were appointed as administrators and the assets of the company were disposed of by way of a pre-pack sale.

The company alleges that Mr Warnett was introduced to it on false pretences and was used by Lloyds and PwC as part of a conspiracy to obtain an internal assessment of the company’s affairs, to identify a fictitious need for additional finance that could then be provided by Lloyds on terms that gave it effective control over the company and the means to force them into administration so that their business and assets could be sold at an undervalue for the benefit of Lloyds. The company is claiming up to £54m from PwC and Lloyds.

Pre-action, the Defendants threatened security for costs, which led to the Joint Liquidators of the company obtaining ATE policies from QBE (for a primary and tertiary layer) and Elite Insurance (for a secondary layer). The Joint Liquidators subsequently obtained 4th and 5th layers bringing the total sum insured up to £5m. Redacted copies of the ATE policies were provided to the Defendants, who pointed out that the policies could be avoided for non-disclosure or misrepresentation and that they were therefore not equivalent to a payment into court or deed of indemnity issued by an insurer. The Defendants asked for a deed of indemnity to be provided, which could cost the company up to £1m more than the premium to put in place. In the absence of a deed of indemnity, the Defendants issued an application for security of costs for a collective sum of £7.2m.

The application turned on whether an ATE policy that has no anti-avoidance provisions constituted adequate security for costs. The starting point for ordering security for costs is whether the court has jurisdiction to make such an order. The jurisdictional threshold will only be met if the court is satisfied that there is reason to believe that a claimant will be unable to pay the defendant’s costs if ordered to do so.

At first instance, the Judge held that the Defendants had failed to satisfy him that there was reason to believe that the company would be unable to pay the Defendants’ costs, so he had no jurisdiction to make an order for security for costs. His decision largely turned on two points: (1) that the evidence of the managing director of the company (Mr Elliott), if disbelieved or found to be unreliable, would unlikely provide grounds for the insurers to avoid the policies or deny liability; and (2) that the ATE policies had been taken out with the assistance of experienced lawyers and that the Claimant had no commercial interest in acting so as to breach its conditions (the Geophysical argument).

On appeal, the Defendants argued that the ATE policies obtained by the company should not be considered at all. The CA rejected this submission and held that it was necessary to consider whether the particular ATE policy in this case gives the Defendants sufficient protection. The CA did not dispute various first instance decisions which held that  an ATE policy may suffice as a defence to security for costs provided that it is properly drafted and depending on the terms of the policy. This position remains good law. The CA has confirmed that, in cases where there is ATE insurance in place, the starting point in considering whether the court has jurisdiction to order security for costs is the terms of the ATE policy.

What did the Court decide?

Where the Claimants fell down in this matter was the terms of the ATE policy, which were insufficient. The CA noted that, in a number of first instance decisions which refused to make an order for security for costs because there was ATE in place, the terms of the policies included some form of anti-avoidance provision, usually along the lines of “The insurer shall not be entitled to avoid this policy for non-disclosure or misrepresentation at the time of the placement except where such non-disclosure was fraudulent on your part”.

The CA held that it may not be a particularly difficult exercise for a judge to assess the likelihood of avoidance if the right to avoid is confined to fraud but, where there is no anti-avoidance clause of any kind, the exercise is very much more difficult and the defendant’s need for assurance is all the greater. In addition, the CA held that Mr Elliott’s evidence was likely to be central to the case and that, if Mr Elliott is not believed, then the company will lose and be liable for the Defendants’ costs. Whilst the CA held that it does not automatically follow that the insurers would then avoid the policies, there was insufficient information before the CA to judge the likelihood of such avoidance. The CA therefore found that the jurisdictional requirement was satisfied and ordered the Claimant to pay security for costs. It is also worth mentioning that this was not a case where ordering security for costs could lead to the claim being stifled and this was accepted by the Claimant.