Security for costs: Claimant ordered to provide security despite ATE policy with anti-avoidance endorsement

The High Court has ordered a claimant to pay funds into court by way of security for the defendant's costs, despite the claimant having taken out an after the event (ATE) insurance policy with an anti-avoidance endorsement: Asertis Ltd v Lewis Barry Bloch [2024] EWHC 2393 (Ch).

The decision acts as a reminder of the relatively low threshold needed to trigger the court's discretion to order security for costs against a corporate claimant, namely if there is "reason to believe" the claimant will be unable to pay the defendant's costs if ordered to do so. In practice, as illustrated by this case, the court may not give a claimant the benefit of the doubt where it chooses to provide only very limited financial information in response to an application for security.

It also shows that an ATE policy will not prevent the court ordering security where the defendant can show there is a real, as opposed to fanciful, risk that the policy will not respond in full. An anti-avoidance endorsement may be helpful in resisting an application, but is unlikely to be a complete answer if there remain circumstances which mean that cover can be avoided and these are outside the defendant's control. A lack of any provision allowing the defendant to enforce the policy directly against the insurer may also be fatal, as that will leave the defendant exposed to the risk of the claimant's insolvency.

Background

The underlying claim is against a former director of Genesis Capital (UK) Ltd (now in liquidation) alleging a breach of his duties as director. The claim is brought by Asertis Ltd, a litigation funder, under an assignment from the company's joint liquidators.

The defendant applied for security for costs on the basis that there is reason to believe that Asertis will be unable to pay the defendant's costs if ordered to do so (which is one of the grounds on which the court can order security for costs against a corporate claimant, under CPR 25.13(2)).

Asertis defended the application, relying in part on a £200 million revolving credit facility and in part on a £250,000 ATE policy it had taken out in respect of the claim, which was supplemented by an anti-avoidance endorsement for the first £160,000 of cover.

Decision

The High Court (ICC Judge Mullen) granted the application for security for costs.

The judge noted that the court has a discretion to order security where there is "reason to believe" the claimant will be unable to pay the defendant's costs. The court does not have to be satisfied on the balance of probabilities.

Asertis's financial position

In the present case, no attempt had been made to demonstrate Asertis's financial position beyond referring to its accounts and the credit facility.

Although Asertis had pointed to statements on its website that it was funded by two investors with assets under management of several billion euros, the judge said he could give no weight to statements on the website, and in any event they did not tell the court anything about the likelihood of funds being made available to the company to meet a costs order.

The limited financial information available gave “reason to believe” that Asertis would not be able to meet an adverse costs order. It had only begun trading in 2020 and had been trading at a loss. Its assets were overwhelmingly the value of the claims it was pursuing, which values were uncertain and might not be easily realisable. Asertis could have provided a fuller and more up-to-date picture of its financial position, but had not done so. There was no information available to suggest that it would be trading profitably at the time it might be called on to pay adverse costs.

That was not altered by the revolving credit facility, the terms of which were not provided to the court. It was not clear whether credit could be advanced to meet adverse costs orders, or would be advanced if Asertis's financial position had significantly worsened at the point at which the costs fell due.

It was therefore necessary to consider whether the ATE policy provided sufficient protection to the defendant.

Relevance of the ATE policy

The judge noted that there was no real disagreement as to the principles. These are, in broad summary, that an ATE policy can provide sufficient protection to a defendant, but the claimant must demonstrate that it actually does provide security, ie that there are no terms or circumstances in which the insurers can readily and legitimately avoid liability to pay out for the defendant's costs.

An anti-avoidance endorsement may ameliorate the risk of the ATE policy being avoided on the grounds of fraud, but that will depend on its terms, including any limitations on the scope or amount of the anti-avoidance endorsement and whether there remains a reasonable apprehension of avoidance.

The judge emphasised that the defendant is required only to show that there is a real, as opposed to fanciful, risk that the ATE policy will not respond in full, and in considering whether there is such a risk the court will take a pragmatic view.

In the present case, there were a number of features that meant the ATE policy did not give sufficient protection despite the anti-avoidance endorsement. These included:

• The policy was limited to £250,000, which meant it might be inadequate to meet the defendant's costs (which were said to be approximately £340,000 in his original costs budget and £525,000 in an updated budget).
• The defendant could not enforce the ATE policy directly against the insurer, which gave rise to a risk that its proceeds would not be available to the defendant if Asertis became insolvent.
• Payment under the ATE policy was contingent on numerous conditions, including for example the claimant entering into a valid CFA or DBA with its solicitor and not changing solicitor without the insurer's prior written approval, and the solicitor not deeming that the claimant's prospects had fallen below 50%. The defendant had no way of policing compliance with those conditions.
• The termination provisions did not require the defendant to be given notice of termination, and it was not clear whether the policy would cover the defendant's costs up to the point of termination.

The judge did not consider it appropriate to ascribe any value to the policy so as to reduce the amount payable into court by way of security, given the numerous termination provisions and the uncertainties as to the effect of termination.

Since the costs management conference had yet to take place, and the judge had some concerns at the level of the defendant's costs budgets, he decided not to order the payment of fixed sums to cover the whole of the litigation. Instead he ordered the claimant to pay into court approximately £101,000 (which was 60% of the defendant's incurred costs to date) plus, within 28 days of the making of a costs management order, 60% of the defendant's incurred costs as at the date of the order and 70% of its estimated costs as approved in the order.