Case law update

IPA Insolvency Practitioner newsletter, October 2024

An insolvency case law update prepared by Alison Kirby, Associate Director at Manolete Partners PLC.

ATE Policy Does Not provide Adequate Protection and Litigation Funder ordered to provide security for costs

Asertis Ltd v Lewis Barry Bloch [2024] EWHC 2393 (Ch)

Background

Genesis Capital (UK) Ltd (“Genesis”) was wound up by the Court on 31.07.19. the joint liquidators appointed over Genesis assigned certain claims to the Claimant in this matter (“Asertis”). Asertis issued proceedings against the defendant (“Mr Bloch”) asserting a breach of the duties that he owed to Genesis as its Director in permitting £2,754,170.60 to be transferred to a third party.

The Court proceedings were case managed and both parties filed costs budgets: Asertis’s budget totalled £295,645 and Mr Bloch’s amended budget totalled £524,989.63. Mr Bloch applied for security for costs on the basis that there is reason to believe that Asertis will be unable to pay his costs if ordered to do so.

The Jurisdiction to make security for costs

The jurisdiction is contained in CPR 25.12 and 25.13. The Court of Appeal in Jirehouse Capital v Beller [2009] 1 WLR 751 held that it is not required to be satisfied on a balance of probabilities, it is sufficient that there is ‘reason to believe’. At that point a discretion to order security arises. The application caused both Claimant and Defendant to file two witness statements to assist ICC Judge Mullen to make a decision.

The Financial Position of Asertis

Asertis was incorporated on 22.03.18. By reference to its filed accounts ICC Judge Mullen observed amongst other things that:

1. Asertis has filed audited accounts for the financial years ended 31 December 2020 to 31^st December 2022. Dormant accounts were filed for previous years.
2. The filed accounts to y/e 31.12.21 that its loss for the financial year was £2,965,831 although fair value gains on its portfolio of funding was £5,174,917 before tax, which resulted in a post tax income for the year of £800,821. Its operating loss was £3,017,54;
3. The previous year had been loss-making, although the loss for the earlier year was £910,729;
4. On the face of it, Asertis’ trading has worsened since 2020;
5. Asertis has the benefit of a £200M revolving credit facility although the terms of it were not in evidence;
6. Asertis refer to having an ATE policy in place.

Having reviewed the limited financial information available, ICC Judge Mullen considered there was ‘reason to believe’ that Asertis will not be able to meet an adverse costs order, being the test in CPR 25.13. ICC Judge Mullen referred to Asertis being a new company, which only began trading in 2020 and has been trading at a loss. The trajectory shown by the limited financial statements suggested a worsening trading position and an eroding balance sheet and ICC Judge Mullen concluded there was nothing available to him to suggest that it was now trading profitably or will be so trading at the time it might be called upon to make payment under an adverse costs order. He then went on to consider the ATE policy.

ATE policies in the context of security for costs applications.

In Michael Phillips Architects v Riklin [2010] EWHC 834 (Ch) the principles were summarised as:

1. ATE can provide sufficient protection;
2. It will be rare to be as good as payment into Court;
3. It must be demonstrated to that it does actually provide security;
4. The amount fixed by a security for costs can be reduced to take account that ATE could cover the defendant’s costs;
5. Examples of deficiencies in the policy were also given, such as limitation on scope or the ability to avoid the policy for fraud.

In this case the ATE policy was entered into on 22.03.24 and was limited to £250,000 for opponent’s costs. The detailed terms were scrutinised by ICC Judge Mullen at length, and he concluded that the terms of this ATE policy cannot be regarded as providing sufficient protection to Mr Bloch as there was a real risk that the policy will not meet the adverse costs order in full.

In considering the appropriate order to make, the Judge was conscious that a costs management order had not yet been made, so that the costs had not been budgeted. He also considered the Defendant’s costs to be inflated, for example allowance for 2 partners, an associate and paralegal at the trial. Given those concerns ICC Judge Mullen decided not to make an order now for the whole of the amount payable into Court and instead directed that:

1. A payment shall to be made in respect of 60% of Mr Bloch’s incurred costs at the date of the making of the costs management order; and
2. 70% of the costs agreed or approved on the making of a costs management order;
3. Both amounts payable within 28 days from the making of that order.

Conclusion

The choice of partner for litigation funding and/or ATE policy is a serious consideration to be investigated thoroughly to ensure that the office holder has the fullest of protection from adverse costs.

Content courtesy of IPA corporate partner Manolete Partners PLC.

Please note that guest content does not necessarily represent the views of the IPA.