Litigation funder's ATE policy was not sufficient to avoid security for costs order

In Asertis v Lewis Barry Bloch [2024] EWHC 2393 (Ch), a litigation funder has been ordered to pay security for costs into court due to concerns it would not be able to meet an adverse costs order, and that its After-The-Event insurance policy would not meet such an order.

Background

Genesis Capital (UK) Ltd (Genesis) was a company in the South Africa-based investment banking Genesis Capital Group. Liquidators were appointed after Genesis was wound up by the court on 31 July 2019. The liquidators assigned claims against Genesis' sole director, Lewis Barry Bloch (Mr Bloch) in December 2022 to Asertis Ltd (Asertis), a litigation funder. The claims related to alleged breaches of directorial duties by Mr Bloch in permitting a payment from Genesis' bank account of nearly £3m to another party. Proceedings were issued by Asertis against Mr Bloch in June 2023.

At a hearing in June 2024, the court heard an application for security for costs made by Mr Bloch. The application was made as Mr Bloch considered there was reason to believe Asertis would not be able to pay an adverse costs order if one was made against the funder if it is unsuccessful in the litigation. This is due to the accounts of Asertis showing that the company began trading in 2020 and has yet to make a profit.

Asertis defended the application, rejecting Mr Bloch's interpretation of its accounts and submitting that it has the benefit of a revolving credit facility with US Bank Trustees Limited and an After-The-Event (ATE) insurance policy with an anti-avoidance endorsement (AAE).

Decision

Judge Millen granted the application, ordering that Asertis has to make a payment into court for costs. It was found that Mr Bloch's reason to believe Asertis would be unable to pay his costs if required could be upheld for the following reasons:

• Asertis has been trading at a loss since it began operating in 2020, the company's assets are largely the value of claims it is pursuing (which are not certain) and the accounts suggest a deteriorating financial position;
• No terms of the £200m revolving credit facility available to Asertis were entered into evidence, and therefore it was unclear whether such a facility could be used to pay an adverse costs order;
• The ATE policy had a limit of £250,000, which is lower than Mr Bloch's budgeted costs, and the policy and AAE contain numerous termination clauses which, if invoked, would mean none of Mr Bloch's costs would be payable.

Much of the judgment focuses on considering the ATE policy, with Judge Millen beginning his consideration of the ATE policy by addressing case law raised in submissions by counsel. It was noted that in Michael Phillips Architects v Riklin [2010] EWHC 834 (TCC), Akenhead J summed up the case law by stating:

“[…]What one can take from these cases, and as a matter of commercial common sense, is as follows:

(a) There is no reason in principle why an ATE insurance policy which covers the claimant’s liability to pay the defendant’s costs, subject to its terms, could not provide some or some element of security for the defendant’s costs. It can provide sufficient protection.

(b) It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the defendant, and because the promise to pay under the policy will be to the claimant

(c) It is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant’s costs.

(d) There is no reason in principle why the amount fixed by a security for costs order could not be somewhat reduced to take into account any realistic probability that the ATE insurance would cover the costs of the defendant.”

Having considered the case law, and the various clauses in the AAE which would enable insurers to void the policy, Judge Millen held:

"In my judgment the ATE Policy cannot be regarded as providing sufficient protection to Mr Bloch, even on the basis that the AAE applies. There is a real risk that the policy will not meet an adverse costs order in full. It offers no protection in respect of the costs incurred in the nine months before the policy was taken out, …and is limited to £250,000, which at the very least raises a risk that it would be inadequate to meet Mr Bloch’s costs in any event, given the level of costs disclosed by both the original and revised costs budgets filed by him."

He also confirmed that Mr Bloch had not suggested that "the claim does not have a real, as opposed to fanciful, prospect of success".

Judge Millen ordered Asertis to pay into court an initial payment of £101,317.31, being 60% of Mr Bloch's incurred costs. He further ordered that following the Costs and Case Management Conference (CCMC) listed for November 2024, Asertis pays into court 60% of Mr Bloch's costs incurred between his cost budget dated 14 June 2024 and the date of the CCMC, as well as 70% of the court approved estimated costs.

Comment

The number of corporate insolvencies remain high, as shown in the latest Insolvency Service report, and we are seeing a growing number of claims being brought against the former directors of insolvent companies – many of which have been assigned from liquidators to litigation funders.  If such companies have limited cash available to them, the terms of any credit facility and ATE insurance are subject to be scrutinised when considering whether the funder has the funds to meet any adverse costs order. The Court's decision is a reminder that there is a relatively low hurdle required to show that an ATE policy will not respond to an adverse costs order amounting to an "unjustifiable element of doubt about the extent of the cover."

D&O insurers who are covering the costs of claims brought by litigation funders may want to carefully consider the financial viability of the relevant funder, as well as any credit facilities and ATE insurance, and consider whether a security for costs application should be made.