Security for costs: part 1
8th Feb 2018
A recent decision of the Federal Court considered whether evidence as to the existence of a policy of after the event (ATE) insurance constituted adequate security for the respondents' costs.
When liquidators or administrators look into the affairs of companies under their control, their investigations can sometimes lead to the potential for claims to be brought for the benefit of creditors. However, given the fact that these companies are often without funds, the ability to prosecute a claim can often be impeded if a defendant/respondent makes an application for security for its costs and such application cannot be met.
Traditionally, defendants and courts have preferred security in the form of payment of funds into court or the provision of a bank guarantee. Both these traditional forms of security involve an upfront payment of funds, which are then effectively quarantined until the outcome of the litigation is known. This adds to the financial burden on the plaintiff/applicant of running the claim, particularly if ATE insurance has also been obtained, as the premiums for such insurance are relatively high.
In Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited  FCA 699, the issue at stake before the Court was whether it was adequate for the applicant to provide security for the respondents' costs by adducing evidence of an ATE policy it had obtained.
The applicant company (Petersen) brought a representative proceeding on behalf of a class who had all suffered losses arising from their purchase of a financial product which was operated by one of the respondents, DOH Graham Limited (DOH), as agent for the other respondent, the Bank of Queensland Limited (BOQ). The proceedings were funded by a litigation funder, Vannin Capital Operations Limited (Vannin), a funder registered in Malta.
Vannin indicated that it was prepared to provide reasonable security for the respondents' costs, but sought to provide it by way of evidence of a policy of ATE insurance that it had obtained from AmTrust Europe (AmTrust). The respondents on the other hand asserted that the AmTrust policy did not provide adequate security and that the traditional forms of security, being payment into court or the provision of a bank guarantee, should be ordered instead.
At least one of the respondents, DOH, had indicated that it might accept an appropriately worded unconditional indemnity in its favour from AmTrust. However, Petersen/Vannin did not offer such indemnity, instead preferring to test the Court’s attitude towards the insurance policy. Relevantly, two Victorian Supreme Court cases handed down in September 2015 held that an appropriately worded deed of indemnity from an ATE insurer may suffice as security for a defendant's costs.
CASE AGAINST ACCEPTING THE ATE POLICY AS SECURITY
BOQ and DOH were united in their opposition to Petersen's position and put forward a number of arguments as to why the AmTrust Policy was inadequate as security, including the following:
- The respondents were not parties to the AmTrust policy and AmTrust had assumed no direct obligation towards them.
- The policy contained several exclusions, which potentially brought into play circumstances that were beyond the respondents' control.
- The inclusion in the policy of an under-insurance clause which would be detrimental to the respondents if enlivened as it would decrease the amount payable under the policy.
- The burden of enforcement of the policy if AmTrust failed to respond to a claim.
Aside from policy exclusions, there was the potential for the policy to be cancelled or the amount payable reduced if Petersen either fraudulently or non-fraudulently breached its duty of disclosure to AmTrust.
The requirement in the policy that Petersen and its legal representatives control the litigation conflicted with the funder's entitlement in the funding agreement to exercise a certain level of control, which could lead to a breach of the policy.
Certain obligations contained in the policy ran counter to 'the proper administration of justice', as they required Petersen's legal representatives to defer management of any adverse costs arguments to AmTrust, and this might result in Petersen taking a position that was not reasonably sustainable and may lead to Petersen's legal representatives breaching their paramount duty to the court.
The cost of obtaining an unconditional deed of indemnity in favour of the respondents (which Vannin did not do) was approximately $550,000 to cover a potential costs liability of $5.5 million. This substantial amount suggested that the risk assumed by AmTrust under the deed was significantly higher than the risk it assumed under the policy, and by implication the policy provided significantly less comfort to the respondents than an unconditional deed of indemnity would.
One overarching concern voiced by DOH was that acceptance of the AmTrust policy as security 'renders DOH hostage to the conduct of the applicant (and funder), whose interests are opposed to those of DOH in this litigation. There can be no presumption that they have acted, and will continue to act, in such a way as to ensure the limits of the AmTrust Policy remain or will remain available...': .
Insurance policies are by their nature full of conditions and obligations, which serve to define and limit the insurer's risk. But parties who have paid very significant premiums for those policies are likely to be highly motivated to do everything possible to keep them on foot and not do anything to prejudice the likelihood of them responding positively to a claim.
The arguments advanced by the respondents focused on an assertion that the risk to the respondents of accepting the ATE policy as security was a significantly higher risk than that assumed by Petersen and Vannin.
For example, the respondents were essentially blind to the process by which Vannin had applied for the policy (and any relevant non-disclosure); they had no control over any circumstances which might trigger exclusions, cancellations or reduced cover; and the evidence suggested that even the insurer considered that the risk assumed by it under the policy was substantially less than the risk it would assume if it provided a deed of indemnity to the respondents.
Kim May is Senior Litigation Manager at Litigation Lending, Sydney.
This is the first article in a series of two. Her next article discusses whether the ATE policy in this case offers adequate security.
A version of this article first appeared in the December 2017 edition of the Australian Restructuring Insolvency and Turnaround Association Journal, 34-6.
The views and opinions expressed in these articles are the authors' and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).