Kerry Underwood


with 2 comments

This piece, in slightly different form, first appeared on the Practical Law Dispute Resolution Blog.

Kerry Underwood offers consultancy services in relation to this and other matters and details are here.

ATE Insurance; Shareholder Funding

There has been a number of recent cases in relation to security for costs.

In Lewis Thermal Ltd v Cleveland Cable Company Ltd [2018] EWHC 2654 (TCC) (15 August 2018)

the Technology and Construction Court, part of the High Court, ordered a dormant claimant company to provide security for the defendant’s costs in proceedings for breach of contract and fraudulent misrepresentation.

The case shows the difficulty of relying on After-the-Event insurance as security for costs and also is an example of the court taking into account the possibility of shareholder funding when deciding whether to order security against an impecunious company.

Here the claimant had taken an assignment of the claim from an electrical cabling installer shortly before the installer went into liquidation and the defendant had allegedly supplied defective cabling to the installer damaging the installer’s reputation and causing loss of business valued by the claimant at £8 million.

The claimant sought to rely on its ATE policy and the court accepted that it could, in principle, answer a security application – see

Premier Motor Auctions Ltd v PwC [2017] EWCA Civ 1872;  and

Harlequin Property (SVG) Ltd v Wilkins Kennedy [2015] EWHC 1122 (TCC).

However ATE insurance was not adequate security where, for example, there was a risk of the claimant’s insolvency and no guarantee from the insurer to the defendant, and an exclusion of the Contracts (Rights of Third Parties) Act 1999 – see Harlequin above.

Neither was ATE insurance adequate security when there was a risk of the insurer avoiding the policy –

see Catalyst Managerial Services v Libya Africa Investment Portfolio [2017] EWHC 1236 (Comm).

Here the claimant’s ATE policy did not give the defendant direct rights against the insurer and it excluded the Contracts (Rights of Third Parties) Act 1999 and also contained other exclusions.

The court held that these were real and not fanciful risks and there was reason to believe that the claimant would be unable, either itself or through its ATE insurance, to pay the defendant’s costs if ordered to do so.

The court also took into account the fact the claimant’s shareholders, who had apparently already agreed to fund disbursements in the action, had funds available for security.

Subsequently the court varied the security order and allowed security to be provided by a deed of indemnity from the claimant’s After-the-Event insurers for the full amount of the defendant’s budgeted costs.

Security for Costs on Indemnity Basis

In Danilina v Chernukhin and others [2018] EWHC 2503 (Comm)

the Commercial Court ordered the claimant to pay further security to three defendants being 75% of incurred and expected costs, as there was a reasonable possibility of indemnity costs being ordered if the claimant lost, accepting the defendants’ argument that if the claimant lost at trial, it was highly likely that she would be ordered to pay indemnity costs, on the basis that she knowingly gave false evidence, as, on the facts, there was no room for mistaken recollection.

In the absence of a possible indemnity costs order, security was generally ordered by reference to 60 to 70% of incurred and expected costs.

This did not involve considering the merits of the claimant’s claims, it assumed she lost them.

The court held that if this happened, it was likely to be because the claimant was dishonest.

The first defendant was also involved in an arbitration with a third party which raised the same issue as one of the claimant’s claims.

The court held that the apportionment of the defendants’ future costs 65% to the claim and 35% to the arbitration was a reasonable possibility, so could be used for the purpose of the security order.

The claimant was unable to establish that her claim would be stifled if she was ordered to pay the level of security sought.

The third party had already provided funds to the claimant and made it clear that he wished her to pursue and win the proceedings.

The claimant’s statement that the third party had not agreed to provide further security was not “full, frank, clear and unequivocal evidence” that he was not willing or able to provide the security sought.

Although the claimant was being asked to provide security at a late stage, two months before trial, this did not justify declining to make the order, particularly as there was no evidence that providing the security would be burdensome to the third party.

Additional Security for Costs

In Mayr v CMS Cameron McKenna Nabarro Olswang LLP [2018] EWHC 3093 (Comm)

the Commercial Court, part of the High Court, dealt with the principles to be applied when a party makes a second application for security for costs, that is an application for additional security.

This was a claim for professional negligence and in November 2017 the parties agreed that the claimant should provide security for costs in instalments and the defendant then made an application for additional security of £1.45 million.

The court pointed out that case law shows that a party cannot seek additional security purely because the original amount sought was now inadequate; in other words they could not have a second bite at the cherry.

However if there had been a material change of circumstances, then a party could seek additional security.

Here the claimants conceded that there had been a change in circumstances, but stated that it did not warrant the level of additional security being sought.

The court said that if there was doubt about the reasonableness of the figures then that doubt should be resolved in favour of the defendant as the prejudice to the defendant of risking being unable to recover its costs outweighed the prejudice to the claimant.

On the facts, the court made an order for further security in the sum of £1.3 million.

The court also said that on an application for security for costs it should adopt a broad-brush approach and not “descend into the level of detail which will be examined on a detailed assessment… ”

“The question is, what amount is it just to order to protect the defendant from a costs order which the claimant is unable to pay? It is a two stage test and to introduce a limit confining the increase in security to only those items which arise from a change in circumstances is not warranted.”

The overall purpose of giving security for costs is to protect the defendant and that purposes can only be achieved if the court considers the overall figures on the basis of the up to date estimate before the court.” 

Do Not Delay

In Accident Exchange Ltd and another v McLean and others [2018] EWHC 1533 (Comm) (12 June 2018)

the Commercial Court granted the application for security for costs, but significantly reduced the amount ordered in respect of incurred costs due to the solicitors’ delay in making the application.

The decision highlights the importance of defendants taking proactive steps to monitor the claimants’ financial position to ensure that any anticipated improvement in that position which has caused the defendant to hold off from seeking security has, in fact, come to fruition.

The claimants’ case on delay originated from events in October 2016, when the claimants’ then solicitors had stated in correspondence that the claimant had completed, subject to shareholder approval, a refinancing which would strengthen the claimant’s financial position.

Consequently, the solicitors decided not to pursue security at that time.

However, the refinancing was not approved, and the solicitors did not make further enquiries until early 2018.

The claimant contended that there was culpable delay between around November 2016 and January 2018 because:

  • a prudent solicitor would have immediately asked for details of when shareholder approval was to be given.
  • the solicitor should have kept the matter under review, for example by inspecting the claimant’s accounts in March 2017, which would have revealed that approval had not been obtained.

The court noted that this was a major piece of litigation, involving very substantial costs (the solicitors’ total costs to the end of trial were estimated at £19 million).

Consequently, one would have expected the solicitors to pursue the matter and, had they done so, it was very likely that the lack of shareholder approval would have emerged.

Even if the claimant had suggested that the security application should await completion of refinancing negotiations, having regard to the date for trial, it would probably have been made earlier than it was.

On quantum, the judge noted that the solicitors sought security for 80% of their costs.

He referred to Stokors SA v IG Markets Ltd [2012] EWCA Civ 1706, in which the Court of Appeal supported the view that around 60% was appropriate.

Having regard to this and to the solicitors’ delay, he ordered “60 per cent of 60 per cent” of the incurred costs.

In relation to costs to be incurred, he ordered 60% of the costs claimed.

Claimant Did Not Become Defendant By Opposing Discharge Of Receivership

In JSC VTB Bank v Skurikhin and others [2018] EWHC 3072 (Comm) (13 November 2018)

the Commercial Court, part of the High Court, rejected the claimant’s argument that, by resisting an application to discharge a receivership, it had effectively become the defendant, and thus could seek security for costs of that application.

Here receivers have been appointed by way of equitable execution over interests in a limited liability partnership and the claimant opposed the application to discharge that receivership.

It was the claimant who had secured this appointment with a view to recovering assets from the defendant who was the principal defendant in the main litigation.

Thus the claimant was now defending an application against it and argued that, therefore, in respect of that discharge application it was effectively a defendant within the meaning of CPR 25.12(1).

The claimant argued that although this was an interim application it raised issues between the parties that were in substance independent of the main action.

The court rejected the application stating that the claimant had instigated the receivership application in the first place and that the defendant, although the applicant in this application, had not chosen to become a party to the proceedings in the first place.

The application to discharge was a defensive measure by the defendant and had no independent life of its own.

The defendant was not asserting any positive claim against the claimant.


The ability to obtain security for costs is a powerful weapon in litigation, as shown by the unsuccessful attempt by the claimant in this case to put itself in the position of being a defendant.

This case reviews a number of the authorities concerning a security for costs.

Although there have been a number of recent cases, as this piece shows, it is still an underused tool by civil litigators.

Third Party Funders, The Arkin Cap And ATE Insurance


Bailey & Others v GlaxoSmithKline UK Limited [2017] EWHC 3195 (QB)

the Queen’s Bench Division of the High Court ordered the claimants’ litigation funder Managed Legal Solutions Limited (MLS) to pay security for costs pursuant to CPR 25.14, and in excess of the Arkin cap.

MLS had been joined as an Additional Party for the purposes of responding to this application.

The application covered costs from the date that MLS started funding the case and was made on the basis that the defendant intend to seek orders against it at the end of the case, if successful, pursuant to section 51 of the Senior Courts Act 1981, which deals with non-party costs orders.

In fact the key issue here was the amount of security, and the relevant factors to be taken into account in fixing that amount.

The claimants had ATE insurance of £750,000 and argued that all of that sum should be taken into account in relation to the security issue, relying on

Premier Motorauctions Limited v. PWC LLP & another [2017] EWCA Civ 1872.

The claimants also argued that any sum ordered should be limited by the approach referred to in

Arkin v Borchard Lines Limited (Nos 2 and 3) [2005] 1 WLR 3055

generally known as the Arkin cap, that is that the third party funder’s liability for adverse costs should be limited to the same sum as its own investment in the case.

CPR 25.14 specifically provides for security for costs orders to be made against third party funders.

“(1)   The defendant may seek an order against someone other than the claimant, and the court may make an order for security for costs against that person if –

(a)  it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and

(b)  one or more of the conditions in paragraph (2) applies.

(2)  The conditions are that the person –

(a)  has assigned the right to the claim to the claimant with a view to avoiding the possibility of a costs order being made against him; or

(b)  has contributed or agreed to contribute to the claimant’s costs in return for a share of any money or property which the claimant may recover in the proceedings; and

is a person against whom a costs order may be made.”

Managed Legal Solutions was balance sheet insolvent.

On the facts the court here held that two thirds of the value of the ATE insurance cover should be utilized to reduce the level of security for costs.

As the ATE cover was £750,000, the level of security that would otherwise have been made was reduced by £500,000.

The court also held that the Arkin cap did not apply.

This was on the basis that at the end of the case the court had a discretion to disapply that cap

“unless I take into account now the possibility that the cap will not be applied, there is a risk that the security ordered will be insufficient and the ultimate intention of the court of trial (and, perhaps, the Court of Appeal on appeal) so far as the costs are concerned will be frustrated.” (Paragraph 60)

Reading the decision as a whole, it comes close to saying that it thinks that Arkin was wrongly decided.

There is another interesting feature of the case.

Managed Legal Solutions was 49% owned by Mr Michael Hunt.

Mr Hunt was the sole shareholder of a company called Corporate Administration Management Limited, a creditor of Managed Legal Solutions to the tune of £3,465,299 – see paragraph 29 of the judgment.

The court had this to say at paragraph 9:

“Although it is some while ago, and the circumstances were different from those obtaining in the present situation, Mr Hunt, who had been managing director of Nissan UK, was sentenced to 8 years’ imprisonment and disqualified from being a company director in June 1993 following his conviction for serious dishonesty involving many millions of pounds. The press reports exhibited to Ms Caswell’s 5th witness statement indicate that at the time of his sentence, Mr Hunt was aged 59. He must now be in his mid-80s. The substantive assertions concerning his conviction and sentence have not been controverted.”

At present there is no statutory regulation of third party funders.

Maybe there should be.




Written by kerryunderwood

December 4, 2018 at 6:28 am

Posted in Uncategorized

2 Responses

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  1. Good morning Kerry I saw you at the Bolton Law Society and I’ve bought the trilogy ! could you email so I contact you please

    Thanks Paul

    Paul Williams

    December 13, 2018 at 8:40 am

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