Don’t delay in getting security!

In a recent Judgment, the Commercial Court has given guidance to Defendants when seeking security for costs. The matter of Accident Exchange Limited & Ors v McLean & Ors [2018] EWHC 1533 (Comm) (12 June 2018) concerned allegations of conspiracy and deceit against the Defendants, who consisted of both firms of solicitors, and their employees/officers.

The claim was unusual. The Claimants were in the business of providing replacement cars on credit hire terms to those whose cars had been damaged in a collision. The intention was that the Claimants would recover the cost of hiring the car from the insurers of the drivers at fault. It was understood that the recovery which the Claimants could make against the insurers was for the market rate of hire of the cars, not for the other charges which were included in the credit hire terms.

A company, Autofocus, was in the business of providing advice and expert reports to insurers. Those expert reports identified that the market hire rates were, in fact, lower than they actually were. The result was that the Claimants recovered less from the insurers than they should have done.

The direct losses claimed were in the region of £60 million, with a further £50 million to £60 million in respect of consequential losses.

The Defendants’ costs for the litigation were estimated at £19 million to trial. Security was sought for 80% of those costs, in three tranches; those already incurred, costs to be incurred to the end of July, and those costs to be incurred from the end of July to the end of trial. It was widely accepted that, if the Claimants had their claim dismissed, they would be unable to pay the costs ordered to be paid to the Defendants.

The Claimants raised grounds of opposition to the security application; first, that the order would stifle the claim and, secondly, that there had been a significant delay in the application being made.

On the first ground, the Court found that, despite the claimants’ complex ownership structure and precarious financial position, they failed to show that they would be unable to obtain funding to continue to run their claim, and it would not be unjust to order security.

With regard to delay, the Court agreed that the security application was being made at a late stage. The trial was listed for October, with the security applications made in April.

The Court considered correspondence on the security issue, which was originally raised by the 9th and 10th Defendants in April 2016. The claimants responded, outlining that they had ‘taken further measures to improve their balance sheet’. Further information on the Claimants’ financial position was requested, and in September 2016 the Claimants stated that a refinancing would be taking place, ‘subject to shareholder approval’. Given this, the Defendants did not pursue the matter of security further. However, in October, unbeknownst to the Defendants the refinancing was not approved. No further queries were raised on security until January 2018.

The Claimants contended that there was culpable delay between around November 2016 and January 2018. They alleged that, first, a prudent solicitor would immediately have asked for details of when shareholder approval was to be given, and secondly, that the Defendant should have kept the matter under review, for example by inspecting the Claimants’ accounts in March 2017, which would have revealed that approval had not been obtained.

Teare J partly agreed that the delay was to be taken into account, and that there should be some reduction reflected in the amount ordered by way of security. This was a major piece of litigation, and given that the Defendants had raised the issue of security, they should have pursued it.

On ordering security, Teare J was mindful of the quantum of the payment to be made. 80% of the Defendants’ costs were sought. The Court felt this was high, and that on a broad brush basis, an allowance of 60% was more reasonable, applying the reasoning of the Court of Appeal in Stokors SA & Ors v IG Markets Ltd. With regard to the reduction for the delay, the Court ordered 60% of the first tranche (incurred costs to date). In relation to tranches 2 and 3, the Court ordered 60% of the costs to be incurred.

This matter provides useful guidance on the importance placed by the Court on the punctuality of making security for costs applications. Once raised by a Defendant, it is clear that the best course of action is to pursue the security, in order to avoid being penalised later when the same is ordered.