Insolvency – security for costs

A recent case ruling has left insolvency practitioners wondering how they are to bring action in the name of the company they represent.

The courts may make an order for security of the case’s costs if it’s satisfied with all the circumstances. It’s just to make an order if the claimant is a company or other body, and there is reason to believe it’s able to repay the defendant’s costs if ordered to do so. A company in administration or liquidation is unlikely to have a sum of money available to pay a court to satisfy this requirement.

After the event insurance

Historically, insolvency practitioners have got around the problem by applying for ‘after the event’ insurance. These policies would ordinarily cover the other side’s costs if a claim was unsuccessful. However, going forward, the courts will see an insurance policy as an inadequate form of security. This is because as with any insurance policy, there is no 100% guarantee that the insurer will pay out when called upon to do so.

Very often, the only route available for the Administrator or Liquidator to collect monies due back to the company is via the court. All too often, the insolvency practitioner asks for some good faith with debtors who simply will not pay because; “the company is bust, and they won’t be able to chase me.” Unfortunately, it appears these claims may fall at the first hurdle if the defendant simply asks the security for costs.

Fighting funds

There are other ways around this problem; such as seeking a fighting fund from creditors. However, the likelihood of this happening is remote, as creditors may view this as simply throwing good money at a lost cause.

In summary

Insolvency procedures are likely to involve various legal costs. In the past, insolvency practitioners would have taken out ‘after the event’ insurance to cover the opposing side’s costs should they lose the case. However, this is no guarantee of receiving a pay-out, and the administrator or liquidator may be faced with having to claim their money back via the court or ask for ‘fighting funds’ from the creditors.

Wilson Field has successfully gained sanction from HMRC to fund litigation in certain circumstances. Claims can also be assigned where the Liquidator or Administrator can recover the benefit of the net recovery on a percentage basis.