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Insolvency – security for costs

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

The courts may make an order for security of the costs if it is satisfied having regard to all of the circumstances of the case. It is just to make an order if the claimant is a company or other body and there is reason to believe it will be able to repay defendant’s costs if ordered to do so. Clearly a company in Administration or in Liquidation is unlikely to have a sum of money available to pay into court to satisfy this requirement.

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

Very often the only route available for the Administrator/Liquidator to collect monies due back to the company is via the court. All too often the insolvency practitioner asks faith with debtors who simply will not pay for no other reason than “the company is bust and it 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.

There are other ways round this problem such as seeking a fighting fund from creditors. However the likelihood of this happening is remote as creditors will view this as simply throwing good money after bad. Wilson Field has successfully gained sanction from HMRC to fund litigation in certain circumstances. Claims can also be assigned where the Liquidator/Administrator can recover the benefit of the net recovery on a percentage basis.

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