ATE Policies: Not Always Straightforward!

Background

One decision by Lady Wolffe that readers may have missed over the summer is her note in the case of Centenary 6 Limited v The Joint Liquidators of Centenary Holdings III Limited. In summary, a shareholder and contributory was attempting to sue the joint liquidators for £22,000,000 under section 212 of the Insolvency Act 1986. The court accepted that “there was reason to believe that the noter [Centenary 6 Ltd] would be unable to pay the [joint liquidators’] expenses” if they were successful and ordered caution in the sum of £100,000.

Chapter 33 of the Rules of the Court of Session

In terms of Chapter 33 a party ordered to find caution must either consign the relevant sum of money or obtain a Bond of Caution. The court can approve another method of security.

Centenary 6’s Proposals

In summary, and after many months, Centenary produced an after the event insurance policy purportedly offering cover for £100,000 of adverse expenses. The joint liquidators attacked the ATE Policy on the grounds that there was no obligation to indemnify if anything giving rise to the claim was “dishonest, misleading, exaggerated, fraudulent or false in any respect”. There were apparently other provisions for the insurer to withdraw indemnity if Centenary 6 did not fulfil obligations. At that stage Centenary 6 had the case continued on the basis that they would apply for a Bond of Caution. There then followed a series of hearings before eventually a Bond of Caution was produced, albeit not signed by all necessary parties. 

Decision of the Court

Lady Wolffe decided that quoting from previous authority, that the security ordered by caution must be the provision “of a guarantee of the [joint liquidators’] judicial expenses, rather than merely a level of comfort.” She did not consider that either the ATE Policy or the proposed Bond of Caution did that or fulfilled the purpose of Rule of Court 33. She found that the ATE Policy had too many features out with the control of the noters, or left to the discretion of the insurer. In relation to the proposed Bond, not only was it unsigned, but it purported to be conditional on the court approving the deed, but at the same time it purported to be subject to the exclusive jurisdiction of the English courts. As such, the court could not draw conclusions or approve the Deed and given it had not been brought properly into existence there was no binding undertaking or Bond of Caution. More time was refused and the note was refused. 

Advice

We understand that the decision may be appealed. However, from an insolvency practitioner’s point of view the case makes interesting reading. While it may be correct that there is an implied undertaking by an office holder raising proceedings that there are sufficient funds in the trust estate to meet any award of expenses, some courts will still order that caution be found in relation to an office holder. The decision shows that not all ATE Policies or Bonds of Caution are equal and advice should be taken to carefully chart the best approach in such circumstances. 

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk).This briefing note is current as at 27th July 2017 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).