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NOTE BY LADY WOLFFE CENTENARY 6 LIMITED AGAINST (FIRST) ROBERT CAVEN AND (SECOND) KEVIN MAWER IN LIQUIDATION OF CENTENARY HOLDINGS III LIMITED


Submitted: 29 June 2017

Web Blue CoS

OUTER HOUSE, COURT OF SESSION

[2017] CSOH 95

P194/16

NOTE BY LADY WOLFFE

CENTENARY 6 LIMITED

Noter

against

(FIRST) ROBERT CAVEN AND (SECOND) KEVIN MAWER

Respondents

In the Liquidation

of

Centenary Holdings III Limited

 

Noter:  McIlvride QC; Ower; TLT LLP

Respondents: Borland QC; CMS Cameron McKenna Nabarro Olswang LLP

 

29 June 2017

Introduction

[1]        By interlocutor dated 5 May 2017:

(i)         I refused to accept an after the event (“ATE “) policy (No 47 of process) (“the ATE Policy”) as a method of security in place of a bond of caution;

(ii)        I refused to accept the deed of indemnity (No 48 of process) (“the Deed of Indemnity”) as a suitable bond of caution;

(iii)       I refused the noter’s further motion (made at the bar) for more time in which to obtain caution; and

(iv)       I also refused the prayer of the note following the noter’s failure to provide caution or any suitable alternative, as previously appointed to do by interlocutors of 14 December 2016, 15 February 2017 and 5 April 2017.

[2]        I also dealt with sundry motions for expenses. The focus of the submissions at the hearing on 29 March and 5 April concerned whether the ATE Policy tendered by the noter constituted sufficient security in lieu of a bond of caution.  The focus of the submissions at the hearing on 5 May 2017 concerned the adequacy of the Deed of Indemnity.

[3]        The noter has reclaimed the interlocutor of 5 May 2017.  The grounds of appeal have not yet been formulated.

[4]        The purpose of this Note is to set out the reasons why I did not accept that the ATE Policy or the Deed of Indemnity proffered by the noter satisfied the requirements of rule 33.4 of the Rules of the Court of Session (“the RCS”).  As a consequence of the noter’s failure to lodge caution, I refused the prayer of the noter’s note.  I also refused the noter’s further motion to allow further time.  As this last matter involved an exercise of the court’s discretion, it is necessary also to set out the relevant procedural history, which is not inconsiderable.

 

Prior order for caution
[5]        The noter is the sole shareholder, and hence contributory, of Centenary Holdings III Limited (“the Company”).  The Company went into liquidation in 2005 and Robert Caven and Kevin Mawer were in due course appointed as joint liquidators of the Company.  The joint liquidators are the respondents to the noter’s application to this court for an order under section 212(3) of the Insolvency Act 1986.  The sum sought is in excess of £22,000,000.  The noter asserts breaches of a variety of duties by the respondents.

[6]        In December 2016 the respondents sought caution for expenses in terms of section 726(2) of the Companies Act 1985 (“the Companies Act”). By interlocutor dated 14 December 2016 (“the December interlocutor”) the Commercial Judge, having been satisfied by credible testimony that there was reason to believe that the noter would be unable to pay the respondents’ expenses if successful in resisting the noter’s claim, ordered caution in the sum of £100,000 and sisted the proceedings pending the lodging of that caution.  However, no time-limit for the lodging of caution was imposed in the December interlocutor.

 

Chapter 33 of the RCS
[7]        Chapter 33 of the RCS governs orders for caution and security.  The issue of caution had been determined by the December interlocutor.  The central issue in the several hearings before me was whether the ATE Policy tendered (and, latterly, the Deed of Indemnity) satisfied the requirements of chapter 33 and, if not, whether further time should be afforded to the noter to provide a bond of caution.  Accordingly, it is only necessary to set out those parts of Chapter 33 governing the procedure where caution is found and the consequences of a failure to find caution.

“Methods of finding caution or giving security

33.4. - (1)         A person ordered-

(a)        to find caution, shall do so by obtaining a bond of caution; or

(b)        to consign a sum of money into court shall do so by consignation under the Court of Session Consignations (Scotland) Act 1895(c) in the name of the Accountant of Court.

(2)        The court may approve a method of security other than one mentioned in paragraph (1), including a combination of two or more methods of security.

(3) Subject to paragraph (4), any document by which an order to find caution or give other security is satisfied shall be lodged in process.

(4)        Where the court approves a security in the form of a deposit of a sum of money in the joint names of the agents of parties, a copy of the deposit receipt, and not the principal, shall be lodged in process.

(5)        A bond of caution or consignation receipt lodged in process shall be accompanied by a copy of it.

Cautioners and guarantors

33.5. A bond of caution or other security shall be given only by a person authorised to carry on a regulated activity under section 31 of the Financial Services and Markets Act 2000.

Form of bonds of caution and other securities

33.6.-(1) A bond of caution shall oblige the cautioner, his heirs and executors to make payment of the sums for which he has become cautioner to the party to whom he is bound, as validly and in the same manner as the party and his heirs and successors, for whom he is cautioner, are obliged.

Sufficiency of caution or security and objections

33.7.-(1) The Deputy Principal Clerk shall satisfy himself that any bond of caution or other document, lodged in process under rule 33.4(3), is in proper form.

(2)        A party who is dissatisfied with the sufficiency or form of the caution or other security offered in obedience to an order of the court may apply by motion for an order under rule 33.10 (failure to find caution or give security).

Failure to find caution or give security

33.10. Where a party fails to find caution or give other security (such a party being in this rule referred to as "the party in default"), any other party may apply by motion-

(a) where the party in default is a pursuer, for decree of absolvitor; or

(b) where the party in default is a defender or a third party, for decree by default or for such other finding or order as the court thinks fit. “

 

[8]        It should be noted that, by virtue of rule 33.6(1), a cautioner’s obligation is co‑extensive with that of the principal obligant on whose behalf he is providing caution. Furthermore, the receipt of a bond in process is clearly without prejudice to a party dissatisfied with the sufficiency or form of caution to bring that matter before the court by motion.  This is the manner in which the respondents proceeded, in their several motions heard on 15 February, 29 March, 5 April and 5 May 2017.

 

The ATE Policy

[9]        The ATE Policy produced is comprised of:

(i)         a two-page “Policy Schedule for Quotation” (“the Policy Schedule”), and

(ii)        a twenty-page standard form document, entitled “Commercial After the Event Legal Expenses Insurance Policy-Scotland: Policy Document” (“the Policy Document”).

In terms of the Policy Schedule the limit of cover was £300,000, subject to special condition 1, and the commencement date was stated to be 27 February 2017.  (There do not appear to be any special conditions contained in the Policy document.)  Payment was deferred to the “Policy ends”.  The signature bears to be effected by a stamp of the Elite Insurance Company Limited (“Elite”), the insurers.

[10]      I do not here set out the terms of the Policy Document.  Nothing turns on the precise wording of its terms.  Parties made extensive reference to the Policy Document in the course of their submissions and it suffices to note its terms from those submissions, which I record below.

 

Procedural history

Interlocutor of 15 February 2016:

[11]      No caution was produced by the noter following the December interlocutor.  In the absence of any time-limit being stipulated in the December interlocutor, the respondents enrolled a motion in mid-February 2017 inter alia to recall the sist and for specification of a date by which caution was to be lodged.  The noter opposed this motion quoad certification.  By interlocutor dated 15 February I required caution to be lodged within 28 days, that is by 15 March and of new sisted the proceedings meantime, in accordance with section 726(2) of the Companies Act.  There was no mention at that time that the noter was considering obtaining an ATE Policy in lieu of a bond of caution.

 

Respondents’ motion in March 2017 for absolvitor:

[12]      On 16 March 2017 the respondents enrolled a motion for, among other things, absolvitor in terms of RCS 33.10(a) by reason of the noter’s failure to lodge caution.  This was opposed and the matter called again before me on 29 March 2017.  Mr Duthie appeared on that occasion for the respondents, as he had done at the hearing on 14 December 2016. The noter was represented by Mr McIlvride QC, who appeared on behalf of the noter at all of the hearings referred to in this Note.

[13]      The focus of the discussion at the hearing on 29 March 2017 was whether the ATE Policy intimated by the noter’s agents to the respondents on 14 March (and whose provisions I have summarised above) satisfied the requirements for caution.  The respondents contended that it did not. After outlining the background, Mr Duthie referred to the ATE Policy produced by the noter.  If this was tendered as an alternative to caution, no motion had been enrolled in terms of r 33.4(2).  The noter’s agents had given no indication that it was proposing to satisfy the December interlocutor by the provision of the ATE Policy, until this was intimated to them on 14 March 2017.  Reference was made to correspondence from the noter’s agents, TLT LLP (responding to chasing letters sent by the respondents’ agents, CMS Cameron McKenna LLP):  in TLT’s letter of 12 January 2017 they explained that the client was based in Australia and they would revert with “the estimated delivery date of the caution to be lodged” and in TLT’s letter of 24 January 2017, they referred to discussions with third party legal insurers and expected to be “lodging the required amount”.  The tenor of TLT’s letters was suggestive of their lodging a bond of caution in compliance with the December interlocutor.

[14]      Mr Duthie argued that the ATE Policy was inadequate. It was clear that in certain circumstances, the subsistence of, or payment under, the ATE Policy was predicated on the noter’s conduct.  In this context, Mr Duthie referred to clause 2.2.2 (failure or delay by the noter to advise Elite about an incident may invalidate right to claim); clause 2.3.3 (referring to Elite determining whether it will agree to meet a claim); and clause 2.5 (Elite’s entitlement to refuse a claim in the event anything giving rise to a claim is “dishonest, misleading exaggerated, fraudulent or false in any respect”).  Furthermore, other provisions entitled Elite to withdraw insurance in the event of non-compliance on the part of the noter.  The following clauses were said to illustrate this: clause 3.1.1 (obligation to notify Elite upon the “discovery of any facts, evidence, development or circumstance, barristers [sic] opinion or expert report which may materially affect the prospects of success”);  clause 3.1.2  (obligation to notify of any offer or tenders in respect of opponents costs);  and the exclusions in clause 5.1.18. of costs incurred at any time when, “in our opinion” the legal dispute does not have prospects of success (sub-clause 5.1.18.2) ); an exclusion in the event of abandonment etc of the dispute owing to the noter’s lack of funds (sub-clause 5.1.18.6);  and the exclusion of any costs associated with an application for security for costs (sub-clause 5.1.18.16).  Mr Duthie also noted that the ATE Policy could be discontinued in the event of the insolvency of the noter (clause 9.2) and Elite had the power to cancel “immediately without any further liability for….opponent’s costs” in the event that Elite or the noter’s legal representatives considered that the dispute did not have prospects of success.

[15]      In summary, Mr Duthie argued that there were significant shortcomings in the ATE Policy.  Too much discretion was retained by the insurer, Elite, or too much was contingent on the conduct of the noter.  Previous expenses were not covered.  In the 15 weeks that had passed since the December interlocutor the noter had failed to provide caution and decree of absolvitor should be granted.

[16]      Mr Duthie referred to paragraphs 20, 23 and 24 of the case of Monarch Energy Ltd v Powergen Retail Ltd 2006 SLT 743 and to Lord Drummond Young’s rejection of the ATE Policy offered in that case, on the basis that it offered merely a “level of comfort” and not the requisite guarantee of the party’s judicial expenses: see paragraphs 51.  Section 726 of the Companies Act required a guarantee, not just a level of comfort.  For like reasons, he argued, the court should reject the ATE Policy tendered in this case.  Mr Duthie also referred to the summary of principles from the case law made by Akenhead J at paragraph 18 in the case of Michael Phillips Architects Limited v Riklin and Another  [2010] EWHC 834 (TCC).

[17]      McIlvride replied to the respondents’ motion.

[18]      He accepted that the letters Mr Duthie referred to from the noter’s agents did not clearly indicate that the noter was seeking an ATE Policy.  He was not aware at either of the hearings in December last year or February of this year that this is what the noter’s agents proposed.  Indeed, Mr McIlvride acknowledged that he himself was not aware of the intention to produce the ATE Policy until shortly before this hearing.  In response to a question from the court, Mr McIlvride also accepted that there was now no prospect of having the interests of the respondents endorsed on the ATE Policy.

[19]      In relation to the ATE Policy, Mr McIlvride argued that the market in ATE policies had evolved since cases like Michael Phillips Architects Limited.  Under reference to paragraphs 13, 18, 21, 24 to 25 of Premier Motorauctions Ltd (in liquidation) and Others v Pricewaterhousecoopers LLP and Another [2016] EWHC 2610, Mr McIlvride argued that the approach of the English Courts was helpful; and, on their approach, the question to ask was whether there was a real, as opposed to a theoretical risk, that the insurers would avoid the ATE policy.  He also relied on the comments of Snowden J, at paragraph 41, to similar effect.  Mr McIlvride did not have any particular submission to make in response to a question from the court that Premier Motorauctions Ltd, and the other English cases, appeared to turn on the terms of the test under r 25.13 of the English Civil Procedure Rules (“the CPR”), and whose terms or procedure appeared to differ from chapter 33 of the RCS.  Under reference to para 52 of Premier Motorauctions Ltd, Mr McIlvride argued that the insurers would not fight to avoid liability, lest this become known in the market.  He also founded on the comments, recorded in paragraph 69 of that case, that Elite had been trading for 10 years.

[20]      Mr McIlvride also replied to Mr Duthie’s reliance on the case of Monarch.  In respect of any concern regarding the failure of the ATE Policy to respond by reason of the insolvency of the noter, this was met by the observations at the end of para 23 of that case, and the availability of the Third Party (Rights Against Insurers) Act 1930.  Further, in that case there was the heightened risk from fraud (see para 30), which led Lord Drummond Young to draw an adverse inference.  The element of fraud was not present in this case.  He also referred to the case of Gaelic Seafoods (Ireland) Limited v Ewos Limited [2009] CSOH 29 simply for the fact that the failure to order caution in that case arose from the reluctance of the liquidator to sist himself to that action and not because of any failure or inadequacy of the litigation funding policy.  From these cases he drew the proposition that an ATE policy might suffice in principle.

[21]      In relation to the ATE Policy tendered in this case, there was not a sufficient basis to justify the respondents’ doubts.  This covered the respondents’ expenses going forward up to £100,000.  While he accepted that clause 10.5 conferred a wide discretion on the insurers he contended that they would exercise it in a “commercially reasonable and sensible way”.  He was not able to elaborate or provide a further basis for that contention.  He did not otherwise dispute the interpretation Mr Duthie placed on the clauses of the ATE Policy he had referred to.

[22]      Finally, Mr McIlvride’s fall‑back position was that if the court was not with him regarding the suitability of the ATE Policy, he wished a further 4 or 5 weeks within which to produce a bond of caution.  He accepted that the noter had already had a considerable time to do this, and that it should have pursued this sooner. The noter or its agents had erred in believing that an ATE Policy would be acceptable in principle.   Further, he assured the Court that the noter was in a position to produce a bond from a reputable UK-based insurer. He stated that Elite insurers have been involved in discussions with brokers. Mr McIlvride went on to explain that a bond from a Russian or Cypriot bank was readily available, but that a bond from that kind of entity might raise issues.  A bond had been agreed in principle with a UK bond provider, but some of the terms were outstanding.  In response to a question from the court, Mr McIlvride explained that the noter or its agents had first considered obtaining a bond of caution only upon intimation of the respondents’ latest motion for absolvitor (ie c mid-March 2017).

[23]      Mr Duthie replied as follows: if it is accepted that what is required in terms of section 726(2) of the Companies Act, per Lord Drummond Young in Monarch, then it was a question of examining the terms of the ATE Policy.  There was no need to look beyond the terms of that Policy, as Mr McIlvride seemed to suggest the court should do, based on the English cases.  While Premier Motorauctions Ltd might be authority relevant to a threshold test under the English CPR, it was not authority for the proposition that the ATE Policy was the equivalent of caution.  The issue did not entail an assessment of the risk of Elite not responding under the ATE Policy; it was a question of whether the ATE Policy meets the requirements of chapter 33 of the RCS.  It did not.  The case of Gaelic was irrelevant, as it was concerned with caution at common law.  The test under s 726 of the Companies Act was different; it was impecuniosity and the noter could not impermissibly try to go behind the December interlocutor.  It would be reasonable for the court to refuse Mr McIlvride’s motion, at the bar, for yet more time.  The noter was the author of its own misfortune.

[24]      As parties had used all of the allotted time for this motion and given that the ATE Policy had only been produced to the court shortly before the hearing,  I continued the motion to the following Wednesday, 5 April 2017.  I also wished some confirmation of the representations made by Mr McIlvride on behalf of the noter, that a bond of caution from a UK-based entity was readily available. (It will be recalled that rule 33.5 of the RCS requires that any provider of a bond must be a person authorised to carry on a regulated activity under section 31 of the Financial Services and Markets Act 2000.)

 

Confirmation sought of noter’s representations about the availability of a Bond

[25]      After the hearing on 29 March the noter’s agents were asked to provide any documentation to support the representation that a bond of caution had been agreed in principle and that this documentation was to be lodged by 4 pm on Monday 3 April 2017.  No documentation was in fact lodged.  Rather, reference was made in an email to certain extracts.  In particular, by email dated 3 April 2017 (timed at 15:52) the noter’s agents replied as follows:

….I attach herewith undernoted extracts from email exchange between the client and the provider of the bond of caution, which confirms the extent of the bond to be made available as agreed in principle, as advised by Senior Counsel at last week's motion hearing:-

1.         The name of the Broker progressing the bond on behalf of the noter is MRSL Enterprise Limited, Insurance Brokers having its registered office at View Point, Basing View, Basingstoke which trades at Sutherland House, 3 Lloyds Avenue, London, EC3N 3DS.

2.         MRSL is currently sourcing an "A" rated Insurer to produce the required bond.

3.         It is anticipated that the bond will take 2-3 weeks to put in place.

4.         The indication of the price is 8% of the bond.

5.         The bond provider will be an EEA Registered Body and authorised by Financial Services and Markets Act 2000

6.         Elite insurance intends to indemnify the bond issuer and the policy will be updated to reflect that.”

[26]      The information supplied by the noter’s agents had been copied to the respondents’ agents. They commented on this information the next day, in the following terms:

“On behalf of the Respondents, we have the following comments in respect of the information provided by the noter’s agents:

 

The Respondents have some concern with the sufficiency of the information provided to support the submission made at last Wednesday’s hearing that terms of a bond were agreed in principle. The below email from agents for the noter provides a note of select points only; we have not seen full copies of the relevant email correspondence or any other documentation relating to any proposed bond.

 

The information provided also suggests that the noter is merely in discussion with a broker who is attempting to source a bond provider. There is nothing in the below to indicate that a particular bond provider has been found, let alone that any terms have been agreed with that bond provider. A broker, of course, is merely instructed on behalf of the proposer (in this case, the noter), as its agent, to go out into the market to try to obtain a particular insurance product. The mere fact (if it be a fact) of an agreement between the noter and its own broker, therefore, is simply nothing to the point.

 

We assume the bond provider will need to complete its own due diligence with regards to the noter’s solvency.

 

The nature and extent of the indemnity to be given by Elite insurance and how this will benefit the bond provider is not clear.

 

Senior Counsel for the noter indicated at the hearing that steps were first taken to obtain a bond following receipt of the noter’s motion for absolvitor on 16 March, almost three weeks ago. From the information provided, it does not appear that any significant progress has been made since then.

 

In short, it is not at all clear what basis there is for the contention that “the principal terms are agreed for a Bond”. We would therefore restate the submission made by Counsel at last Wednesday’s hearing that there has been significant delay to the progress of the action, caused by the noter and, in those circumstances, it would be reasonable for the court to refuse to grant a further 5 weeks indulgence.”

 

Further clarification sought; the noter’s agents’ acknowledgement that the position was other than had been represented on 29 March 2017

[27]      Upon consideration of this material, I noted that the noter's Senior Counsel had stated at the Bar that the provision of a bond had been "agreed in principle", albeit some terms were still to be agreed.  However, the limited and perhaps selective information supplied, albeit unsupported by any primary documentation, did not appear to support that contention.  Accordingly, I again invited the noter’s agents to confirm whether the representation by its Senior Counsel the previous week was correct.  So far as material, the noter’s agents’ reply was as follows:-

The correct position is that the Insurers (Elite Insurance Company) instructed a broker on or around Friday 24 March 2017 to obtain a bond of caution.  The Insurers advised TLT (the Agent) that, following discussions with the broker, in principle a bond could be obtained potentially in time for the hearing on Wednesday, subject to any indemnity required by the bond provider being approved by the Insurers' underwriting committee.  The Insurers advised that an indicative cost had been provided for obtaining a bond of £100,000.  The Bond would be from an overseas bond provider.  A bond from a UK provider could also be obtained but with no prospect of having the bond in place for the hearing on 28 March 2017.

 

Following discussion between the noter and the Agent, it was agreed that in the event the ATE insurance Policy was not considered sufficient by the court that a bond of caution would be obtained from a UK bond provider.  As the Insurers had indicated a bond could be obtained, and an indicative cost agreed, Senior Counsel on discussion with the Agent advised the court a bond had been agreed in principle and suggested a continuation of 5 weeks for that bond to be produced.  In hindsight it would have been more accurate to say that the broker had advised the Insurer that in principle a suitable bond could be obtained.

 

However, the agent had misunderstood the Insurers' position on that matter.  What was suggested was that an overseas bond provider had been approached and had agreed in principle that a bond could be issued quickly.  The Insurers advised a UK bond would take longer to arrange.  The agent mistakenly conflated these two points and wrongly assumed the broker had also agreed in principle with a UK bond provider that a bond could be issued.

 

(May I add that the mistake is mine and I offer my sincere apologies to the court for inadvertently providing information to senior counsel which was not fully accurate. It was not my intention to mislead in any way.)

 

The Agent has been in subsequent discussions with the Insurers and directly with the broker in order to avoid any further misunderstanding as to the position.  Correspondence from both the Insurers and the Brokers are attached, confirming the correct position.

 

The broker advises that, while there are obstacles, it is expected a suitable bond will be placed within the timescale sought by Senior Counsel.  It is indicated approaches have been made to a number of bond providers.

 

The insurer indicates that it will likely reach a separate agreement with any bond provider to give security for the bond, which requires approval of the insurers' underwriting committee.  It is anticipated approval will be granted.”

 

[28]      The attached information from Elite comprised an email in the following terms:

The broker is currently working to obtain a bond from a bond provider

The bond provider will require security.

 

That security may be obtained in a number of ways, however it is common for the bond provider to require that the ATE Insurer guarantees reimbursement of any monies that the bond provider is required to pay out.

 

This arrangement will be by way of a separate agreement. The ATE Policy will not be amended and the terms and conditions continue in force in their current form.

 

Elite will need to obtain underwriting authority to enter into such agreement with the bond provider (we have not seen any draft documentation or request at this stage) because this changes the risk that the ATE Insurer is bearing.

 

In this case I would anticipate that approval will be provided but will take some time to obtain. Obviously I cannot guarantee that such approval will be forthcoming.

 

The ATE Insurer will make an additional charge by way of an additional deferred and contingent premium to reflect the additional risk that it is bearing.

 

I trust that the above adequately explains the position but if you have any questions, please do let me know.”

 

[29]      The letter from the brokers was equivocal, at best.  I do not set out its full terms but it indicated that while it was in dialogue with a number of insurers and reinsurers, it stated that it would be hard to find “a primary with an A rating” to write a bond of this size.  It noted that any bond provider would want to tie the ATE Policy to a call on the bond, or would require collateral or a clear indemnity for the bond exposure. It concluded in the following terms:

“The most significant issue in placing this bond is the small size. The A rated insurers are large international players with substantial balance sheets who are looking at high minimum premium targets. It will be challenging to find a player that will look at a deal of this size.  In MRSL Enterprise’s experience of placing surety bonds it will take at least four weeks to place this bond with a rated carrier. Given the urgency of this case MRSL Enterprise would expect to get this placed in four weeks.”

 

Hearing and Interlocutor of 5 April 2017

[30]      It was against this unsatisfactory background that the hearing on the respondents’ continued motion resumed on 5 April.  On that occasion, Mr Thomson appeared on behalf of the respondents.  Mr McIlvride appeared again on behalf of the noter.  I indicated at the outset that, in relation to the ATE Policy, this did not in my view meet the requirements of rule 33.4 of the RCS and that I was minded to grant the respondents’ motion. However, I invited Mr McIlvride to comment on the information that had been provided following the last hearing, on 29 March 2017.  It was noted that the terms of the letter from MRSL suggested that what was proposed involved more links in a contractual chain, or a need for collateral, and was not the straightforward provision of a bond.  Mr McIlvride explained that the bond would not be provided directly by Elite, but that Elite would provide security to the bond provider.  He assured the court that this will be provided within 4 weeks.  In response to a question from the bench about the terms of the email from Mr Coleman of Elite, that this “will take some time to obtain”, Mr McIlvride stated that Elite were aware of the 4‑week timescale.  He therefore moved at the bar for the grant of a further 4 weeks for this to be done.  He accepted that this would be the last continuation and that the noter accepted the risk that, if this were not achieved, the respondents’ motion will be granted.  He explained that the reason why the email and letter provided dated only from the day before (ie 4 April 2017) was because the principal solicitor within the noter’s agents had been on leave.

[31]      Mr Thomson opposed the grant of any further indulgence.  He noted that the position of the noter’s agents kept shifting.  On 3 April the noter’s agents had represented that they anticipated a bond within two to three weeks.  That time‑frame was then increased to 4 weeks, whereas the latest information suggested that nothing was agreed in principle but it was all still contingent.  This was all to be understood against a background of delay since the December interlocutor.  Mr Thomson also indicated that the respondents proposed to bring forward a number of motions for expenses, for these to be on an agent and client basis and for the noter’s agents to be held personally liable.

[32]      With some reluctance, but bearing in mind the consequences for the noter if the proceedings were dismissed, I allowed a further four weeks for the noter to produce a bond of caution in accordance with rule 33.4.  I stressed that this was the last indulgence to be afforded to the noter.  I reserved all questions of expenses.

 

Deed of Indemnity produced for the continued hearing on 5 May 2017

[33]      The noter’s agents produced some additional documents on 3 May.  One of these included the copy Deed of Indemnity (the principal of which was lodged as No 48 of process).  This copy bore to be a deed among Elite, the noter and both of the respondents, Mr Caven and Mr Mawer.  This version of the Deed of Indemnity was signed only on behalf of Elite.  (Another copy version produced had been signed only on behalf of the noter.) (The Deed of Indemnity was, quite correctly, not checked by the Deputy Principal Clerk in terms of rule 33.7(1) of the RCS, given that it was unsigned and, at that stage, only a copy was tendered.)  The Deed of Indemnity was in the following terms:

 

THIS DEED OF INDEMNITY is made on the    day of                2017

 

BETWEEN

 

(1)        ELITE INSURANCE COMPANY LIMITED a company incorporated in Gibraltar with company number 91111 whose registered office is at World Trade Center, 6 Bayside Road, Gibraltar, GX11 1AA and whose address for correspondence is Centennium House, First Floor, 100 Lower Thames Street, London, EC3R 6DL (“Elite”);

 

(2)        ROBERT CAVEN, Insolvency Practitioner, of 110 Queen Street, Glasgow G1 3BX (“Mr Caven”);

 

(3)        KEVIN MAWER, Insolvency Practitioner, of Marston House, Walkers Court, Audby Lane, Wetherby, West Yorkshire LS22 7FD (“Mr Mawer”);

 

(4)        CENTENARY 6 LIMITED, a company incorporated in Scotland with company number SC260562 with registered address Aitken Nairn, 7 Abercromby Place, Edinburgh, EH3 6LA (“C6”)

 

Individually a “Party” and together the “Parties”.

 

WHEREAS:

 

1.   Mr Caven and Mr Mawer were the joint liquidators of C6. 

 

2.   C6 has legal claim (“the Claim”) against Mr Caven and Mr Mawer in respect of the liquidation of Centenary Holdings III Limited (in liquidation), a company incorporated in Scotland with company number SC014091 whose registered office is Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX.  C6 has issued legal proceedings in relation to the Claim in the Court of Session in Scotland. 

 

3.   Elite issued an insurance Policy (Policy number 2/17/761927) on 27 February 2017 in respect of C6’s potential liability for adverse costs arising out of the Claim.

 

4.   C6 has been ordered by the Court to provide security for costs to Mr Caven and Mr Mawer in the sum of £100,000.  In order to meet this liability Elite has agreed to indemnify Mr Caven and Mr Mawer in accordance with the terms of this Deed.

 

      NOW THIS DEED WITNESSES as follows:

 

      Definitions

1.   In this Deed the following definitions shall have the following meanings:

 

Business Day” means a day on which banks generally are open in the City of London for the transaction of normal banking business (other than a Saturday).

 

Costs” means costs in the Claim. 

 

Taxation” means determination by an auditor of the Court of the correct amount of legal costs payable by one party to another.

 

Notice” means a notice given pursuant to this deed. 

 

      Indemnity

 

2.   This Deed shall come into effect provided that: (i) the Claim is not struck out, disallowed or otherwise impeded for any reason related to the Court making an order for security for costs; and (ii) the Court approves this Deed as sufficient security for costs.

 

3.   Elite hereby unconditionally and irrevocably undertake to pay to Mr Caven and Mr Mawer any sum or sums which C6 is held liable to pay in respect of their Costs following Taxation or agreement.

 

4.   Mr Caven and Mr Mawer will inform Elite immediately if the Claim is resolved (whether by agreement, judgment, Court order or otherwise) in their favour such that C6 incurs an adverse costs liability.

 

5.   Elite shall be given opportunity to ensure representations are made on behalf of C6 in respect of Costs including during any Taxation.

 

6.   Payment will be made by Elite within 10 Business days of receipt by Elite documentation evidence of the outcome of any Taxation or agreement which means Taxation is not required.

 

7.   Elite’s total liability under this Deed shall not exceed £100,000.

 

8.   Elite shall be deemed to be a Principal Debtor and not merely a surety and, accordingly, Elite shall not be discharged nor shall its liability be affected by any act or thing or means whatsoever (including, without limitation, any defences to payment asserted by, insolvency of, or unenforceability as against the C6). 

 

9.   For avoidance of doubt and without prejudice to the foregoing, Elite’s liability under this Deed shall not be subject to avoidance on the grounds of fraud or misrepresentation by the C6, nor shall it be affected by any lack of substance in the Claim.

 

10. Upon payment by Elite of any sum under this Deed, C6 shall be liable for an equivalent sum to Elite.  This sum shall be payable at the conclusion of the Claim.

 

Notices

 

11. Notices under this Deed shall be in writing and served at the addresses set out in this Deed (or to such address as is notified in writing by one Party to the others from time to time) by hand or by pre-paid first class recorded delivery post.

 

12. Notices shall be deemed served:

 

7.1       if delivered by hand, at the time of delivery to the Party; or

 

7.2       if sent by pre-paid first class recorded delivery post, at the expiration of 48 hours from despatch.

 

Notices to Elite must be delivered to Centennium House, First Floor, 100 Lower Thames Street, London, EC3R 6DL.

 

General

 

13. Subject to the principle that there should be no double recovery, this Deed shall be in addition to and not in substitution for (and shall not be prejudiced by) any rights which Mr Caven and Mr Mawer may have against C6 or any other person in respect of the sums indemnified under this Deed.

 

14. Elite may not assign or transfer any of its rights or obligations under this Deed.

 

15. This Deed shall be governed by and construed in accordance with English Law and shall be subject to the exclusive jurisdiction of the English Courts.

 

IN WITNESS WHEREOF this Deed has been executed as a Deed on the date set out above.”

 

[34]      Leaving aside the use of English legal terminology, the Deed incorrectly asserts that the respondents are the joint liquidators of the noter (1st recital).  More fundamentally, and necessarily bearing on the question of the adequacy of this Deed, the terms of clauses 2, 3 and 15 are to be noted.  While clause 3 was intended to be the operative undertaking, this was suspensive upon purification of clause 2.  Clause 2 first required that “the Court approve this Deed as sufficient security for costs”.  However, clause 15 stated that the deed “shall be governed by and construed in accordance with English law and shall be subject to the exclusive jurisdiction of the English Courts”.

 

Hearing on 5 May 2017
[35]      At the continued hearing, Mr McIlvride and Ms Ower appeared on behalf of the noter. Mr Borland QC appeared on this occasion on behalf of the respondents. Mr Borland noted that there were two different versions of the deed of indemnity produced and that neither was executed by all parties.  He sought clarification of which version the noter founded upon.  Mr McIlvride indicated that the noter relied on the version signed by Elite (lodged as No 48 of process).

[36]      Mr McIlvride proceeded to explain that as the Deed of Indemnity bore to be subject to English law, he declined to make any submissions as to its import. He indicated that the noter had taken advice that the Deed of Indemnity complied with rule 33.4 of the RCS.  In response to a question from the Court, he indicated that he was unaware of whether the author of this advice had an English law qualification.  He explained that the noter’s agents had received oral and written advice.  The tenor of the oral advice was that the written advice was adhered to, notwithstanding that the deed had not been signed by all parties.

[37]      Mr McIlvride referred the written advice, which had been tendered by the noter’s agents’ court runner to the General Department together with the Deed of Indemnity.  This was a two-page Opinion for the noter, dated 3 May 2017, from Simon J D Catto, Solicitor Advocate.  After setting out the background, the terms of chapter 33 of the RCS and after noting that the Deed is “not in the normal form”, Mr Catto referred to clause 3.  He opined that this would suffice.  Under the heading “Next Steps”, he further advised:

“My expectation is that the court would take a pragmatic approach here.  In other words, they would want to know that Elite in is in a position to satisfy the terms of the Indemnity.  Our principal argument will of course, be that the provision of a Bond by a person authorised to carry out regulated activity under Section 31 of the Financial Services and Markets Act 2000 and in the form provided by Rule 33.6 is sufficient.  Our secondary argument, however, will be that the indemnity from Elite is sufficient security.  With that in mind, it would be useful to obtain sufficient financial information about Elite and its ability to meet any order in order that the Defenders can be satisfied.

 

Given time constraints, I think it is essential that the indemnity is signed today and presented to court.  [….]  My expectation is that the Deputy Principal Clerk will be satisfied that the Deed of Indemnity is in proper form and that the question will then simply be whether the form of Caution is deemed sufficient by the Defenders or whether they wish to enrol a motion for Decree of Absolvitor by Default.  My own view is that, whilst the Deed of Indemnity is not in the form I would have expected to see for a Bond of Caution, the court will in all likelihood be satisfied that it does constitute adequate security and will not grant Decree of Absolvitor”.

 

Mr McIlvride accepted that the Deed of Indemnity was not signed and he sought a further two days in order to have a copy signed by all parties.  Mr McIlvride advanced a further proposition, albeit weakly, that as the principal Deed of Indemnity had been received in process (No 48 of process) by the general department, this constituted acceptance.  He did not otherwise make any submission on the terms of the Deed of Indemnity, relying instead on the opinion of Mr Catto as regards its sufficiency.

[38]      In reply to all of this, Mr Borland had three motions:

(i)         The court should give effect to its determination (indicated on the last occasion, on 5 April) that the ATE Policy did not satisfy the terms of r 33 of the RCS either as a bond of caution or as an alternative, under r 33.4(2);

(ii)        The court should find that the Deed of Indemnity (No 48 of process) was not a proper bond of caution; it had not been lodged timeously and in any event it was not a proper bond of caution;

(iii)       If the court was with him on points (i) and (ii), he sought refusal of the prayer of the Note (which was the proper mode of disposal), in terms of the motion enrolled on 16 March and heard and continued on 29 March and on  5 April.

[39]      In relation to (i), this was simply to give effect in an interlocutor to the decision the court had come to on 5 April.  In relation to (ii), this had not been produced timeously.  As an unsigned deed, it had no legal effect.  In any event, the Deed of Indemnity was inept.  In the first place, Mr Borland argued, the court’s jurisdiction under section 726(2) was to enable it to order a party (here, the noter) to produce a bond of caution.  There was no warrant or authority to enable the court to compel another party (here, the respondents) to become party to any deed for the purpose of s 726.  The Deed of Indemnity purported to be a four-party document and in which the respondents were required to undertake obligations to Elite.  The respondents had no intention of countersigning the Deed of Indemnity or undertaking any obligations to the noter.  The court had no power to compel this.     

[40]      Turning to Mr Catto’s Opinion, Mr Borland noted that from Mr Catto’s online profile  it was not suggested that he was qualified in English law.  (By contrast, Mr Borland was.)  Mr Borland’s submitted that Mr Catto’s Opinion as to the efficacy of the Deed of Indemnity was not worth the paper it was written on.  It was a fundamental of English and Scottish contract law that a document conceived of as a four‑party document, with obligations on several parties, cannot come into force until all parties signed it.  This was not signed by all parties and was not a valid deed. It had no legal effect.  There was no prestable obligation on Elite to make payment.  Clause 2, referred to by Mr Catto, was in fact a suspensive condition.

[41]      Furthermore, the Deed of Indemnity was ineptly drafted.  It was slapdash and shoddy.  The first recital was incorrect in stating that the respondents were the liquidators of the noter.  In the second recital, the reference to the “claim” was incorrect.  Caution was granted in respect of the expenses relative to legal proceedings and not to a legal claim generally.  By reason of the conditionality of clause 2, which he had already referred to, there was no immediately enforceable obligation or undertaking owed by Elite to the respondents.  This alone rendered it incapable of satisfying the requirements of a bond of caution.  Clause 3, which bore to be an unconditional undertaking, conflicted with the suspensive character of clause 2.  These two clauses were inconsistent and productive, at the very least, of uncertainty.  The respondents were not going to sign up to clause 5, which required them to grant certain entitlements to Elite about taxation.  The payment provision, in clause 6, was inept.  There was no specification of what would constitute “evidence of the outcome” of any taxation or agreement.  Clause 8 refers to a “Principal Debtor” but this is not defined.  Clause 10 was a counter indemnity between Elite and the noter and was of no concern to the respondents.  Clause 13 was also meaningless as regards double recovery in the context of what should be an unqualified unilateral obligation in a bond of caution.  In respect of clause 15, conferring exclusive jurisdiction on the English courts, this court had no power to regulate or rule on what is the subject-matter at hand, namely the sufficiency of the Deed of Indemnity as a bond of caution.

[42]      In short, the Deed of Indemnity proffered was materially insufficient in its terms; it would never be signed by all of the proposed parties and it was, in that state, wholly ineffectual.  It did not comply with the requirements of section 726 of the Companies Act or r 33 of the RCS.

[43]      In relation to the suggestion that because the principal Deed of Indemnity had been received into process by the General Department, Mr Borland submitted that any such receipt was subject to r 33.7(2) and was solely concerned with the form; it was without prejudice to a dissatisfied party making any motion, as the respondents had done. Sufficiency was a matter for the court.

 

Discussion on sufficiency of the ATE Policy as a form of security

Caution and the characteristics of a Bond of Caution

[44]      Having been ordered to lodge caution, and having failed to do so, the question at this stage of the proceedings is whether the ATE Policy is an appropriate substitute for caution, for the purpose of rule 33.4 of the RCS. In considering that question, it may be helpful to recall the essential features of a cautionary obligation. In his Principles of the Law of Scotland, Bell defined cautionary as “an accessory obligation or engagement, as surety for another, that the principal obligant shall pay the debt or perform the act for which he is engaged, otherwise the cautioner shall pay the debt or fulfil the obligation”:  see paragraph 245 (and his citation of Stair and Erskine to like effect). Bell also observed that it was commonly an engagement of friendship and gratuitous (ibid, at paragraph 246), and this is borne out by comments in the reported cases later in the 19th Century and into the early 20th Century (see, eg, Morrison v  Morrison’s Executrix 1912 SC 892 at 895 per  Lord Justice Clerk McDonald).

[45]      An order requiring one party to provide caution for expenses is a simple form of cautionary obligation.  The purpose of an order for caution for expenses is to prevent the risk that the successful party will be unable to recover any judicial expenses it might ultimately be awarded from its opponent.  The risk arises usually, but is not limited to, the impecuniosity of his opponent (e.g George M Ritchie (1881) 8 R 747).  For present purposes, it matters not that the tests to be satisfied to obtain an order for caution at common law or under section 726(2) of the Companies Act are different; if granted, the underlying objective is the same, to secure payment of the judicial expenses of the party for whose benefit caution has been ordered.

[46]      It is clear from the 19th Century cases that the party compelled to secure caution could do so by having a person of means provide a bond of caution.  Once granted, it would require exceptional circumstances for the cautioner to be entitled to withdraw his bond (see, eg, Oliver v Robertson (1869) 8 R 82)) or to have the maximum amount of his liability fixed.  In modern practice the cautioner provides a bond in the amount of the sum specified in the court order requiring the provision of caution:  MacFadyen, Court of Session Practice at Section L, paragraph 522.  The liability of a cautioner for expenses is contingent only on (i) the successful party being awarded expenses against the principal obligant, and (ii) the principal obligant defaulting on that obligation to pay expenses. In the event that these two contingencies are purified, the beneficiary may call for payment under the bond of caution.  Accordingly, subject to these contingencies, a classic bond of caution would embody an unqualified obligation to pay the beneficiary’s judicial expenses up to the limit of the bond.  This is clear from rule 33.6(1), which, reading short, requires the cautioner to bind himself (and, if an individual, his heirs and successors) to make payment to the successful party “ass validly and in the same manner” as the party found liable in expenses (ie the principal obligant).  Accordingly, the operative clause in a bond of caution is the undertaking by the cautioner to pay in the event of default on the part of the principal debtor.  Conventionally, the bond will be a probative deed or self-proving writing and it will also have a clause for preservation and execution.  It may confer the benefit of discussing.  Subject to proving default on the part of the principal obligant (and any benefit of discussion), the beneficiary is able readily to enforce the bond against the cautioner up to the amount of the bond and without further need to constitute his claim. The other form of caution for expenses provided for in rule 33 of the RCS is consignation, which has the additional benefit (for the beneficiary) of the undoubted ultimate availability of the sum consigned into court.

[47]      It is important to bear these features in mind when considering whether the ATE Policy or the Deed of Indemnity satisfied the requirements of r 33.4.  What is envisaged under section 726 is, as Lord Drummond Young said in Monarch (at para 11), the provision of a “guarantee of the [respondents’] judicial expenses, rather than merely a level of comfort”.  Any alternative to caution for the purpose of rule 33.4 must, in my view, fulfil the same purpose as a bond of caution. I turn to consider the two deeds the noter has proffered over the last several months, starting with the ATE Policy.

 

Comment on the ATE Policy
[48]      In my view, the ATE Policy did not provide sufficient certainty of payment of the respondents’ expenses (if found due) such as to qualify as a suitable alternative to a bond of caution.  There are too many features outwith the respondents’ control, or within the discretion of the insurer, Elite.  I note four features, which separately, but certainly cumulatively, sufficed to render the ATE Policy unacceptable as an alternative to caution.

[50]      In the first place, what is insured as the benefit of inter alia, the insured (ie the noter) being ordered to pay the respondents’ expenses, in certain circumstances.  Consistent with that, any claim under the ATE Policy is made by the noter or its legal representatives.  There is no provision for a claim by, or payment to, the respondents under the ATE Policy.  There is nothing to indicate that that payment would be payable directly to or claimable by the respondents.   No form of endorsement of the interest of the respondents on the ATE Policy was said to be possible. In those circumstances, the respondents would be dependent on the goodwill of the noter to claim and to pay over any sum claimed. In the event of the noter’s insolvency, there is nothing to preclude any sum recovered under the ATE Policy falling into the general pot of unsecured assets of the noter and leaving the respondents to rank as ordinary creditors. (I am doubtful that the kind of implied trust that Snowden J posited might arise under English law in those circumstances would arise as a matter of Scots law: see para 66 of Premier Motorauctions Ltd.) Further, in contrast to the case of Monarch, there was no offer in this case for an assignation by the noter of the ATE Policy in favour of the respondents.

[51]      Secondly, Elite is entitled to treat the ATE Policy as void in the event of the noter’s insolvency: see clause 9.2.  Given that caution was granted on the basis of section 726, ie the court having been satisfied by credible testimony that “there is reason to believe that the company will be unable to pay” the respondents’ expenses if successful in their defenve, this itself creates considerable doubt about the efficacy of the protection the ATE Policy is intended to provide. 

[52]      Thirdly, there is a tension between the terms of the Policy Schedule (stating that the opponents’ costs are insured) and the exclusion in clause 5.1.18.2 (of expenses “incurred at any time, when in our [ie Elite’s] opinion, your legal dispute does not have prospects of success”).  Even assuming that the provision in the Policy Schedule overrides the clear exclusion (in clause 5.1.18), under clause 10.5 of the ATE Policy Elite reserved the right to cancel the Policy immediately and “without any further liability…for [the respondents’ costs]” if either Elite or the noter’s representatives consider that the noter’s proceedings do not have “prospects of success’: clause 10.5.1.  This is bolstered by the discrete condition (in clause 6.1.2) that the noter’s legal dispute “must have and continue to have prospects of success throughout the period of cover”.  “Prospects of success” are defined as meaning that the legal dispute has “greater prospects of being successful rather than unsuccessful” (see the definitions in clause 3).  In other words, as soon as Elite or the noter’s representative forms the view that the prospects of success of the noter’s case has declined to 50-50 or less, Elite can cancel the ATE Policy.  The effect is that the respondents would be deprived of the benefit of the ATE Policy at the very point when it is needed, ie at the point in time when it becomes apparent to Elite or the noter’s advisors that the noter is less likely to succeed.

[53]      Fourthly, the continuation of cover is dependent on a variety of matters that are all outwith the respondents’ control but within the discretion of Elite or otherwise dependent upon the noter’s conduct:

(i)         the insured’s right to make a claim under the ATE Policy may be invalidated or Elite may be entitled to refuse liability in a variety of circumstances, including failure or delay in telling Elite about “an incident that may lead to a claim on the Policy” (proviso to clause 2.2); 

(ii)        if any claim is made that is “dishonest, misleading, exaggerated, fraudulent or false” (clause 2.5) or if the noter or its legal representatives fails to keep Elite informed of certain matters during the proceedings (clause 3.1). This includes an obligation immediately to notify Elite of the discovery of “any facts, evidence, developments or circumstances, barristers [sic] opinion or expert report which may materially affect the prospects of success or alter Elites view, or the noter’s legal representative’s view of the prospects of success…”: clause 3.1.1.;

(iii)       there is an exclusion of cover for the respondents’ expenses in the event that the proceedings are discontinued by reason of a lack of funds on the part of the noter (clause 5.1.18.6); and

(iv)       there are onerous obligations on the part of the noter in relation to cooperation with Elite and with its own legal advisers (in clause 6.1.3). The considerable delay in providing any caution does not inspire confidence of compliance with this provision.

[54]      In Monarch, features similar to the first, second and fourth features just noted were also of concern to Lord Drummond Young.  However, and again in contrast to the position in Monarch (see eg at para 25 thereof), there is no offer here of a protocol governing the noter’s conduct during the currency of the ATE Policy or requiring communication by it  from time to time to the respondents in order to address the fourth feature of concern.  The ratio of Lord Drummond Young’s refusal in Monarch, to accept that the policy proffered in that case provided sufficient security, turned on the allegations of fraud and the risk of avoidance for material non-disclosure (see para 30). Such allegations are not made here.  However, while Lord Drummond Young expressed concerns in relation to features of the policy proffered in that case, and which coincide with features of the ATE Policy here, in this case there is nothing suggested or offered by the noter to address these concerns. Monarch is therefore not conclusive of the acceptability of the ATE Policy as a form of security.  Furthermore, it is not a correct reading of Gaelic Seafoods (Ireland) Ltd that, but for the liquidator’s refusal to sist himself as a party, the ATE policy relied on in that case  would have been accepted. Lord Drummond Young’s comments at para 25 are, in fact, to the contrary.   

[55]      Having regard to the principal features of a cautionary obligation generally, and of a bond of caution in particular, the features of the ATE Policy just noted are in my view too far removed from the clear, simple and readily prestable obligation in a bond to qualify as a suitable alternative for the purposes of rule 33.4 of the RCS.  For completeness, I did not accept the criticism advanced by Mr Duthie on 29 March, to the effect that the ATE Policy would not meet expenses already incurred.  Unless the court stipulates otherwise, and to do so would be unusual, any caution for expense granted covers only future expenses.

 

Comment on the English cases concerning ATE policies
[56]      Both parties referred to a number of cases concerning ATE policies.  As noted by Lord Drummond Young in Monarch (at para 31), ATE policies can be an important feature of litigation funding.  However, parties were unable to find any reported case in Scotland where an ATE policy was accepted as an alternative to caution (cf Gaelic Seafoods (Ireland) Ltd).  There is a considerable body of case law in England about ATE policies, which has been conveniently summarised by Akenhead J in Michael Phillips Architects Ltd  [2010] EWHC 834 (TCC)  at paragraph 18, as follows:-

“(a) There is no reason in principle why an ATE insurance policy which covers the claimant's liability to pay the defendant's costs, subject to its terms, could not provide some or some element of security for the defendant's costs. It can provide sufficient protection.

 

(b) It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the defendant, and because the promise to pay under the policy will be to the claimant.

 

(c) It is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant's costs.

 

(d) There is no reason in principle why the amount fixed by a security for costs order could not be somewhat reduced to take into account any realistic probability that the ATE insurance would cover the costs of the defendant.”

 

This summary has been adopted in subsequent cases, eg in Premier Motorauctions Ltd (at para 21).  Under reference to the discussion in the latter case, and its own consideration (at para 24 ff)) of the decision of Stuart-Smit J in Geophysical Service Centre v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC), Mr McIlvride argued that, as was done in those cases, I should form a view as to the likelihood of Elite declining to pay under the ATE Policy.

[57]      In my view, this submission misapprehends the different procedures and tests applicable to such applications in the two jurisdictions and the stage at which they fall to be applied.  The discussion in the English cases is framed by the requirements of CPR 25.13, which requires consideration inter alia of whether there is “reason to believe” that the party from whom security for costs is sought will be unable to pay the other party’s costs.  The availability of the ATE policy proceeds as a potential asset of the claimant is taken into account when considering if the party from whom security for costs is sought will be unable to pay the other party’s costs. It is in that context that the English courts consider the terms of the ATE policy offered, the credit-worthiness and standing of the insurance company, the terms of the particular ATE policy and how readily the policy may be avoided legitimately. In Premier Motorauctions Limited, Snowden J considered that issue as part of the first stage in determining whether the jurisdiction to make an order under CPR 25.12 was engaged: see para 38 to 41.  He distinguished this from the question of “whether the ATE policy provides the same security as cash or a bank guarantee, or indeed whether the ATE policy provides the same security as might a deed of indemnity from the same or another insurer”. That was not the correct question. Rather, he continued:  “[i]t is whether, having regard to the terms of the ATE policy in question, the nature of the allegations in the case and all the other circumstances, there is reason to believe that the ATE policy will not respond so as to enable the defendant's costs to be paid”: see para 41.  In other words, the question of assessing the likelihood of an ATE Policy responding was part of the anterior ‘jurisdictional threshold question’ (as Snowden J defined it).  Indeed, his review of the English cases traces the shift in approach from consideration in some of the earlier cases of the equivalency of an ATE policy to security for costs, to this anterior jurisdictional question: see Premier Motorauctions Ltd at paragraphs 66 to 67.

[58]      Turning to the arguments presented, in my view, the difficulty with Mr McIlvride’s reliance on Premier Motorauctions Ltd is that in this case, the threshold in section 726(2) has already been met and determined by the December interlocutor.  It is too late, now, to advance the kind of argument considered by Snowden J in Premier Motorauctions Ltd.  It would have been at that stage, that is when the court was considering whether the threshold in section 726 of the Companies Act has been met, that the noter should have invoked the ATE Policy as a basis to invite the court not to draw the conclusion that it in fact did. In other words, the correct question in these proceedings at this stage, where the requirement for caution has already been determined (as it was by the December interlocutor), is precisely the question eschewed by Snowden J:, namely, ”whether the ATE policy provides the same security as cash or a bank guarantee, or indeed whether the ATE policy provides the same security as might a deed of indemnity from the same or another insurer”.  Premier Motorauctions Ltd  is not authority for the proposition that an ATE policy is per se an acceptable alternative to caution. Even on the approach identified in the English cases, it is accepted that an ATE policy will rarely afford the same level of security as payment of money into court (ie consignation) or a guarantee: see principal (b) from Michael Phillips Architects, quoted above at paragraph [56].

[59]      Furthermore, I understand that the English courts have a statutory power to award costs against a non-party: see s 51(3) of the Senior Courts Act 1981.  That power may address the risk arising from the fact that payment of the proceeds of an ATE policy is generally made to the party against whom an order for security for costs has been made, and not the party in whose favour such an order has been granted. While the Scottish courts have a common law power to award expenses against a true dominus litus, when not a party, that is a power sparingly exercised and is in any event not straightforward: see McLaren on Expenses, Chapter III(2) at p 149.  I have already noted my doubts that Scots law would recognise an implied trust arising and protecting any policy proceeds paid from falling into the general pot for unsecured creditors: see para [50], above. Accordingly, these other aspects of the English procedural rules make it problematic, to say the least, to adopt one feature from English law or procedure (ie its approach to ATE policies) without an appreciation of how other features of English procedure may more readily secure for the opponent the benefits of such a policy.  It follows that none of the English cases is of any real assistance in this case. They are, in any event, addressing a different question.   It is clear that they necessarily turn on the terms of the ATE policy in question.  None of these cases persuaded me that the correct question was as Mr McIlvride contended, or that the ATE Policy was a suitable alternative to caution. For the avoidance of doubt, I stress that I am not precluding the possibility that a suitably worded ATE policy may be relevant to the anterior question of whether caution is required or, where section 726 of the Companies Act is invoked, its threshold test has been met. However, that is not the question here.

 

The Deed of Indemnity

[60]      Turning to the Deed of Indemnity, produced on 5 May, I accept all of Mr Borland’s submissions as regards the deficiency of this deed.  Mr McIlvride did not seek to counter any of these submissions.  His presence was essentially passive, which was simply to tender the Deed of Indemnity. By reason of clause 15, he disavowed making any submissions in support of the Deed of Indemnity and was content to rest on Mr Catto’s opinion.  As for Mr Catto’s opinion, he does not profess to have any English-law qualification. (Mr McIlvride did not trouble to seek clarification of this for the purposes of the continued hearing on 5 May 2017.)  Mr Catto appears untroubled by clause 15 or not to have appreciated its significance. He did not comment on other clauses of the Deed.  He did not consider the conditionality of clause 2.  He did not address his mind to the implications of the deed purporting to be a multi-party deed.  Nor did he address his mind to the prospect that this would not be signed by all the parties.  In short, Mr Catto’s opinion had no persuasive value.

[61]      Turning to Mr Borland’s criticisms of the Deed of Indemnity, he is correct that for so long as the Deed of Indemnity is unsigned by all of the parties --a position that will not change, given the respondents’ stance-- it is ineffectual.  Leaving that matter aside, even had it been signed by all parties, I would not have accepted it as sufficient in its terms.  Clause 2 is suspensive of the undertaking in clause 3.  Clause 15, stipulating that the Deed of Indemnity was governed by English law and subject to the exclusive jurisdiction of the English Courts, is inimical to resolution of the very issue the noter was asking this court to consider:  whether the Deed of Indemnity was sufficient for the purpose of rule 33.4 of the RCS.  Even assuming it had been argued, and I had been persuaded, that I could assume that English and Scots law was the same in the interpretation of the Deed of Indemnity, it would be an unacceptable state of affairs for the court to accept as sufficient a deed which excludes its jurisdiction.  At the very least, this could be productive of further disputes as to some feature of its efficacy or enforcement, and on which this court could not rule.  Finally, given the terms of clause 15, in the absence of an opinion from an English-qualified lawyer, there was no appropriate conclusion the court could draw in respect of clause 2.  As clause 2 has not been purified, the undertaking in clause 3 is suspended.  As presented, therefore, the Deed of Indemnity had not brought into existence any binding undertaking in relation to the respondents’ expenses.

 

Refusal of request for more time
[62]      In the course of the hearing on 5 May 2017, Mr McIlvride made a motion at the bar for further time.  His stated intention was to have the Deed of Indemnity signed.  In the exercise of my discretion, and having regard to the procedure since the December interlocutor, I refused that motion.  The noter and its agents had had a total of some 5 months within which to comply with the December interlocutor.  They had been endeavouring to obtain a bond of caution since about mid‑March.  As the stated purpose of being granted further time was to have the proffered Deed of Indemnity signed, and given the stance of the respondents as stated to the court through their Senior Counsel, there was no prospect that the Deed could be signed by all parties.  Even if it were, the non-justiciability in this court of its import precluded satisfaction of the suspensive condition in clause 2.  There would be no utility in granting further time for the purpose Mr McIlvride identified.  At the hearing on 5 April, having secured on that occasion a further four weeks, Mr McIlvride had accepted that that would be the final indulgence the noter could expect from the court. Mr Borland noted that a failure to obtain caution entitled the counterparty to decree of absolvitor in ordinary proceedings or, as here, refusal of the prayer of the noter’s Note:  rule 33.10.  Mr McIlvride did not contradict the correctness of that proposition.  I granted the respondents’ motion for and refused the prayer of the Note.