Premier Motorauctions Ltd ((in Liquidation)) and Another v Pricewaterhousecoopers LLP and Another
| Jurisdiction | England & Wales |
| Judge | Mr. Justice Snowden |
| Judgment Date | 24 October 2016 |
| Neutral Citation | [2016] EWHC 2610 (Ch) |
| Docket Number | Claim No. HC-2014-002210 |
| Court | Chancery Division |
| Date | 24 October 2016 |
[2016] EWHC 2610 (Ch)
Mr Justice Snowden
Claim No. HC-2014-002210
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Rolls Building, Fetter Lane,
London, EC4A 1NL
Hugh Sims QC and Jay Jagasia (instructed by Hausfeld & Co LLP) for the Claimants
Henry King (instructed by DLA Piper UK LLP) for the First Defendant
Adam Zellick (instructed by CMS Cameron McKenna LLP) for the Second Defendant
Hearing dates: 20 and 21 July 2016
This is an application by the Defendants for security for costs pursuant to CPR 25. It raises issues relating to the use of After-the-Event (ATE) Insurance to provide security for the costs of an action by two insolvent companies. The application is made by the defendants at the first CMC after the close of pleadings in proceedings against them by the two claimant companies which went into administration on 22 December 2008 and then into compulsory liquidation on 18 June 2010.
Background
The First Claimant ("PMA") is the parent company of the Second Claimant ("PMAL") (together "the Companies"). Mr Keith Elliott ("Mr. Elliott") owns 97% of PMA and prior to administration was the managing director of both Companies. At all material times the Second Defendant ("the Bank") was the Companies' bank. The circumstances in which the First Defendant ("PwC") came to act for or in relation to the Companies prior to their going into administration is disputed.
Prior to going into administration, PMAL had two main business operations, a car auction business in Leeds, and an auction business selling unique registration plates for the DVLA at various locations around the UK. As well as being the holding company for PMAL and other group companies, PMA also owned the Leeds property from which PMAL traded, together with a piece of land in Birmingham which was acquired in July 2006 with the benefit of lending from the Bank, and which was intended for commercial development.
In April 2008 a proposed sale of PMAL, and certain interests in PMA's properties fell through, and at about the same time capital loan repayments became due on the loan from the Bank for the purchase of the Birmingham site. This led to Mr. Elliott communicating with the Bank about the need for additional lending facilities, and his proposal to secure a joint venture partner to assist in the management, development and operation of the Birmingham site. In early July 2008 the Bank increased the overdraft facility available to the Companies from £1m to £1.5m; and on 28 July 2008 the Bank agreed a further increase in the overdraft facility to £1.75m and agreed to postpone capital repayments required on the Birmingham loan.
At this point in late July 2008 the Bank introduced a Mr. Warnett of PwC to Mr. Elliott as, so the Claimants allege, a person who might be willing to act as a non-executive director of the Companies, and Mr. Elliott and Mr. Warnett had a meeting on 11 August 2008 to discuss whether and if so, on what basis Mr. Warnett might be willing to act. The precise purpose, contents and outcome of this meeting is disputed, but it led to PwC being engaged to conduct a review of the Companies' cash-flow needs pursuant to an engagement letter dated 15 August 2008 that was signed both by the Companies and by the Bank.
On 21 August 2008 PwC issued a draft Business Review report which indicated that the Companies needed an immediate injection of £2 million and identified that receipts in a DVLA Client Account should be treated as trust monies. At a meeting on 29 August 2008 attended by the Companies, PwC and the Bank, the Bank orally confirmed that it would increase the Companies' overdraft facility with immediate effect by £2m on terms which included that the monies in the DVLA Client Account could not be set-off against the overdraft with the Bank. The Companies drew down on that increased overdraft facility and Mr Elliottt signed a further guarantee in relation to the £2m additional funding.
The other terms stipulated orally by the Bank are disputed, but on 5 September 2008 PwC issued the Bank with an engagement letter proposing to provide services to the Bank in relation to a proposed sale of PMAL and its businesses, and on 11 September 2008 the Bank issued a facility letter to the Companies in relation to the increased overdraft which stated, as a condition, that the Companies should engage in a sales process in conjunction with PwC, to be completed by 31 December 2008. The Companies obtained legal advice from Walker Morris in September 2008 and declined to sign either the PwC letter of 5 September or the facility letter of 11 September 2008.
From September to December 2008 PwC continued to carry out review work for the Bank and during that period various proposals and offers were made and considered for investment in the Companies or for sale of some or all of the Companies' businesses or assets. Many of the facts surrounding such proposals and offers are disputed, as are allegations that the Bank thwarted at least one advantageous offer. None of the deals came to fruition, and on 22 December 2008, two partners of PwC (Messrs. Ellis and Green) were appointed as administrators of the Companies and the main business and assets of the Companies were sold by way of a pre-pack sale. The consideration included the provision of a share warrant in favour of the Bank.
The essential claim of the Companies, now acting by their joint liquidators, Messrs. Khalastchi and Atkins of Menzies LLP ("the Joint Liquidators") is that Mr. Warnett was introduced to the Companies on false pretences and that he had no intention of performing a role of non-executive director. It is said that Mr. Warnett was used by the Bank and PwC as part of a conspiracy to obtain an internal assessment of the Companies' affairs, to identify a fictitious need for additional finance that could then be provided by the Bank on terms that gave it effective control over the Companies and the means to force them into administration so that their business and assets could be sold at an undervalue by the administrators for the benefit of the Bank. The Companies allege that the Defendants thereby breached various duties to them and conspired to cause them loss by unlawful means.
Those allegations are denied by the Defendants, who contend that in reality the Companies were "run into the ground" by Mr. Elliott, who mismanaged the Companies, their assets and their finances, and who drew heavily on their funds to support his own extravagant lifestyle. They contend that the allegations concerning Mr. Warnett make no sense, that the need for additional finance that he identified was genuine, and that the change of treatment of the DVLA Client Account was backed up by independent legal advice and did not cause the Companies' financial difficulties. The Defendants say that the allegations of conspiracy are spurious and implausible, that there were no breaches of any duties (some of which duties are in any event denied) and that the insolvency of the Companies has caused the Bank significant loss.
The Companies' primary loss claim is for losses estimated to total between about £45million —£54million. In addition to denying liability, the Defendants deny this primary case as to quantum on the basis that if the Bank had not provided the additional £2million overdraft facility the Company would not have been able to carry on trading.
The Correspondence concerning Security for Costs
The Claim Form was originally issued on a protective basis in July 2014 and included Mr. Elliott as a claimant. In response to a letter before claim sent in September 2014, the Bank indicated that it would be seeking security for costs and indicated that its costs were likely to be between £250,000 and £500,000 (or more). In March 2015 the Companies' solicitors wrote to PwC indicating that they were in the process of obtaining ATE cover of £4.5 million.
On 17 June 2015 the Claim Form was amended pre-service to remove Mr. Elliott and the Amended Claim Form and Particulars of Claim were served on 19 June 2015. On 29 June 2015, solicitors acting for the Companies served notice that ATE policies had been issued to the Joint Liquidators and the Companies (as co-insureds) by QBE Insurance (Europe) Limited ("QBE") (the primary layer of £250,000 and a tertiary layer of £1,750,000 in excess of £1 million) and by Elite Insurance Company Limited ("Elite") (the secondary layer of £750,000 in excess of £250,000). A premium of £75,000 had been paid on inception of the QBE policy, and a further £350,000 is payable within 4 weeks of disclosure.
When the Defendants acknowledged service in early July 2015, they also asserted that by reason of the Companies being in liquidation and the Joint Liquidators' communications to creditors to the effect that there were no assets to be realised in the liquidations, they had reason to believe that the Companies would be unable to pay the Defendants' costs if ordered to do so. The Defendants contended that this gave them an entitlement to substantial security, and they asked for the Companies' proposals in that respect, including the provision of copies of any ATE insurance policies upon which the Companies proposed to rely.
Redacted copies of the QBE and Elite policies were provided to the Defendants in August 2015. I shall return to some of the terms of the ATE policies in due course. In October 2015 the Bank's solicitors sought details of how the Companies intended to pay the further premium of £350,000 due after disclosure under the QBE policy, and in December 2015 PwC's solicitors wrote to the Companies'...
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