Over the decade since the implementation of the costs reforms proposed in Lord Jackson's Review of Civil Litigation Costs, lawyers and litigants have become accustomed to the courts actively managing the costs of disputes with a value up to £10 million. But the court also retains a discretion to apply the costs management regime in cases even above this level. In a recent case (in which Gowling WLG act for the claimants), the court granted just such an order, to manage the costs of insolvency claims valued at £280 million plus.
In this article, we look at the decision and why insolvency practitioners should consider actively seeking costs management orders in complex and high value insolvency claims.
In Transworld Payment Solutions U.K. Limited & Anor v First Curaçao International Bank N.V. and Anor  EWHC 2407 (Ch), the claimants (a company in liquidation and its liquidator, Stephen Hunt of Griffins) seek in excess of £280 million in relation to allegations connected with Missing Trader Intra Community fraud.
The costs management regime under Part 3 of the Civil Procedure Rules (whereby parties exchange and seek to agree budgets for the costs which it would be reasonable and proportionate for them to incur in the proceedings) does not automatically apply in claims worth £10 million or more. Nevertheless, the claimants sought a costs management order (CMO), asserting that a CMO was necessary to enable them to understand the extent of the costs risks against them in the event they were unsuccessful and, if appropriate, to obtain such appropriate further after the event insurance cover as necessary to cover adverse costs risks. The application was contested by the defendants and the second defendant (in response to the claimants' application) issued an application for security for their costs.
Should the court make a costs management order?
Deputy Master Collaço Moraes set out that it was common ground that, while costs management does not apply automatically to this claim (it being in excess of £10 million), the court nevertheless has an unfettered discretion to make a CMO under CPR 3.12(1)(e), 3.12(3) and 3.15(2). While the discretion is unfettered, it must be exercised having regard to the overriding objective of dealing with cases justly and at proportionate cost, and the court is required to take into account certain factors, which the court weighed as follows.
Knowledge of the financial position of the parties
In the court's assessment, the most important factor was the importance of the parties having knowledge of their financial positions - including their exposure to adverse costs - to enable the parties to manage risk and to provide a level playing field.
In circumstances where the claim was being brought by an individual with litigation funding for the benefit of creditors of the first claimant, the need to know the real exposure to costs (i.e. the costs that might ultimately be recoverable on assessment) was a factor that weighed heavily in favour of making a CMO. In the deputy master's view, a CMO would provide a quantification which would enable all parties to better assess and cater to the risk of adverse costs, providing a more level playing field. While these costs budgets would not be set in stone, any revisions would be subject to the control of the courts and would have to be justified by reference to significant developments in the litigation.
It should be noted the defendants argued that because the claimants allege dishonesty, if they lose the claim, the likelihood, on the principles set out in Clutterbuck & Paton v HSBC plc  EWHC 3233 (Ch), is that there will be an indemnity costs order, rendering the costs budgets irrelevant to the assessment of costs. The deputy master was unpersuaded by this argument. He noted the claimants had accepted that proportionality would not impact on the issue of costs budgets, and the only issue was whether the costs are reasonable. At , the deputy master said: "If cost budgets are assessed on the basis of reasonable and necessary costs, then what the claimants will have is a baseline of reasonable costs by agreement or approval of the court, which will enable the claimants to take a realistic view as to the exposure to adverse cost in the event of an adverse cost order being made on an indemnity basis."
In this regard, it is also useful to remember that:
- There is no presumption that unsuccessful claimants at trial, who had made allegations of dishonesty, ought to pay the defendant's costs on the indemnity basis (Libyan Investment Authority v King  EWHC 434 (Ch)).
- CPR 44.3(1) provides that the court will not allow costs that have been unreasonably incurred or are unreasonable in amount, irrespective of the basis of assessment.
- Pursuant to CPR 44.4(3)(h), the court should have regard to costs budgets, regardless of the basis of assessment.
Controlling recoverable costs
The second key factor was the ability of the court to control the recoverable costs of the litigation. Although the defendants had provided costs estimates, they were just that - estimates. They also did not provide the level of detail that would be required under a CMO and, without a CMO, there was no means to control any amendment to those estimates.
There was also a significant discrepancy between the costs estimates of the first defendant (a little over £6 million) and the second defendant (a little under £12 million), which the judge did not think could be justified by their different roles in the proceedings, and so suggested that the second defendant's estimate may be significantly in excess of the sums that would be recoverable on assessment.
Making a CMO would therefore provide various benefits, including prospectively controlling (in conjunction with case management directions) the recoverable costs of key stages of the litigation where the two defendants' estimates were significantly different.
Finally, while the deputy master noted that the court has jurisdiction to make a split CMO (whereby only some parties are subject to costs management - for instance, in cases involving a litigant in person), that would not be in accordance with the overriding objective in this case, and so all parties' costs should be managed.
The other factors did not, in the court's estimation, weigh heavily in this case, although they may in others:
- Fairness - while the court considered it "only fair" that all three parties know what costs are considered to be reasonable in this case, this didn't add much weight to its assessment of factors 1 and 2 above.
- Avoiding legal catastrophe - similarly, the principle that a CMO should be made to avoid the legal catastrophe of an adverse costs order did not add a great deal to the other factors in this case.
- Proportionality - finally, the deputy master considered the proportionality of costs management in this case. He said that, while it was clear that it was not proportionate to make a CMO in this case, proportionality did not trump the other factors. Since the defendants had already provided some form of estimate, and the costs of complying with a CMO should not be significant, arguments about proportionality did not militate against making a CMO.
Having weighed all the above factors, the deputy master's firm judgment in this case was that it was just and in furtherance of the overriding objective to make a CMO.
Security for costs
Having decided to subject the claim to costs management, the deputy master then went on to consider the second defendant's application for security for costs. As in principle the claimants had agreed to provide security for costs, the question for the court was to determine their quantum. In this case, the deputy master ordered that quantum be determined at the same costs management conference as the parties' costs budgets. He considered the approved costs budgets would provide a strong guide to the appropriate quantum for security, and it was more appropriate to base security on this sum than the disputed estimates already before the court.
Costs management – an important tool for insolvency practitioners
While it has been relatively rare for a party to ask for costs management, a CMO can be a valuable tool for insolvency practitioners (IPs) in complex and high value insolvency litigation (including litigation that involves allegation of fraud and/or dishonesty), and this decision demonstrates that IPs are well placed to receive CMOs. Although the court recognised that many IPs are sophisticated litigants, it also recognised that they bring claims as officers of the court for the benefit of creditors, and will be personally exposed to adverse costs. Even though IPs and their firms often have a significant financial stake in any recoveries, this potential commercial upside is not an argument against making a CMO to clarify the potential costs downside. IPs should therefore consider whether high value insolvency disputes would benefit from a CMO to clarify the real costs exposure and to inform the appropriate level of after the event insurance cover.
Gowling WLG acted for the successful claimants in this application. If you would like to discuss the decision, or our insolvency practice more generally, please contact Jason Freedman.