The High Court has, for the first time, granted security for costs in a challenge to a proposed English restructuring plan. There has been concerns that this ruling could motivate dissenting creditors in contested restructuring plan proceedings to file their own applications for security for costs, potentially causing delays or disruptions to the process.

However, dissenting creditors should note that the court’s discretion in this instance was closely linked to the particular facts of the case.

Annecto Legal helps restructuring professionals and insolvency practitioners in finding the right litigation support, funding and insurance for restructuring plans and security for costs requirements.

RE Consort Healthcare

Consort Healthcare (Tameside) plc company is a special purpose vehicle delivering services to the Tameside and Glossop Integrated Care NHS Foundation Trust under a project agreement established in 2007 through a private finance initiative. The Trust was tasked with redeveloping an existing hospital site.

A dispute emerged between the company and the Trust, leading to adjudication, which resulted in a significant award against the company in favour of the Trust. The company concluded that the adjudication award, along with its impact on the required level of future service, rendered its business unviable.

Consequently, it proposed a restructuring plan under Part 26A of the Companies Act 2006 to settle the claims against it and modify its obligations under the project agreement. The company asserted that, without the restructuring plan, it would be forced into administration.

The Trust contested the proposed plan. In its application for security for costs, the Trust pointed out that (a) the other plan creditors, who were likely to support the plan, were having their costs covered by Consort’s sponsors, and (b) security for costs was necessary to “level the playing field.” The Trust argued that it would be unfair to bear the risk of being unable to recover its costs from Consort, which had acknowledged that it expected to be cash flow insolvent without the restructuring plan.

The High Court rejected the company’s arguments that security for costs should not be ordered due to Part 26A proceedings. The Court also considered the Trust’s concerns about the Consort being unable to pay costs. In a surprising decision, the Court found that the risk of the Consort being unable to pay costs was significant enough to grant security for costs for the Trust.

Case reference: Consort Healthcare (Tameside) Plc v Tameside and Glossop Integrated Care NHS Foundation Trust [2024] EWHC 1702 (Ch)

Funding options for restructuring

When it comes to restructuring a business to avoid insolvency, litigation assets may be used to generate cash to pay for restructuring costs, such as lay-offs or tax liabilities. A claim for money has a present value and could either be sold outright or used to attract funding for both the legal costs of the actual claim and any wider costs of the restructure.

In circumstances where litigation is the only asset of the business, understanding these options and getting best value is critical. In mergers and acquisitions, potential litigation can depress the value of a business as a buyer will use the prospect of a costly dispute to reduce the sale price. Insurance can be used to shift litigation risk off the balance sheet, allowing a seller to secure full value for the business.

Equally, if buying a business with litigation risks against it, the buyer may insure against such claims upon purchase to immediately benefit from the removal of said liabilities.

ATE insurance for security for costs

After the event insurance policies may provide sufficient protection for claimants. If a claimant is covered by After the Event (ATE) Insurance, it will be taken into consideration by the court when assessing the need to grant security for costs.

ATE insurance policies typically cover parties entering litigation and the inevitable costs that will arise from proceedings. The terms and conditions included in the ATE policy will be examined, as well as the insurer’s rating and location. It is often common for claimants to provide either anti-avoidance endorsements (AAE) or a Deed of Indemnity should an application be made against them for security for costs.

This is an important role as many genuine claims fail to secure ATE as a result of poor presentation and preparation. Annecto Legal has vast experience in working with litigation funders and ATE underwriters and gives clients the opportunity of securing the right product at the best price to protect against the real risks of litigation.

How can Annecto Legal assist?

At Annecto Legal, we assist a wide range of clients in finding the appropriate funding, assignment options and insurance for restructuring and security for costs applications.

Having specialists at your side and being fully funded can help to ensure that you are in the best position possible. If you wish to speak to an advisor about a security for costs application or restructuring, please contact us today.