Defendant’s “potential exposure” not relevant to security for costs

Isaacs: Decision upheld

A defendant’s potential exposure to paying the premium for after-the-event (ATE) insurance necessary to meet its demand for security for costs was “not relevant” to the question of security, the High Court has ruled.

The Khan Partnership (TKP), a central London commercial law firm defending a breach of fiduciary duty claim, argued that a deed of indemnity was unacceptable as security because it would be liable for an additional £195,000 in ATE insurance premiums if it lost the case.

Stuart Isaacs QC, sitting as a High Court judge, said that applying principles from case law, Deputy Master Arkush was correct not to have taken into account the “amount and potential recoverability of the premium” from TKP.

“The relevant questions for the court were whether the deed of indemnity would in fact give TKP real or adequate security for its costs and whether making the order would prevent IDL [the claimant] from pursuing its claim.

“The answer to the first question was yes and the answer to the second was no. TKP’s potential liability for the premium for the deed of indemnity was not relevant to those questions. In my judgment, the master’s order was correct.”

Delivering judgment in Infinity Distribution Limited v The Khan Partnership [2020] EWHC 1657 (Ch), Mr Isaacs said TKP formerly acted for Infinity Distribution Limited (IDL) in connection with an HMRC investigation into potential VAT fraud by mobile telephone traders.

IDL, now in administration and insolvent, was a wholesale supplier of mobile telephones. TKP successfully obtained a repayment from HMRC of input VAT.

IDL alleges that TKP had acted in breach of fiduciary duty in connection with the fee arrangements between them in “allegedly making unauthorised deductions” from IDL’s client account. It claims £337,525.

TKP disputes the claim and seeks to set off further sums which it claims are due to it from IDL. It applied for security of costs of £500,000 by payment into court or another method approved by the court.

Chief Master Marsh ordered in December 2018 that IDL should provide £350,000, secured by a deed of indemnity. There was no appeal against that order.

IDL told TKP in February 2019 that it would be seeking from TKP the costs of the premium for the deed of indemnity.

The following month IDL said its ATE insurance premium would need to be “topped up” from £180,000 to £350,000 – because the ATE insurer could not provide an indemnity for more than the insured amount – and it would also seek to recover this from TKP.

Mr Isaacs said: “The total costs in question amount to £315,000, comprising the original £120,000 premium for the original cover of £180,000, plus an additional £195,000 for the topped up ATE policy and associated deed of indemnity.”

He went on: “TKP took the view that the deed of indemnity was unacceptable. This was not, as is often the case, because of the terms of the proposed security but because of the TKP’s potential liability for the costs of the premium for it if it was unsuccessful at trial.”

However, Deputy Master Arkush ruled that the deed of indemnity was adequate and acceptable security. TKP appealed, seeking a payment into court instead.

TKP said the effect of the order would be to increase its total costs exposure from £421,000 to £616,000.

Mr Isaacs said the scope of the hearing before the deputy master was whether TKP’s potential liability rendered the deed of indemnity unacceptable.

“If the answer was no, as the master determined, then provision for security in that form had already been ordered by Chief Master Marsh.” He dismissed the appeal.

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