RBS Rights Issue Litigation [2017] EWHC 463
Group actions appear to be the bread and butter of funders and the interest in collective action has only increased with time. An issue arose in the RBS rights issue litigation as to the circumstances in which the Court may require disclosure of the names of commercial funders, and the details of any ATE insurance, in advance of a threatened application for security for costs when a trial is imminent. Although the majority of the claimants had settled the litigation, a hold-out group remained. The costs were gargantuan – RBS’s costs far exceeded £100m and RBS considered that they would incur a further £25m between the date of settlement and the end of the trial. The hold-out claimants’ costs were £20m. Complex case management orders had been made in relation to costs such that the hold-out claimants had an exposure to past costs and, from the date of settlement, were now solely liable for the adverse costs from the date of settlement through to the end of trial. They were also 100% responsible for the funding of the claim. These changes of circumstances led RBS to make an application for security for costs, requesting the names of the funders and a copy of applicable ATE insurance policy. RBS of course have some familiarity with this argument since the Wall case where they had successfully obtained an order disclosing the name of the funder. However, the request for the ATE policy was a step further.
Whilst RBS’s arguments were much the same as in Wall, the claimants argued that relief was premature unless RBS had a realistic prospect of success in an application for security. They also argued that the delay in making the application was fatal since RBS had never sought security previously. As for the ATE policy, the claimants argued it was privileged and it was not relevant unless the claimants were ever to rely on the ATE policy. In broad terms, the claimants were arguing that the Court should not exercise its discretion in the same way as it had in Wall.
The Court accepted that RBS needed to be able to show that any application for security had a realistic prospect of success. One of the arguments that the claimants made was that it would be wrong for a claim to be stayed if security was ordered against a funder, but not paid, as the claimants would not be responsible for a funder’s actions. Another was that it needed to be shown first that the claimants cannot or will not pay the adverse costs.
The Court was having none of this – it was perfectly proper that enforcement may be directed first against the funders – and indeed it was more likely in the context of group litigation. As the Court commented “This should not come as a surprise: such orders are by no means unusual”. In consequence, it could come as no surprise that commercial funders’ exposure may occasion an application for security. Indeed, this had already happened in another shareholder case – Sharp v Blank. In that case, the funders standing behind the claimants had already been required to provide security for costs under CPR 25.14, and the Court stated that they might have to provide more security because it had become apparent that the claimants' ATE cover was insufficient for the defendants' estimated costs to the end of the trial. As the Court held “funders are routinely in the front line”.
However, although the jurisdiction to order security in these circumstances was undoubtedly present, it was clear that there was still a discretion as to whether to order it, and the delay in making an application was always an important factor to consider. The choice between putting up security or withdrawing the claim became more and more difficult the closer the case came to trial when costs had already been incurred. RBS’s point was that, in a funded case, the focus of the enquiry as to fairness should be the funder rather than the claimant. As to this, the claimants said that RBS had known for 18 months that a funder was involved and no application for security had been made. RBS explained its application on the basis of a change of circumstances, in part because of the settlement with the other claimants but also because it had become apparent that the claimants did not have sufficient ATE cover and a change in the funding arrangements with Hunnewell, the litigation funder. RBS had no details as to the financial viability of Hunnewell.
The Court accepted it had to strike the correct balance, between ordering something that would not provide any fair, real choice or could not be accommodated within the timetable. It also had to consider whether the impact on the claimants was plainly and obviously unjust. The Court accepted that the December settlement was a watershed and the occasion for a rather changed risk profile as well as arithmetically increased exposure.
The reality was that, although no application for security had been made, the funders should have been aware of their exposure from day one – they were not entitled to assume there was no risk of an application being made. The Court said that it was “arguable that commercial funders providing (it is assumed) multi-million pound funds for multi-million pound gain should have ready access to funds to provide by way of security if they proceeded without other cover”.
The Court, without wishing to offer any encouragement to an application, did consider that RBS should be provided with limited disclosure to consider the financial position as to costs.
As to the ATE policy, the Court did have jurisdiction to order its disclosure when necessary to enable the Court proportionately and efficiently to exercise its case management function. The Court also did not consider that an ATE policy could be privileged per se, although elements may need to be redacted. Further, the way that the claimants had previously deployed the ATE policies meant that they were not entirely irrelevant in the context of case management – they were put forward to obtain procedural advantages. Nonetheless, the Court did not consider, in the exercise of its discretion, that it was appropriate to order their disclosure. With all that said, though, the Court was clearly troubled at the uncertainty and opaqueness of the claimants’ funding and ATE arrangements, particularly on the basis that there appeared some doubt as to whether either were sufficient. The Court did consider that there should be more transparency as to the funding position and the ATE cover. The warning signs of this case were clear for funders and claimants to see – defendants were entitled, in certain circumstances to see relevant extracts of ATE policies and any chinks in the funding armour would inevitably lead to their disclosure. Funders had to fund a case assuming that security for costs could well be ordered, and that the funders would need to furnish that security. Reliance on ATE policies would not necessarily be sufficient in the absence of their disclosure – indeed, the more a party relied upon an ATE policy, the more likely it would that its disclosure was going to be ultimately desirable.