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Home / News and Insights / Insights / Whether to follow the smoking gun: litigation

This article was first published in the Summer 2018 edition of RECOVERY magazine and is reproduced with the permission of R3 and GTI Media.

You look through a company’s records and find the ‘smoking gun’ – that piece of evidence you could only have dreamed of. You know you have a cast-iron case! Is it time to crack open the champagne? Or maybe you need to put it on ice while you think it through first? Any litigation is likely to be a big endeavour and one that you need to consider carefully.

In order to work it out, let’s start at the end and work backwards.


Assuming that the end result of the ‘smoking gun’ is a successful litigation, does your ‘target’ actually have any money? Consider employing an enquiry agent to find out what assets the target has before you go any further.

Ask yourself ‘will judgment have to be enforced abroad?’. Are there reciprocal enforcement rights in the relevant jurisdictions and how difficult or costly will it be to enforce against assets outside the jurisdiction? And will the target’s money or assets still be there in a year’s time when you have won the case?

Should you get a freezing order, pre-action, to prevent the dissipation of assets?  Injunctions are expensive to obtain and are discretionary based on whether it is just and convenient to make the order. The court will want to see that there is an underlying cause of action, meaning that time, and therefore costs, will need to be expended putting together all the necessary evidence and a legal basis for a claim. The applicant will need to give an undertaking to pay damages to the respondent if it is found that the freezing order shouldn’t have been made. Accordingly, freezing orders are not commonplace and are only likely to be sought in cases with large amounts at stake and where funding is not an issue.

Adverse costs

Even in the clearest cut cases this is a risk. Perhaps an offer of settlement was unreasonably rejected, perhaps not all heads of claim were won, perhaps an interim application was lost, perhaps the witnesses let you down on the day or perhaps the judge just didn’t get it – there are many reasons why an adverse costs order could be made. Trustees in bankruptcy suffer these orders personally as they bring the litigation in their own name. The same applies in administration and liquidation where the office-holder’s cause of action is taken in their own name (eg preference).

Office-holders are usually entitled to be indemnified from the company’s assets (this can be disapplied by the court) but that only assists if there are funds to be indemnified from.

Orders for costs against a company in administration or liquidation have ‘superpriority’ over other claims in the process unless the court orders that they are an expense. This will affect preferential claims and floating charge realisations.

Note the requirement in rules 7.111 to 7.115 of the Insolvency (England and Wales) Rules 2016 to seek the approval of preferential creditors or floating charge holders before costs above £5,000 are incurred in relation to specified claims.

While it is rare for an administrator or liquidator to be ordered to pay a costs order personally in a claim by the company, the court can make such an order, for example, where it was not reasonable to pursue the claim and does not have to limit the order to the assets available to pay them. That said, it is generally considered that the appropriate remedy for a defendant is a security for costs order (see below) rather than a third party costs order.

After-the-event (ATE) insurance should be considered, but getting cover is dependant upon the merits of the case. If the premium is deferred, it must be paid if the case is won. The premium can be in region of 40 per cent of costs covered and for smaller claims this can be disproportionate.

A great deal of time can be spent putting together the information required to obtain ATE insurance which can, again, be prohibitive. A solicitor or barrister will have to confirm that the chances of success are within the insurance company’s tolerances (eg 65 per cent or more). This means incurring costs on investigations, counsel’s opinion and solicitors.

Once obtained, the insurer will have an interest in everything that happens in the case and will be entitled to payment of a deferred premium if the case is settled early. Consider taking out insurance in stages rather than insuring the whole case in order to limit the amount of the premium payable. Of course, this carries the risk that further insurance is not available at a later stage, for example if the merits of the case change.

Security for costs

Where the company is the claimant, the first thing that an office-holder may have to deal with is an application for security for costs. If cash security is not available, the existence of ATE insurance may defeat an application. However, the terms of the policy will be scrutinised by the court and if it could be set aside (for example if the case advanced is found not to be factually true) then it will not be sufficient for the purpose of providing security.

An order may be refused if the defendant is using the application to stifle a genuine claim, but this means having to persuade the court about the merits of the case at an early stage and opposing the application adds another layer of costs. If security could easily be provided then the court is likely to conclude that that claim is not going to be stifled by an order for security.

Litigants in person (LIPs)

If a target is not represented then the adverse costs risk is minimised (provided they remain LIPs throughout). However costs can still be claimed – financial loss for time reasonably spent or, in the absence of such loss, an hourly rate currently set at £19 per hour plus disbursements (which may include counsel’s or expert’s fees) and the costs of obtaining any legal advice that falls short of formal representation.

LIPs often have little incentive to settle  (as they are not incurring costs) and may pursue defences that a person properly advised would not. While the court will not allow a LIP to ignore procedural rules, he or she is likely to be given leeway by the court.

Litigants in person often slow an action down and create more work and costs for the represented party. Correspondence is likely to be protracted, hearings may be adjourned more than may ordinarily be the case and even where a litigant in person has an obligation to file documents and bundles at court, the represented party may have to do this to ensure that a hearing runs smoothly.


Many solicitors and barristers will take on cases on conditional fee arrangements (full or partial). It may be necessary to fund an initial opinion from counsel so that the lawyers are comfortable as to the merits of the case first. If fees are conditional upon recovery then the lawyers will also be interested as to the financial means of the target.

Litigation funders may provide funding and provide or arrange ATE insurance but claimants should expect to give up a large proportion of any recoveries. There are a variety of funding arrangements on the market but this is outside the scope of this article.

Success fees and ATE premiums can no longer be collected from the opposing party.

Litigation risk

It is highly unlikely that any solicitor or barrister will give any case a 100 per cent chance of success. This is because of litigation risk, based on any number of factors including: witnesses not coming up to proof under cross-examination; judges not seeing the case the way the claimant does; unexpected evidence coming to light and documents being discredited, among a list of many others. Cases only get to trial because both parties think that they are right but it is not possible that they will both be victorious.


Mediation is a useful way to settle a case and avoid the risks of litigation. The process can be costly since the parties must still present their position, provide key evidence and have a very good understanding of their case as well as a good idea of possible outcomes.

Costs may be wasted if there is no settlement but it is worth considering, or at least having a settlement meeting, not least because the courts expect it such that it is almost impossible to avoid some form of alternative dispute resolution procedure.

Timing is crucial: too early and the parties may not be ready (in terms of understanding the strength of their case and the issues or being psychologically ready to settle); too late and the costs of the proceedings will have been wasted or one party may be feeling confident and wish to proceed to trial.

Assign the claim

If there is no appetite to take a claim then perhaps the claim can be assigned (eg to a creditor). Failing that, there are companies that make a business out of buying claims.

Unless a claim is sold outright there is still a risk that a costs order could be made against the assignor so it is important to make sure that the assignee has the means to pay any costs order and to get a meaningful indemnity.

Preparation is key

All of the risks of litigation can be best addressed by proper investigation of a claim at the outset so as to be in a position to assess the merits, apply for ATE insurance or funding, get a conditional fee arrangement in place, oppose a security for costs application, present the best case possible in a mediation and keep costs risks to a minimum.

A well presented and evidenced letter of claim can also lead to an early settlement, leaving you to kick back and enjoy that glass of cold champagne!

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