Quinn Insurance Ltd (Under administration) v PriceWaterhouseCoopers (A Firm)

• Jurisdiction: Ireland
• Judge: Mr Justice Robert Haughton
• Judgment Date: 30 January 2018
• Neutral Citation: [2018] IEHC 16
• Docket Number: Record No: 2012 1540P
• Court: High Court
• Date: 30 January 2018

Between:

QUINN INSURANCE LTD (UNDER ADMINISTRATION)

Plaintiff

- and -

PRICEWATERHOUSECOOPERS (A FIRM)

Defendant

[2018] IEHC 16

Haughton Robert J.

Record No: 2012 1540P

THE HIGH COURT

Company - S. 52 of the Companies Act, 2014 - Security for Costs - Insurance compensation fund (ICF) - Prima facie defence - Issue of exceptional public importance

Facts: The defendant sought an order of security for costs pursuant to s. 52 of the Companies Act, 2014. The defendant asserted that the plaintiff would not be able to pay its costs. The issue pertained to whether the defendant was entitled for an order for security for costs. The quantum was not an issue. The plaintiff asserted that it had suffered losses due to the defendant's wrongdoings.

Mr. Justice Robert Haughton refused to grant the relief sought by the defendant. The Court held that in order to obtain security for costs, the moving party must establish prima facie defence and the inability of the other party to pay the same. The Court noted that since it was an interlocutory application, it would not give any findings in relation to the defendant's defence. The Court found that since the plaintiff was being funded by a third party, it was not in a position to pay for the defendant's costs. The Court, however, held that even after two criteria had been met; it had the discretion to refuse the relief for the common good if special circumstances existed. The Court observed that the plaintiff had prima facie established that there was a casual link between the plaintiff's loss and the defendant's fault. The Court held that even though there was a dispute between the private insurance company and the private auditor, the present case raised significant point of law relating to the regulatory framework and the extent of the obligations of the auditors of insurance companies under the Insurance Acts.

Judgment of Mr Justice Robert Haughton delivered this 30th day of January, 2018.

1 In this application, the defendant seeks security for costs pursuant to Section 52 of the Companies Act 2014, which states: -

'Where a company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter, may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his or her defence, require security to be given for those costs and may stay all proceedings until the security is given.'

By agreement between the parties, this judgment deals only with the issue of entitlement to security for costs, and not with quantum of security.

Background

2 The plaintiff is a limited liability company incorporated in the State in 1995. It was a substantial insurance company underwriting business both inside and outside the State. By order of the High Court dated 3 March, 2010, it was placed under the statutory administration of joint administrators Paul McCann and Michael McAteer ('the joint administrators') in accordance with the Insurance (No. 2) Act 1983. Mr. McAteer has averred that the plaintiff is insolvent and has been reliant on obtaining funding from the Insurance Compensation Fund ('ICF') to satisfy claims and wind down the plaintiff's business, most of which has now been sold off.

3 The defendant is a professional services firm that provided auditing services to the plaintiff and related companies during the period 2005-2008.

4 The plaintiff issued the Plenary Summons herein on 15 February, 2012, claiming damages. It was served on 10 July, 2013, and an appearance was entered on 17 July, 2013. The proceedings were admitted to the Commercial Court on foot of an affidavit in which Mr McAteer averred that the action would be 'very large and very complex', involving a pool of some 40 million documents which would need to be reviewed on discovery. A statement of claim was delivered on 24 September, 2013, and after extensive exchange of particulars a defence was delivered on 1 August, 2014. Thereafter, a motion brought on behalf of the defendant seeking to compel the delivery of particulars was heard by Costello J. Her order, requiring the plaintiff to provide certain particulars, was appealed by the plaintiff to the Court of Appeal, and in a judgment delivered by Hogan J. on 22 March, 2017, was successful in part only.

Main pleaded claims

5 In these proceedings the plaintiff claims damages for alleged breaches of contract, breach of duty and breaches of statutory duty, misrepresentation, negligent misstatement or unlawful interference with the plaintiff's business and economic interests, arising from the manner in which the defendant conducted its audits of the plaintiff's Financial Statements and audited certain Forms ('Regulatory Returns') statutorily required to be submitted to the Financial Regulator of insurance companies for the financial years ending 31 December 2005, 2006, 2007 and 2008 ('the material period'). The plaintiff's claim is that the Financial Statements did not show a true and fair view of the state of the plaintiff's affairs and/or that the Regulatory Returns did not disclose the true financial position, as a result of which the plaintiff did not maintain assets sufficient to cover the 'Minimum Solvency Margin' or 'Adequate Solvency Margin' required by the 1994 Regulations or 1995 Regulations, or did not take such steps as the Financial Regulator would have required had it been aware that the solvency margin was inadequate. There are two elements to the claims:

(1) Technical Provisions

i. In its Financial Statements the plaintiff was required to include Technical Provisions, that is to say, a total of the minimum levels of reserves that as a non-life insurance company it was statutorily obliged to maintain in order to ensure that claims would be covered. The estimation of Technical Provisions is complex and involves actuaries. In the first instance the estimation and 'booking' of Technical Provisions was undertaken by the plaintiff, supported by the actuarial opinion of Milliman Advisors Limited ('Milliman').

ii. As part of this element it is alleged, inter alia, that there was significant underestimation of the level of reserves caused by deficiencies in the plaintiff's reserving department; by the methodology employed by Milliman, and/or the specific actuarial approaches adopted by Milliman in arriving at its best estimates which failed to take into account error or the likelihood of errors in the source date supplied by the plaintiff; by the percentage margins over Milliman's best estimates applied by the plaintiff to the Booked Technical Provisions; by the way in which the plaintiff incentivised its claims handling staff; and by the manner in which it appointed staff to technical positions without the requisite experience.

iii. It is alleged that the defendant failed to carry out appropriate tests to evaluate the Technical Provisions as estimated by Millimans and adjusted by the plaintiff, and failed to recognise or report to the plaintiff or the Financial Regulator on the inadequacy of the Technical Provisions. It is alleged that the opinion given in the accounts for the years 2005 to 2008 should have stated that the defendant had not reviewed the plaintiff's claims reserving methodology, or interrogated or reviewed the plaintiff's own assessment of the plaintiff's required technical reserves sufficient to discover significant underestimation.

iv. It is claimed that there was significant and material understatement of the Technical Provisions for the material period, such that the plaintiff's claim liabilities were materially underestimated in the audited Financial Statements for the material period, in Forms 6,10 and 11 audited by the defendant and comprised in the Regulatory Returns. The plaintiff relies on re-estimation by its expert actuary Mazars LLP ('Mazars', a UK firm in the Mazars Group) of what it asserts should have been the Technical Provisions.

(2) Guarantees given by plaintiff's subsidiary companies

i. Guarantees were given during the material period initially by four direct or indirect subsidiaries of the plaintiff, being companies holding property assets forming part of the plaintiff's technical reserves, in favour of the wider Quinn Group of companies. In 2005, these guarantees covered €655 million of debt. The scope of the guarantees was extended in the years 2006 and 2007, and in 2007 the debt of the wider Quinn Group the subject of these guarantees increased to €1.29 billion. In 2008, the plaintiff authorised four additional subsidiary companies to grant guarantees over the same amount as had been guaranteed by the original guarantees in 2007.

ii. The defendant audited the four subsidiaries that originally provided the guarantees, and also audited the plaintiff's accounts, for the material years.

iii. It is pleaded that the defendant was aware or ought to have been aware of the existence of the guarantees but, in breach of duty, failed to recognise or identify the implications and consequences of them for the plaintiff's financial statements; failed to note the guarantees in the plaintiff's accounts; failed to qualify the accounts so as to give a true and fair view of the plaintiff's financial situation; failed to qualify its opinions in the financial years 2005 to 2008; and failed to report to the plaintiff's board and Financial Regulator on the significance and implications of the guarantees. In wrongly opining as to the propriety of the plaintiff's accounts, it is alleged that the defendant failed to alert the plaintiff's board or the Financial Regulator of deficiencies in the Technical Provisions.

(1) Technical Provisions

(2) Guarantees given by plaintiff's subsidiary companies

6 As a result of the failure of the plaintiff to comply with the regulatory regime relating to reserves, the plaintiff claims that it has...