Security for Costs:
Balancing Justice (and how Manolete can help)

‘Security for Costs’ is a key feature in English litigation. In simple terms, it allows a person being sued (the defendant) to ask the court to ensure the person suing (the claimant) can pay potential legal fees. This could be in cash, bond or a guarantee. This concept exists to ensure fairness. Unlike the claimant who chooses to start the legal process, defendants don't always have that choice. They must defend themselves and cover the costs involved.

While ‘Security for Costs’ is meant to uphold justice, it is also a strategic move for the defendant. If the claimant doesn't provide the security, their legal action might come to a halt. This is especially important in situations where a company which doesn't have enough funds is trying to sue. One common reason for asking for this security is when the company suing might not have enough funds to pay the defendant's legal fees, according to CPR 25.13(2)(c).

‘Inability to Pay’
CPR 25.13(2)(c) includes the words “will be unable” rather than “may be unable” to pay the defendant's costs. This requires the defendant to supply evidence to support the application that the claimant company actually will be unable to pay the defendant’s costs when the costs become due for payment. However, the opening words of the rule that, “there is reason to believe”, have the effect of watering down the obligation to prove the company’s inability to pay costs if ordered to do so.

Needless to say, evidence that the claimant is in liquidation is prima facie sufficient to meet the requirement of inability to pay (Northampton Coal, Iron & Waggon Company v Midland Waggon Company (1878) 7 Ch D 500)) - so too would proof that the claimant is balance sheet insolvent.

Navigating the Court’s Discretion
In Absolute Living Developments Ltd v DS7 Ltd and others [2018] EWHC 1432 (Ch) the High Court rejected a security for costs application against an insolvent company. The Court perceived a palpable risk that the order would suppress a legitimate claim. There were no funds in the estate: the Liquidator, her legal team and the forensic accountants instructed by her were all acting on a contingent basis and would only be paid if the claim succeeded. The Liquidator had been unable to secure any offer of 'after the event' insurance (ATE) cover. The Liquidator had determined she could not reasonably ask the creditors to provide funds to stand as security for costs in part because creditors were likely to wish to expose themselves to a risk of a third-party costs order if the claim were lost. Marcus Smith J held that if the claim was stifled or the Liquidator had to fund the security, the result would be “entirely contrary to the public interest in the insolvency regime that exists in this jurisdiction. It is critical in the public interest that liquidators proceed in a manner that is uninhibited in terms of deciding how to bring actions, including how those actions are framed and funded.”

This decision offers a little solace to those office holders keen on pursuing valid claims without direct funding or ATE. However, it is questionable whether many office holders would adopt a similarly bold approach to the Liquidator in Absolute Living pursuing litigation on a purely contingent basis with no funds in the estate and knowing that in the absence of ATE, the Liquidator would be personally liable for any adverse costs.

The ATE Solution?
Even if an office holder had ATE, it would not likely be an answer to an application for security for costs. Indeed, in Premier Motorauctions Ltd (in liquidation) and another v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872, the Court of Appeal, concluded that in principle, an appropriately framed ATE insurance policy could be an answer to an application for security, if the insurance gave the defendant “sufficient protection”. However, in that case, the defendants did not have assurance that the insurance was not liable to be avoided for misrepresentation or non-disclosure. Accordingly, the Court was satisfied there was reason to believe the claimants would be unable to pay the defendants costs if ordered to do so, and so security for costs was ordered.

Manolete's Perspective
As the market leader in the insolvency litigation finance sector and the sole firm awarded a Band 1 ranking by Chambers for Insolvency Litigation Funding, Manolete Partners Plc has a unique perspective.

Manolete's approach to funding is both straightforward and efficient and provides an easy solution to issues of security for costs:

• When purchasing a claim, we offer the Insolvency Practitioner and the estate an uncapped indemnity, avoiding the need for ATE
• As a publicly listed business with robust financial backing, Manolete ensures challenges related to security for costs do not stifle claims backed by Manolete, allowing the claims of insolvent companies to be pursued for the benefit of the estate.

A testament to our strategy's success is that, Manolete recently celebrated financing our 1,000th case without ever having had any defendant successfully obtain an order for security for costs against us or a party funded by us.

Conclusion:
Manolete’s model provides for an uncapped indemnity in relation to adverse costs meaning if the case is lost then the estate and the IP are fully protected with a pound-for-pound indemnity for the entirety of any adverse costs award. We do not rely upon the Arkin Cap which has limited liability for some litigation funders to the extent of the capital they have advanced to the claim. There is no dilution of the returns to creditors by purchasing ATE in view of the indemnity we offer.

One key area in which the differences in the various insolvency litigation funding options has been tested recently is how they respond to issues relating to security for costs. This is against the backdrop of the courts scrutinising, on a line-by-line basis, ATE policies to ascertain how likely they are to pay out in the event of a claim being made upon them (as part of their considerations of whether security for costs should be ordered). The Court of Appeal in Premier Motorauctions held that exclusions in an ATE policy can lead to a realistic prospect that cover under the policy may be avoided or excluded. In these cases, the courts have declined to accept such ATE cover as adequate security. This contrasts to Manolete’s transparent Plc balance sheet which clearly shows the strength of our financial covenant.

Caleb Bompas
Associate Director

CASE STUDY
The Manolete Model in Action

Manolete periodically releases anonymised case studies that show the outstanding benefits of our unique model.

This case concerns a construction company which entered into CVL in January 2022. This case highlights:

• The impact of the ‘Manolete effect’ to engage an otherwise unresponsive director; and
• Maximising returns from a small claim involving a Bounce Back Loan that would otherwise have not been made due to lack of funds in the estate to pursue.

Q&A

Caleb Bompas
Associate Director

What is your legal background?
After completing my LPC in 2012, where one of the highlights was meeting my wife (who also happens to be an insolvency lawyer), I embarked on my legal career at Stephenson Harwood LLP. I quickly gravitated towards litigation, which ultimately led to my qualification into the firm's Commercial Litigation department, specialising in contentious insolvency. Over the course of the next eight years, I acted on several high-profile bankruptcies. These tended to throw up the more unusual cases, like when a famous tennis player attempted to argue the Insolvency Act didn't apply to him because he had diplomatic immunity. My time at Stephenson Harwood also included a rewarding six-month secondment to Christie's Auction House and a term as a Judicial Assistant in the Commercial and Chancery Courts.

How long have you been at Manolete?
I'm the newest addition to the Manolete team. My arrival aligns with Manolete's recent expansion and my initial experience has been nothing short of fantastic. The past month has been a whirlwind of activity with a ready-made portfolio of claims to manage as another member of the team went on maternity leave. However, my role as an Associate Director encompasses more than just managing claims. It involves sourcing new opportunities, educating the market about Manolete's offerings, purchasing claims and ultimately overseeing the claims to ensure that meritorious ones are pursued and resolved, maximising returns to insolvent estates.

What have been your main impressions?
My second week at Manolete coincided with the quarterly legal team meeting. This event brought together our legal and net worth teams. I was struck by the remarkable cohesion and collaboration within the legal team. I was also impressed by the wealth and diversity of experience among our 17 lawyers. Having two deputy judges and the former chief bankruptcy registrar as part of the team is invaluable when considering how the Courts may decide a matter. Moreover, at Manolete, there's a clear blend of technical ability and commercial acumen that makes it an exceptionally dynamic place to work.

What are the other highlights?
I have a remarkable degree of autonomy in managing my portfolio of claims. Decision-making is swift, whether it involves purchasing a claim, settling a case, or initiating legal proceedings. The turnover of cases is also rapid; the average time at Manolete from purchasing a claim to its conclusion is around 12 months. We call it the “Manolete effect” and I am already seeing this in action, as previously evasive directors come to the table once Manolete become involved. Additionally, working at Manolete has afforded me the opportunity to collaborate with a wide range of solicitors, barristers, and IPs.

What do you do outside of work?
I'm an entertainer for my two boisterous young children. Fortunately, living in London provides ample access to family-friendly events - we particularly enjoy visiting the Tate Modern. You can regularly find me at the Emirates Stadium, where I'm a proud Arsenal season ticket holder. One day, when my children no longer require my services, I hope to return to the opera.

Stephen Baister writes
Law Reports Can be Fun – Sometimes

Most readers of these newsletters will have had to read a law report at some time. It can be a productive way to spend time, but it will rarely be fun. Yet there are law reports that can be read, almost like literature, for the sake of the story they tell or for some other quirk that draws the reader in. Here are three I have enjoyed.

The first, going back to 1869, shows that long trials and litigants in person are not entirely recent phenomena. William Patrick Ralston Shedden and Annabella Jean Shedden (appellants) v Patrick and the Attorney General et al (respondents) reads like a Wilkie Collins novel: it is about an American claiming an estate in Scotland by descent and deals with classic subjects of the kind you might expect: marriage, illegitimacy and judgments obtained by fraud or misrepresentation.

The law report ((1869) L.R. 1 Sc. & Div. 470) records, “When the case was called, it became necessary for Miss Shedden, her counsel being unprepared, to address the House, which she did for twenty-three days. Her father, the Appellant William Patrick Ralston Shedden, followed her, and spoke for two days.” The Sheddens lost.

Amusingly the law report records Ms Shedden’s repeatedly interrupting the Lord Chancellor while he is trying to give judgment in an attempt to correct perceived errors. One can only speculate about the identity of the barrister who was “unprepared” and whether he had bottled out of facing the House of Lords with a hopeless case.

My second is about witchcraft, although the report in R v Duncan and Ors [1944] 2 All ER 220 is actually about a point of procedure. The appellants had been convicted of conspiring to pretend to “exercise conjuration” contrary to the Witchcraft Act 1735 by putting on fraudulent seances. Not unreasonably, you might think, the defence had asked to demonstrate one of the defendant’s mystical powers to the jury. (There was also an issue about the meaning of “conjuration of spirits” in section 4 of the Witchcraft Act.) The decision to refuse the practical demonstration was upheld on appeal so the convictions stood. It would have been so much more interesting if the jury had been allowed to see the demonstration, I feel.

Essentially a commercial case about illegality in the performance of a contract, my final case, Howard v Shirlstar Container Transport Ltd [1990] 1 WLR 1292, is an adventure story. Shirlstar had agreed to pay Captain Howard, a pilot, £25,000 to repossess a plane which had been hired “to a person of importance in Nigeria.” Captain Howard, assisted by a Miss Spalding who had done a crash course in wireless operation and to whom he was engaged, found the aircraft, flew it out of Nigeria without air traffic control clearance, and, in spite of being pursued by a Nigerian fighter plane, landed it in the Ivory Coast. Unfortunately, the plane was impounded there and sent back to Nigeria. Shirlstar paid £12,500 but refused to pay the second instalment. Captain Howard sued for the balance due to him, and Shirlstar counterclaimed for what they had already paid.

The judge at first instance found for Captain Howard, holding that he had a defence of self-defence under Nigerian law to his otherwise illegal conduct. An appeal against that decision failed. Much of the Court of Appeal’s judgment is about contract and illegality, but the underlying story is one of derring-do and romance: it could have been the subject of a novel by Eric Ambler and would make a good film.

The Blame Game:
Unravelling the challenges faced by directors

Manolete Partners invites you to an evening of informative talks and networking

Join us on Wednesday 8 November at Edgbaston Cricket Ground for an evening of informative talks. Our fantastic panel of guest speakers will give you a tour of some of the issues faced by directors, the impact of directors getting it wrong and the remedies available to office holders to maximise recoveries for the insolvent estate.

Our speakers will specifically delve into excessive remuneration of directors (Rachel McCahill, Partner at Buckles), directors' inactivity, inferences and missing material (Ali Tabari, Barrister at St Philips Chambers) and what the Supreme Court’s decision in Sequana means for directors (Mark Wilson, Partner at Gateley Legal).

The speaker session will wrap up with a few words from Neil Stewart (Associate Director, Manolete Partners).

A hot buffet and further refreshments will then be served and there will be an opportunity for networking. We hope you can make it!