Great expectations

Happy New Year to all of our readers – we hope you had a safe and enjoyable Christmas break.

While the Government has recently extended the furlough scheme to the end of April 2021, we expect the various extraordinary Government economic support measures to be gradually withdrawn during Q2/Q3 2021. This is likely to lead to an exceptionally busy time for all professionals in the insolvency and restructuring industry. The recent end of the Brexit transition period will be another factor likely to lead to significant changes (good and bad) for many UK industry sectors. We look forward to supporting the vitally important work you do, wherever we can be of assistance.

2020 did end with one significant high note: Manolete was voted the TRI Insolvency Litigation Funder of the Year for 2020. This is the fourth time we have won this award, which is a tremendous reflection of the great work we do with all the brilliant IPs and insolvency lawyers throughout the UK. Together, over the last 10 years, we have delivered many tens of £ millions into UK insolvent estates. In the last 9 months we have completed close to 100 UK insolvency claims – that is a tremendous rate of completion and a terrific driver of value back to creditors.

Below Andrew Cawkwell, Manolete’s Associate Director for the North-East sets out an interesting and important article regarding ‘Duties of Office Holders when Realising Litigation’.

On a related issue Stephen Baister has recently had an article published ‘Fiduciaries and the Financing of Insolvency Litigation: Some Legal and Practical Considerations’. Please follow this link to access the full article.

Steven Cooklin, ACA ACSI CF
Chief Executive, Manolete Partners PLC

In this issue:

• Duties of Office Holders when Realising Litigation Claims, Andrew Cawkwell Associate Director for the North East

• TRI Conference and Awards, December 2020

• The Value of Discretion by Stephen Baister, Non-Executive Director

Duties of Office Holders when Realising Litigation
By Andrew Cawkwell

When an Insolvency Practitioner becomes aware of a potential claim which could be taken forward to realise value for a company’s creditors, there are several options available.

Considerations

In deciding what to do, the IP will generally consider:

• the circumstances of the case
• whether the proposed target for the litigation has sufficient net worth to satisfy any potentially successful judgment or enter into ADR on viable commercial terms
• the likelihood of success in the claim (this will usually involve some element of legal assessment of its merits)
• the views of the creditors (in particular HMRC when it is a significant creditor)

The insolvent estate may have sufficient funds to credibly finance an action (whether by paying solicitors’ fees on a standard retainer basis and/or asking lawyers to act on a CFA with appropriate ATE in place or with the insolvent estate carrying the contingent cost of an indemnity for any personal liability incurred by the IP if the case is lost). In those circumstances, there is no doubt that IPs may properly use those funds to commence litigation if they can show they have exercised proper commercial judgement in doing so.

How any IP demonstrates that commercial judgement has been properly exercised will differ slightly with each case. However, it is necessary for IPs to explore the options available to progress the case and not simply to rely upon the availability of funds in the claim as a means of self-financing the litigation. This is particularly relevant in cases where there are finely balanced interests of secured creditors to consider, as well as HMRC (in relation to Crown preference issues post 1 December 2020) and the needs and wishes of unsecured creditors.

Ultimately litigation is a risky business and it is right to consider the availability of other forms of financing litigation (and the costs, risks and benefits of the same) so a fully informed decision can be made and appropriate file notes made detailing those specific considerations. This is important from a regulatory perspective and helps justify decision-making to creditors when things go wrong and the outcome is not as anticipated.

Options

• Do nothing: This is unlikely to be a realistic option unless the proposed claim is unmeritorious.
• Ask creditors to fund the action: Fear of ‘throwing good money after bad’ and the re-introduction of Crown preference is likely to deter unsecured creditors from offering funding. In those limited circumstances, experience shows there can be a mismatch of expectations between creditors (who generally lack sophistication and understanding of the costs and risks when it comes to pursuing insolvency litigation) and lawyers and IPs who are pursuing claims often leading to adverse outcomes. HMRC funded actions are, generally speaking, hard to come by and often limited in quantum.
• Fund the action themselves or via their IP firm: The problem here is that, as in Burnden Holdings (UK) Ltd v Fielding, the court confirmed its willingness to exercise its jurisdiction to award costs against a third party under s.51 of the Senior Courts Act 1981. Accordingly, an order was made that the IP’s own firm was liable for an element of the adverse costs. Inevitably an IP or their firm/employer will try to exercise control over the litigation and/or, in exchange for providing funding, is likely to benefit from a successful conclusion, and where the litigation fails, the non-party therefore pays the successful side’s costs. The court is likely to infer the IP and IP firm are acting as a ‘commercial funder’ like any other.
• CFA/DBA (with or without ATE insurance): Since April 2016, any CFA uplift and ATE premium are no longer recoverable from a losing party out of any damages awarded by the court. As such, any recovery may not in itself be enough to cover the legal team’s fees (and disbursements) and any ATE premium.
• Funding agreement or assignment of the proposed litigation: If the office holder is unsure of the merits and possible value of a claim, they should seek independent legal advice from solicitors. Manolete purchases 9 out of 10 cases which pass our rigorous assessment process. As such, we are in a strong position to offer a valuable option for IPs and solicitors referring cases to us. We also understand there may be a desire to test the market by directly approaching several litigation funders or third-party purchasers and/or utilising the services of a broker.

Actions

If any IP determines they wish to seek an offer for funding or assignment of a claim which they believe to be meritorious, Manolete is well positioned to provide a wide range of support to allow them to unlock value through insolvency litigation. At Manolete, we understand litigation can be long, complex and sometimes daunting and we are on hand to deal with your queries promptly and effectively. If we offer terms to purchase your claim:

• The insolvent estate receives a large substantial upfront payment on day one of the assignment.
• The case will run in our name and at our risk.
• The IP always chooses which solicitor they would like to instruct (even when we have purchased the claim). They are paid as the case progresses (as is counsel) so there is no accruing success fee element, as in CFAs.
• Manolete’s model provides for an uncapped indemnity in relation to adverse costs meaning if the case is lost then the IP is 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 referred to above.

Manolete is the market leader in the insolvency litigation finance market with a 67% share. We understand with an increasing number of competitors, IPs may wish to be seen to ‘test the market’ by visiting more than one potential provider to get a better estimation of levels of interest in particular claims.

We have no concerns whatsoever in this approach because:

• we believe strongly in the unique features of our product.
• our longstanding reputation in the marketplace over the last 11 years.
• our open and transparent PLC balance sheet clearly shows the strength of our financial covenant.

If an IP or insolvency lawyer wishes to test the market, then they should be aware:

• The funding market continues to evolve with more funders having entered the market, and with new entrants, product offerings have become more diverse and difficult to measure/ compare precisely.
• Direct intimate knowledge of the funding market is required in order to appropriately make the comparison between the products offered by various litigation funders or the use of a broker. However, it is important to remember Manolete does not engage at all with brokers and as such, our product offering is only available on a direct access basis.
• If an IP has a litigation funding requirement, it is very important they contact Manolete directly and do not rely on a broker to provide access to our products or a solicitor who may signpost products which may not include our unique features such as the uncapped indemnity covering the IP’s entire risk. A broker may also use confusing language such as a “whole of market” search which is misleading if it does not include the product offering of the market leader.

Be Aware

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 v Price Waterhouse Coopers and Lloyds Bank [2017] EWCA Civ 1872 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.

Conclusion

An IP has fiduciary responsibilities and duties to obtain the best price available for assets comprised in the insolvent estate.

A meritorious legal claim will almost certainly have value when contemplating an assignment to a third-party litigation funder. Advice from a solicitor may be advisable to assist in determining if a case is meritorious and estimating its potential value. Declining to take any action in respect of a meritorious legal claim for lack of funding would not be appropriate unless it can be demonstrated the IP sought funding in the first place and the case was declined. Manolete will consider all cases referred to us and provide a decision in writing (whether accepted or declined).

An IP should be able to demonstrate an assessment of the key considerations was undertaken and the options listed above were considered. If an IP elects to test the market with other providers of funding, they should be aware of the key differences between the products and ensure in particular the arrangements for protection from adverse costs are sufficient to mitigate the risks and defeat security for costs applications.

Andrew Cawkwell
Associate Director for the North-East

TRI Conference and Awards
December 2020

Manolete Partners, was named Insolvency Litigation Funder of the Year for the fourth time in five years at the digital 2020 Turnaround, Restructuring and Insolvency (‘TRI’) Awards in December.

The TRI Awards, now in its thirteenth year, is firmly established as the landmark awards ceremony for the turnaround, restructuring and insolvency profession and champion the outstanding performance and contribution of firms, teams and individuals in the sector.

Steven Cooklin, said: “We are absolutely delighted. I feel very proud for the Manolete team to be recognised by our peer group as ‘Insolvency Litigation Funder of the Year’. By everyone’s hard work and dedication, we have continued to invest in an unprecedented level of cases and at the same time our case completion rate is also at record levels. But none of that would have been possible without first building strong and lasting partnerships with Insolvency Practitioners and their legal teams across the UK.”

The awards followed the Manolete sponsored TRI Conference which was a digital broadcast. Mena Halton and Stephen Baister presented for Manolete on Tax Avoidance and Directors’ Duties. There were also illuminating sessions from Howard Kennedy, Moon Beever and Gordon Brothers.

Shard Financial Media as an organisation made excellent use of technology by continuing digitally with its annual conference and awards ceremony.

The Value of Discretion
By Stephen Baister

The Cork Report which led to the passing of the Insolvency Act 1986 made much of what it described as “the exercise of the newly-conferred discretions” proposed under the new legislation which, it noted, would “only receive acceptance if there is consistency shown in their exercise”; and indeed the 1986 Act conferred on the courts a wide range of discretionary remedies: to make a winding up or bankruptcy order; to annul, vary or rescind an order; to make an administrations order; to grant relief in respect of antecedent transactions and so on.

The ability of the courts here to exercise discretion is key to the flexible and creative nature of our insolvency system and marks it out from many of its more “black letter” equivalents in other jurisdictions. But the courts’ discretion is tempered by practice and authority. Some discretions are very much at large; others are exercised in accordance with well-established principles which ensure there is consistency and principle in the way in which they are exercised.

This tension between, on the one hand, a discretion that enables the courts to be innovative and, on the other hand, the discipline of practice and authority, has played a vital role in the development of our insolvency law and ensured it remains exceptionally able to cope with change. We should appreciate and treasure that.

Dr. Stephen Baister
Non-Executive Director