A Darkness at the Edge of Town: Are storm clouds gathering for the litigation funders?

By: Andrew Brown and Jamie Cockfield - Radcliffe Chambers

This article initially appeared in the Radcliffe Chambers annual review of insolvency law in 2022, Insolvents' Row, along with a full year's case update, recent chambers' news, and various other articles concerning matters of commercial awareness in the insolvency industry. A copy of the review can be found HERE .

To be clear, when Bruce Springsteen sang A Darkness on the Edge of Town, he was not singing about litigation funding. His themes of loss, regret, and a yearning for a better life somewhere in the dark distance are a far cry from the litigation funding industry, which has seen a year-on-year increase in value to the present with some estimates placing total funding assets in the UK at ￡2.2billion, and a global market of $25.8billion (expected to double by 2030). Rather, the imagery of a creeping darkness just beyond the immediate vicinity spelling trouble is an oblique, and somewhat ham-fisted, metaphor for recent challenges faced by the industry which we intend to explore in this short article.

?The EU cracking down on litigation Funding?

?On 13 September 2022, the EU Parliament overwhelmingly endorsed a report submitted by Axel Voss (German MEP) suggesting an EU-wide regulation of the litigation funding industry. The chief recommendations of that report were:

• An authorisation system be established by each member state whereby only ‘authorised’ (ie. regulated) funders could operate, and a corresponding prohibition of non-EU funders operating within the EU.
• A hard cap of 40% of any damages / debts awarded limiting the sums capable of recovery in any funding contract.
• ?An absolute liability to the funder for any adverse costs orders against the funded party, with a coupled requirement that each funder have financial adequacy to meet costs.
• Disclosure of the funding contract within the proceedings, and a prohibition on the funder controlling or influencing case management decisions, and
• A fiduciary duty owed by the funder to the funded party.

?The EU funding market is limited at present, and far below that of England and Wales, but it is growing. These proposed regulations would have a chilling effect on the growth of any internal market in its infant stage, and it would certainly weaken the likelihood of English funders expanding across the Channel. Recently, Erik Bomans, CEO of Deminor, noted these proposals were dangerous and likely, if enacted into law, to lead to increasingly expensive litigation as defendants try and drive up the costs by spurious applications and positions in order to put funders into a bind where they would only see limited recoveries.

?Reading the tea leaves of the EU Parliament’s response to the report, it appears likely the proposed regulations (or a version thereof) will be adopted. However, and thankfully, there appears no inclination to do similarly in this jurisdiction. While funders are obviously commercial parties looking to make a profit, the reality (especially in insolvency) is that funders provide an alternative system of funding a claim which otherwise might never be run; this improves access to justice and returns to creditors who might otherwise see nothing.

?Adverse costs against a litigation Funder – Manolete

?On 9 September 2022 the litigation funder Manolete released a H1 trading update, announcing it had received a ‘surprising’ and ‘rare’ adverse decision ‘on one of its larger cases’.

?The case, which was not mentioned in any news reports or Manolete’s releases, is Manolete Partners Plc v Dalal [2022] EWHC 1597 (Ch). Manolete brought the claim as assignee of Bolton Poultry Products (the ’Company’) and its liquidator, and was brought against former directors and/or alleged directors regarding the misappropriation of money. The Company sold both live and slaughtered chickens (so, some were Born to Run). The Defendants were Ebrahim Dalal (D1), Sajid Dalal (D2), Anisha Dalal (D3) and the estate of Johra Dalal (D4). The Company sold halal chicken whole and in parts. It was incorporated in April 2005 and went into liquidation in January 2015.?

?In summary, the Claimant made four allegations. First, they alleged that the Company made considerably more money from its business than was recorded in its accounts and that the Defendants misappropriated these sums. The Company had been the subject of investigations by HMRC’s Civil Investigation of Fraud Team which opened a corporation tax enquiry in 2011, and which continued more or less until 2015. The Claimants pleaded the corporation tax assessments made by HMRC and alleged on the basis of those assessments that the Company made over ￡7.1m of additional sales to those shown in the company accounts over the course of its trading history. This claim was therefore based firmly on HMRC’s corporation tax assessments.

?In relation to the first element of the claim, Mr Justice Jourdan QC found the Claimant did not prove that it was more likely than not there were additional sales receipts to those declared by the Company, and this element of the claim failed.

?Second, it was claimed that properties purchased in the name of some of the Defendants were acquired using money belonging to the Company, and the Company could trace into the properties as proprietary interests.?On this element, the judge found the failure to establish additional sales receipts meant there was no foundation for the claim. However, he found the Company was entitled to trace ￡250,000 into one property. This was because D1 had paid himself ￡250,00 from the Company, which he was rightfully owed, but did so at a time when it was probable that substantial amounts were owed to HMRC and the Company should have been treated as insolvent thereby amounting to a misfeasance.

?Third, it was claimed that some of the Defendants authorised payment of Company money to themselves in breach of duties they owed to the Company. In relation to the third claim, the Claimant was entitled to recover the modest sum of ￡24,373.78 from D1 in respect of cheque payments made to him, and to also recover ￡7,000 each from D2 and D3 relating to cheque payments. Claims relating to two for payments totalling around ￡140,000 were rejected.

?Fourth, it was claimed that a new company (‘Bolton Halal Chicken Ltd’) formed shortly before the Company went into liquidation in January 2015 acquired valuable goodwill from the Company without paying for it. This element of the claim failed.

?The Court determined the percentage of the Defendants’ costs that the claimant had to pay. The claim against D1 was for approximately ￡8m, but they succeeded in recovering only ￡250,000 and were ordered to pay 95 per cent of D1’s costs and 85% of D2 and D3’s costs. All claims against D4 failed and in relation to D4’s costs the issue was whether bringing and continuing the claim against D4 was unreasonable to such a degree so as they should not benefit from the usual costs protections. However, D4 did not state that the claim for additional receipts was unreasonable, and this should lead to costs on the indemnity basis, and the claim was not sufficiently unreasonable to take it out of the norm and costs would be awarded on the standard basis.?

?In the interim since judgment, Manolete has appealed, and was granted leave to appeal by the Court of Appeal on 23 September, with a hearing likely to take place in Spring/Summer 2023.

Is this bad news for the litigation funding industry?

?No.

?In England and Wales, the industry continues to go from strength to strength, and neither the recent Manolete decision nor the EU’s approach is likely to curtail that. The Supreme Court recently rejected permission to appeal against the Court of Appeal decision in Lock v Stanley (Re Edengate Homes Ltd) [2022] EWCA Civ 626, in which a creditor challenged an office-holder’s right to assign a chose in action to Manolete, and the High Court in Manolete Partners Plc v Hope [2022] EWHC 1801 (Ch) overturned a first-instance decision capping recoveries at the quantum of liquidation debts and expenses which would otherwise have adversely affected Manolete as the funder with a share of recoveries. Likewise, while funders can be on the hook for adverse costs, that was already the case in security for costs applications (Re RBS (Rights Issue Litigation) [2017] EWHC 1217 (Ch)), and is unlikely to deter funders who require a good chance of success as a term of engagement. Further, funding of group litigation continues to grow domestically. Finally, if the EU wishes to curtail the growth of litigation funding in the bloc, then that will hopefully increase the attractiveness of investment in the English industry and/or an increase in cases with the jurisdiction ability moving to these shores.?There might be a darkness on the edge of town, but it will soon fade in the light of the dawn.

?Andrew Brown and Jamie Cockfield are barristers at Radcliffe Chambers specialising in the insolvency and commercial law, and they can be reached at [email protected].