There is no doubt that administrators and liquidators face unique challenges when approaching the issue of funding insolvency claims. Up to April 2016, the most common way of funding insolvency proceedings was by combining both conditional fees agreements (CFAs) and after the event (ATE) insurance to create a scenario in which an officeholder could pursue litigation with no liability for the costs of either their own solicitor, nor that of their opponents in the event that a claim was unsuccessful.
Likewise, and perhaps most importantly, given the current difficulties in funding insolvency claims, both the success fee arising under the CFA and the ATE insurance premium were recoverable from the losing opponent, meaning that, in the event of a successful outcome, the cost of these funding instruments were not deducted from the proceeds of the litigation meaning that recoveries for the creditors – the very purpose of the litigation being pursued – remained unaffected.
Following the implementation of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), which ended recoverability of CFA success fees and ATE premiums in insolvency claims from April 2016 – the economics, that is to say the ratio of claim value to the legal costs involved in pursuing the claim, on the majority insolvency claims means that there is often little or no benefit to creditors in the legal actions being pursued.
If the economics of a claim are not sufficient to withstand the payment of success fees or ATE premiums from the proceeds, the officeholder is left with only a few potentially unattractive options. They may either pursue the litigation using monies from the insolvent estate or attempt to raise monies from the creditors, or they may pursue the claim without adequate protection against the risk of a personal liability for the Defendant’s costs in the event that the claim is unsuccessful.
This means that in practical terms, it is often only the larger value claims which are appropriate for ‘traditional’ funding methods such as CFAs and ATE insurance.
Recent Legislative Changes
However, recent legislative changes mean that office holders are in a unique position of being able to consider whether it is in the creditors best interests to assign – or monetise – an insolvency claim.
Administrators or liquidators have long since had the power to sell any company of the property which, as per Schedule 1 (2) and Schedule 4 (6) of the Insolvency Act 1986, included any right of action vested in the company at the time of administration or liquidation without any potential complications relating to champerty or maintenance. This meant that office holder claims were not capable of assignment as they were not property of the company prior to the administration of liquidation.
That position has changed, dramatically improving the monetisation options available to office holders, following the insertion of S 246ZD to the Insolvency Act 1986 implemented by section 118 of the Small Business Enterprise and Employment Act 2015. This provides that an officeholder has the power to assign a right of action relation to fraudulent trading, wrongful trading, transactions at an undervalue, preference and extortionate credit transactions where the company entered into administration or liquidation on or after 1st October 2015.
Monetisation of Office Holder Claims
Monetisation involves the sale of a claim by way of assignment to a funder. The purchase price usually either takes the form of an upfront, outright purchase of the claim, or a purchase for a nominal fee with an agreement to split any recoveries obtained from the litigation between the funder and the administrator or liquidation.
In selling the claim, the office holder can obtain a number of major and, in some cases, immediate benefits, one of the most important of which is that the office holder is immediately de-risked. As the claim has been assigned to the funder, there is no longer any risk of the office holder being personally liable for an adverse costs order arising from the litigation and it is not incumbent upon the office holder to raise the funds to pay, or agree an alternative fee structure (such as a CFA), with the legal representative.
Further, in the event of an upfront, outright purchase of the claim, the office holders can make an immediate return for the benefit of the insolvent estate or for creditors from a contingent asset (the proceeds of the litigation being contingent upon a successful conclusion of the claim and recovery) that may otherwise take years to realise.
A Note of Caution
As claim monetisation becomes an increasingly common method of funding insolvency claims, office holders are likely to be increasingly wary of their duties in deciding when monetisation is appropriate and the terms on which any sale of a claim is agreed. As the office holders’ overriding duty is to look after the interests of creditors, it is necessary to ensure that they are achieving the maximum possible benefit or recovery when deciding to selling an asset – in this case, the litigation.
It must therefore be incumbent upon the office holder to make a reasonable investigation of the terms available, and this is where the engagement of an independent broker can provide considerable benefit.
In an emerging and evolving market, a broker can assist with and/or undertake a whole market search on the office holder’s behalf, providing a summary of the options available, as well comparing those to the other potential options such as traditional litigation funding or after-the-event (ATE) insurance. This can help to meet the duties owed to creditors and mitigate the risk, however remote, of any argument that the IP has a failed to obtain the maximum possible benefit for the creditors.
Funding of higher value insolvency claims
For the majority of modest value insolvency claims, monetisation is likely to provide a more attractive scenario for creditors and office holders and in many instances may be the only viable option.
However, funding options such as ATE insurance and securing financing from a third party funder remain viable and attractive options for funding higher value insolvency claims and the ATE industry in particular has been quick to adapt to the post-April 2016 landscape. For instance, there has been an increased willingness to consider damages-based premiums, where the ATE insurer is taking a percentage of the actual amount recovered rather than a fixed premium sum that is first in line for the waterfall of distribution. This model aligns the insurer’s interest and return more closely to those of the creditors.
It is also noteworthy that the Courts now have an increased willingness to accept an ATE policy indemnifying an office holder against adverse costs as adequate security when facing a security for costs application.
In Premier Motorauctions Ltd (in liquidation) and Premier Motorauctions Leeds Ltd (in liquidation) (the “Companies”) v. PricewaterhouseCoopers LLP and Lloyds Bank Plc, the Defendants pursued applications for security for costs, despite the fact that the Companies, via their liquidators, had put in place £5m of adverse costs cover via a syndicate of ATE Insurers having utilised the services of a Broker to ensure that the terms of the cover were adequate and appropriate in light of the circumstances presented by the case.
The Defendants sought to argue that the ATE policies did not provide adequate security on the basis that they were conditional and might be avoided, rescinded or cancelled in the event that the Defence succeeds. They specifically identified that they intended to put the credibility of a key witness at the heart of their Defence and that, should that Defence succeed on that basis, it would create a scenario which would entitle the ATE insurers to avoid the policies on the basis of misrepresentation.
Having considered the arguments, the Court concluded that that the Defendants had failed to satisfy one of the key requirements of CPR 25.13 – that the Companies will be unable to pay the defendant’s costs if ordered to do so – and refused the Defendants’ applications for security of costs.
In reaching this decision, the Court had particular regard to the fact that the ATE policies; (1) had been taken out by Liquidators acting in their capacity as independent professional insolvency office-holders; (2) that they had arranged the ATE policies after having conducted an investigation into the claims with the assistance of an experienced legal team; (3) that the ATE insurance market was now a substantial and mature market in which insurers are unlikely to have a commercial incentive in seeking to avoid liabilities under policies they issue.
The Premier Motorauctions decision was then swiftly followed by the decision of the High Court in Holyoake & Anor v Candy & Ors  EWHC 3065 (Ch) (29 November 2016). In this matter, the Claimants had put in place £4m of adverse costs cover via ATE insurance on which they sought to rely.
Although the cover had not been put in place by an office holder, the interesting issue relevant to security for costs arising from this Judgment is that, despite having raised a number of arguments at the hearing itself that the policy could not be relied upon as adequate security if the Defendants were successful at trial, in correspondence after the hearing the Defendants accepted that the ATE policy should act as adequate security up to its limit of £4m and pursued the application on the basis that security in the sum of £5.5m should be provided (i.e. there was a shortfall in security of £1.5m).
The importance of these developments cannot be overstated as indemnities from ATE insurers offer a viable and cost effective funding option to office holders who may otherwise have their claims stifled by an ability to satisfy a security for costs order. This is especially the case where the Court is willing to accept an appropriate ATE policy as adequate security without the need for the additional expense of a security for costs bond.
It is also further evidence, especially given the actions of the Defendants in the Holyake matter, that the existence of ATE insurance is likely to act as a significant deterrent to Defendants issuing security for costs applications as a means to stifle or delay a claim.
Robert Warner, Head of Broking