Third party finance for insolvency
On appointment, an insolvency practitioner investigates the dealings and affairs of the company or individual. These investigations will frequently identify claims (in the case of corporate insolvencies, these claims typically lie against the former directors of the company) but the insolvent estate rarely has the funds with which to bring those claims. On the occasions where there are funds, creditors may be reluctant for those funds to be placed at risk in litigation. This scenario presents a need for third party finance. Generally, a cause of action cannot be assigned, but a cause of action vesting in the insolvent estate is an asset in the estate which can be assigned in one of the few exceptions to the rules against champerty and maintenance. In corporate insolvencies, this power to assign was extended by the Small Business and Enterprise and Employment Act 2015 to certain office holder claims. This ability to assign a cause of action as an alternative to the more traditional funding makes insolvency litigation particularly well suited to third party finance. It is Manolete’s practice to take assignment of claims where possible as this is very effective.
Traditionally, insolvency lawyers acting on cases without monies in the estate worked on contingency fee arrangements, whether informal or otherwise. This often left lawyers unpaid for their work and the problem of meeting expenses such as court fees and experts’ fees remained. Because an IP bringing an office holder claim faces personal liability in adverse costs, ATE insurance was taken out. The uplift paid to lawyers under a formal CFA arrangement, combined with the ATE premium, often significantly eroded or extinguished realisations from the claim to the detriment of the estate.
Whether taking assignment or funding, Manolete pays all legal fees and expenses. Lawyers are never required to work on a contingency basis and Manolete provides the IP and the estate with a complete indemnity off its balance sheet, avoiding the need for ATE and maximising returns to the estate. An initial consideration is paid on entering into the purchase or funding agreement and the net realisation after payment of all costs and expenses is divided between Manolete and the estate in agreed shares. The claims are advanced at Manolete’s expense and at Manolete’s risk. The IP and the estate share in the net proceeds realised from the claims whilst being completely de-risked. The estate share is at least equal to, and usually greater than, the Manolete share. The interests of Manolete and the estate are completely aligned. If, for example, an IP wishes to close a case, Manolete can take an outright assignment of the claim for a full consideration.
Manolete offers a full service to the insolvency profession and will support claims with a minimum value of £20,000. There is no upper limit. Case types include antecedent transactions, breach of duty, directors’ loan recovery and unlawful dividend, but all claims arising in an insolvency will be considered. The referral process is very simple: an email with a brief summary and the key documents will suffice and Manolete aims to make the investment decision within 7 days.
Claims advanced by an IP can be ignored or dismissed, particularly when the target is a former director, in the knowledge that the estate is without a fighting fund and in the hope that the claim will ‘go away’. It must be said that many claims do not see the light of day and are stifled due to lack of funds. Once a claim is supported by Manolete, there is a positive change in the dynamic, in particular following assignment. The claim has real credibility and the target knows that lack of funds is no longer an obstacle to pursuit of the claim. Third party finance can bridge the funding gap, and Manolete has the financial strength to do so, but, as any IP or insolvency lawyer knows, a lot of skill and expertise is required to formulate and run insolvency litigation to a successful realisation.
Manolete not only provides the cash, but significant added value through its in-house legal team of 12 solicitors who are all experienced insolvency litigators and well versed in the law, practice and procedure of contentious insolvency. External solicitors of the IP’s choosing always conduct the litigation, and the Manolete in-house legal team works with those solicitors extremely effectively and in a collegiate and supportive manner to achieve outstanding results.
A claim or cause of action is an asset like any other in the estate to be realised for value. Whether the IP seeks funding or assignment, the IP is exercising his discretion to make a commercial decision and considerations will include the proven expertise, track record and financial strength of the third party funder.
The real skill of litigation is not going to trial, but achieving a result through negotiated settlement. Manolete strongly encourages a dialogue with opponents and seeks resolution wherever possible through ADR, whether without prejudice discussions or preferably through mediation. Where a claim has been assigned, Manolete involves the IP in ADR and the IP is always welcome to attend any mediation. In excess of 95% of Manolete cases are resolved through ADR. When a claim has Manolete backing, most opponents take the opportunity to settle. Negotiated settlement saves time and costs and, perhaps most importantly, an opponent who agrees to pay an agreed sum is likely to pay that sum. Negotiated settlement removes litigation risk, including the risk of an unsatisfied judgment following trial.
Not all cases settle, and where settlement is not possible, Manolete proceeds to trial. A number of Manolete funded or purchased claims proceeding to trial have involved important points of law or procedure and reported decisions include:
Hastings Borough Council v Manolete Partners Plc  UKSC 50
Guy Mander and Dilip Dattani (as joint liquidators of Bowe Watts Clargo Ltd) v Jonathan Watts  EWHC 7879 (Ch).
Ball (Liquidator of PV Solar Solutions Ltd) and Anor v Hughes & Anor  EWHC
Brewer & Anor v Iqbal  EWHC 182 (Ch)
Bright Future Software Ltd, Manolete Partners Plc v Ellis 2020 EWHC 1674 (Ch),
A&C Restoration LLP (in liquidation), Manolete Partners Plc v Andrew Michael Riches  EWHC 1607 (Ch).
Abdulali & Anor (as joint liquidators of Smith Technologies Ltd) v Pearson & Mackie  All ER (D) 120 (Apr)
Manolete Partners Plc v Matta & Ors  EWHC 2965 (Ch)
Manolete Partners Plc v Hayward and Barrett Holding Ltd & Ors  EWHC 1481 (Ch)
The pandemic and lockdowns have presented challenges to the insolvency profession. The moratorium on winding up petitions and government support measures prolonging the lives of companies which would otherwise have entered into an insolvency process have resulted in a downturn in the number of insolvencies. Manolete has risen to the challenges and continued to source and support insolvency claims, in the financial year to 31 March 2021 achieving record case realisations of £35.3m. The High Court rapidly and efficiently adapted to remote hearings, which meant that it has been business as usual for Manolete litigation including witness trials. As the moratorium and support measures are lifted, a large number of insolvencies are expected and with those insolvencies many claims which will require finance. Manolete is already being referred claims arising out of misuse of Government loans and grants and that will continue and increase. The months and years ahead will see a huge demand for finance of insolvency litigation.
Manolete Partners Plc is the leading UK provider of finance for insolvency litigation, established in 2009, listed on the London Stock Exchange in 2018 and having invested in 620 cases to date. Realisations total £69.5m, of which £33.6m has been returned to insolvent estates after payment of all legal costs and expenses.