In this issue:
The Times they are a' changing
ATE in decline, Funding/Assignments rising
TRI Award: Insolvency Litigation Funder of the Year
Checklist: Choosing Your Funder/Buyer
Stat attack: High Growth in Case Numbers and High Recoveries for Small and Large Cases
New Hires, New Offices, New Country
Welcome to Manolete’s Winter 2016 Newsletter.
2016 has been quite a year for surprises and with Article 50 yet to be triggered and “The Donald” soon to assume office, I suspect 2017 will not disappoint!
In the World of Insolvency Litigation, 2016 has also been a year of significant change:
- The Small Business Enterprise and Employment Act has now come into force. For all appointments commencing from 1 October 2015, Office Holders can now assign/sell their Insolvency Act claims. Consequently, IPs now have more options to realise value for Wrongful Preference, Wrongful Trading, TUVs and Fraudulent Trading claims. Since the bill was passed, the investigation work has been completed on a number of cases and we have seen a sharp rise in these types of enquiries since the Summer, including a package of claims from one of the Top 10 firms. Many IPs are appreciating the benefit of selling/assigning the claim:
- Once assigned (a simple and fast process) the claim proceeds with Manolete Partners Plc as the claimant – taking the IP out of the “firing line” for adverse costs (we always provide a full indemnity to the Office Holder and the Company to ensure complete adverse cost protection).
- The IP’s team will usually have significant work still to do on the case but, now with Manolete as the Claimant, the IP’s team is paid for that work e.g. further investigation work, Witness Statement preparation and review, further financial analysis etc. That is billed to, and paid by, Manolete as incurred. On medium and larger cases, this often crucial work will typically cost Manolete £25,000 - £300,000 and more. We pay our legal teams as the case progresses; we treat the IP teams in exactly the same way.
- Where the Office Holder is under pressure to complete their appointment, Manolete can make a one-off payment to the Estate. The Office Holder and their advisor's fees can be finalised and distributions made.
- However, the Office Holder may well believe that creditors’ interests are best served by assigning the claim to Manolete (to pass the risk on to us) but still retain a majority interest of the net proceeds of the claim. This is a very common model for us and our full cost indemnity (including all adverse cost risk) for the benefit of the IP and the Company ensures that the Estate continues to operate but on a completely risk-free basis.
- Manolete self-insures ATE, so this is provided absolutely for free to your case. As ATE is notoriously expensive and is deducted straight off the top line of any recovery, Manolete’s model delivers far greater value to the Estate.
- Of significant attraction to many IPs (and particularly large firms where insolvency may not be the leading business line): any PR issues related to the case focus on Manolete, rather than the IP or his/her firm. Defendants will often try anything to “throw mud” at the IP to deflect attention away from the core merits of the claim. This naturally disappears once the claim is assigned to Manolete.
- The Office Holder always gets to choose which legal firm works on the case –Manolete has no panel of law firms nor of Counsel. We retain whoever the IP directs us to. If a law firm or barrister introduces the case, they are guaranteed to be retained on the case by us.
- On 6th April 2016, the Jackson Reforms came into effect for Insolvency claims (CFA Success Fees and ATE Premiums now need to be paid from the case recovery and can no longer be reclaimed from the defendant). As those IPs who conduct a lot of insolvency litigation will know, in practice, this makes little difference. Less than 1% of cases ever reach a judgment in Court and therefore CFA Success Fees and ATE Premiums almost never got recovered from the defendant under the old pre-Jackson regime. Almost every single successful case settled, so the CFA uplift and ATE premium came out of the recovery - ahead of the IPs fees and ahead of the creditors.
Professor Peter Walton’s report in April 2016 highlighted this key fact and concluded:
“IPs who continue to agree 100% CFA uplifts as a matter of course, may find themselves accused of a breach of duty by creditors if the payment of such uplifts contributes to a reduced dividend (or no dividend at all) to unsecured creditors”.
Having operated in the UK insolvency market for 8 years, we have clearly shown that the Manolete insolvency litigation model delivers much faster and superior returns for insolvent estates. The Government is clearly looking to the Recovery Industry to now embrace the funding/assignment model even further.
- A number of leading brokers have reported that ATE applications on insolvency litigation are now in sharp decline (for example, Burford (First Assist), one of the largest providers of ATE in the UK has announced that it is closing its ATE business this month). Many brokers have therefore sought to move their business models into factoring of Insolvency claims. However, in order to replace their substantial ATE commissions, brokers will seek to replace their commission by charging an "introducer fee" to the funder/buyer of the claim (which may not have been disclosed to the IP and his/her legal team). The upshot of these “hidden” broker commissions will mean funding inevitably becomes more expensive for the Estate. For this reason, we have decided to only take insolvency claims direct from lawyers and IPs. We never insist on any ‘exclusivity’ so lawyers and IPs will always be free to approach brokers, but Manolete will only make offers direct to you, thereby ensuring the maximum value is retained within the estate.
- It has also been good to see a number of new firms enter the market. With this increased competition, we were naturally delighted to be selected as the industry’s “Insolvency Litigation Funder of the Year” at the TRI Awards in October 2016.
The judges (all eminent figures from across the insolvency, regulatory and creditor communities) published comments which focussed on the high level of recoveries that Manolete has delivered to insolvent and bankrupt estates and the large number of cases we have supported for UK IPs. It is largely thanks to the IPs and lawyers who have worked with us that we attained this accolade. Thank you to one and all.
Choosing the Funder/Buyer of Your Claim
With more choice now available in the market, a brief checklist for lawyers and IPs:
- Has your potential investor financed insolvency claims before? As we all know, insolvency claims are far from simple – books and records may be missing, key former company employees may be disinterested in assisting and insolvency is a highly specialist area of the law. You need a reliable financial partner who understands the claim, understands the challenges and who will continue to support the case for its full duration. If you have sold the claim to a third party but retained an interest, you need to be convinced they have the knowledge and financial standing to maximise the return. While we are known for getting fast results for estates, it is also widely recognised that we are quite prepared, if necessary, to take claims to Court (including, recently, the Court of Appeal and Supreme Court).
- What is the investor’s track record? Have they won a good majority of their cases and have they abided by their funding obligations when cases have gone against them. The single case that we have lost cost us £500k. Naturally, not a pleasant experience but what good is a funder if they are only interested in the winning cases...
- Is the amount of funding fixed and limited to a set amount? This is where the traditional litigation funding model can diverge from the unique requirements of an IP. In order to take advantage of the ‘Arkin Cap’ (which limits a funder’s liability to the fixed amount they agreed to fund) most, and probably all, seven members of the Association of Litigation Funding (“ALF”) will strictly limit the amount they are prepared to invest in your case. The ultimate amount of funding required to complete a case is, of course, an inexact science. Consequently, we do not think this is an attractive way to finance insolvency litigation (one of the reasons why we have not joined the ALF). IP’s work on the basis of personal liability and the estate wants to protect any assets outside of the litigation – therefore limits to funding are really not appropriate to Insolvency Litigation. Certainly – the funder may say that it will provide ‘top up’ funding but, by definition, at the time the IP asks for a ‘top up’ then the case will have exceeded the original budget meaning things have not gone as originally planned. So will the funder still be keen to support the case? Even if they are – upon what terms? What is likely to be left for the Estate? Manolete simply provides unlimited funding and unlimited adverse cost protection.
- Many funders try to “have their cake and eat it” - they insist on the legal team working on some form of discounted fee rate, sometimes even a full CFA. We believe that funders only play a proper role by providing full liquidity and full financial support to a case. We have never used a CFA nor partial CFA (nor any variant). If we are to take a material percentage of the net result, we believe that the funder must take on the full risk of the case. Other funders take a "preferred return" ahead of all other stakeholders - Manolete does not.
- Does the funder insist on using ATE? Does the funder have a tied ATE provider that the IP must use if he/she wants to take the funding? The IP and the legal advisers must, of course, look at the cost of the whole funding package in order to ascertain which funder provides truly best value for the Estate. Some funders will superficially offer relatively low percentage shares of the net proceeds but the IP must take large and expensive ATE cover (which the funder is likely taking a commission on). Remember: ATE takes the top slice of any recovery. If it is too expensive, will there be anything left for the legal fees and IP fees and for a creditor return? Manolete’s bespoke insolvency products only pay anything to the funder when the estate gets paid i.e. only after Manolete has paid for every other single cost (solicitors, Counsel, experts, court fees, additional IP work etc). Our percentage is on the net return (to the Estate) not the gross recovery.
- Many other Funders will structure their fee as the higher of a multiple of costs funded or a percentage of the gross recovery. Clearly the first element does not encourage sensible and proportionate cost control. The second element will make a funding offer look superficially “cheap” as it is expressed as share of the gross, rather than net recoveries. The IP and the creditors are only concerned with the net (after all costs) recovery that actually comes into the Estate. Under Manolete’s model, we only take a share of the net recovery, never the gross.
- Show me the money! While some funders give the impression they are well financed – exactly which entity are you contracting with to supply the funds? Is it a ring-fenced offshore fund or SPV with limited assets or does the IP and his/her legal team really have the support of the main fund/’group’ balance sheet? Manolete is a single entity UK Plc (audited to UK Plc standards) with no subsidiaries nor any associated entities. Every case receives our full support.
Delivering Value for Insolvent Estates: High Growth in Case Numbers and High & Fast Recoveries
The number of signed insolvency cases that we have backed (for over 70 different UK Recovery and Insolvency firms) continues to increase at a strong pace, as shown by these figures up to November 2016:
The 158 cases are split roughly equally between Funded Cases (where Manolete is funding the IP and the legal team) and Purchased Cases (where Manolete has taken an assignment of the claim). Over the coming years, we expect the proportion of Purchased Cases to increase as more ‘Insolvency Act’ actions get sold/assigned, rather than just funded. The chart shows, it took us over six years to sign our first 100 cases – we are well on track to sign up our next 100 cases in less than half that time.
Cases range from just £20,000 claims (usually against delinquent directors) to multi-million pound claims against major UK and international corporates.
111 of the 158 cases have already been completed in an average time of just 8.4 months (ranging from just 3 weeks to over 24 months) - this compares to an average of 30-48 months for CFA/ATE funded cases. We have only ever lost one case. It is the speed of completion and high success rate, which really drive the returns to insolvent estates. Our cases are completed so fast and at such high levels, there is simply no time available for legal costs to build to disproportionate levels. Once the Estate receives the recovery historic IP and lawyer WIP can be settled. Our high success rate is what led us to self-insure all adverse cost risk. As there is no expensive ATE premium payable on our cases, the returns that we are able to deliver to the insolvent estates are very high.
Selected Large Cases:
- In Q1 2016, we recovered £1.8m on a misfeasance claim for a Midlands based IP firm in 14 months. With legal costs of just £230k and zero ATE cost, the large majority of the proceeds were recovered for the benefit of the estate and a substantial creditor dividend paid, after all Liquidator and Administrator WIP had been settled in full.
- The Financial Times reported on a multi-million pound claim that we launched against two former directors of Cobham Group (the FTSE 250 Defence Contractor). Follow this link for the full article.
- ITV News covered our success at the Supreme Court on our multi-million pound claim against Hastings Borough Council. We had already won in the Technology and Construction Court and the Court of Appeal.
- While it did not eventually lead to a signed case, we were pleased to support the FRP Liquidators of Longmeade on a potential £18m claim. We financed two sets of QC opinions to support the Liquidators claims. The Judge’s reported opinion highlighted a number of key features of Manolete’s bespoke insolvency funding product.
- £475k was recovered for an IP from a Top 8 Accounting Group based in London. Legal costs were £54k and as usual there was zero ATE cost, resulting in the majority of the proceeds going to the estate. This followed a £1m success for the same IP team in the prior year.
Smaller and Medium Size Cases:
A whole raft of smaller cases has been rapidly completed this year for IP firms, from the Big Four and all the way through to one and two partner SPG Practices in the regions. A number of smaller and mid-market firms have now referred well over 10 successful cases each to Manolete over recent years. These firms are at the particularly tough end of the heavily regulated UK insolvency market and these smaller cases usually occur where there are very few or no assets left in the company. Our recovery is usually very fast (within just a few weeks/months) and the recovery at the least covers the IP and legal teams’ statutory and investigatory work, which would have otherwise resulted in a complete write-off for the IP and legal teams. As pointed out by Professor Walton, using CFA Success Fees and ATE on small (less than £250k cases) means little, if anything, is left to pay for the IP’s WIP, let alone a creditor dividend.
New Hires, New Office and a New Country
Manolete staff rank among some of the very finest insolvency lawyers in the UK market. A veteran insolvency lawyer, Mena Halton, heads up the Manolete Legal Department – which reviews and supervises all cases. In November 2015, Elizabeth Taylor (Head of Darbys Solicitors Insolvency and Recovery Division and a Funder Member of R3 Thames Valley region) joined the team as an Associate Director. In August 2016, we were pleased to welcome on board Jonathan Lupton, also as an Associate Director. Jonathan was formerly Head of Business Recovery at Coffin Mew solicitors and had worked both for and against Manolete on several cases before joining us. Within his first five weeks Jonathan had reviewed, funded and completed his first case. Having worked through a very large number of job applications from insolvency lawyers over the past six months, we have secured the services of two other leading lawyers who are set to start with Manolete in 2017. Announcements will be made in due course. In June 2016, we moved into our new head office at 21 Gloucester Place, London W1U 8HR.
Having taken advice from a leading Scottish QC, in September 2016, we launched Manolete Scotland at a well-attended launch event in Edinburgh. We followed this with a marketing initiative at the excellent Annual ICAS Insolvency Group Conference at Gleneagles in October. We have further events planned early in 2017 for other Scottish regions. We have already funded our first Scottish case and are currently reviewing a raft of other excellent cases
UK Marketing Events
We were honoured to be chosen as the first ever litigation funder to act as lead sponsor for the prestigious Insolvency Lawyers Association Annual Conference in March 2016, which was chaired this year by Mister Justice Snowden.
2016 also saw us present at numerous insolvency industry events including the IPA Annual Conference, the Radcliffe Chambers Insolvency Debate and a range of R3 regional meetings.
For further information or to discuss a new case, please contact:
Tel: 0203 859 3490
Mob: 07900 985559
Director - Head of Legal
Tel: 01494 618522
Mob: 07912 466695