June 4th 2020
The 50% Fallacy
Despite the business challenges of Covid-19, Manolete received 57 and 58 new case enquiries in the months of April and May 2020, respectively. These levels are around 10% higher than incoming cases from IPs and their solicitors in the period immediately prior to the crisis.
This is a great testament to the resilience of the UK insolvency profession – we have all adapted quickly to the “new abnormal”.
Furthermore, the April and May 2020 enquiry levels are double the rates we experienced 12 months ago - this a reflection of the transformation we have all seen unfolding in the insolvency litigation sector over the recent past. As Professor Peter Walton commented in his April 2020 sector report entitled “Insolvency Litigation Funding – in the best interests of creditors?”:
“[The insolvency litigation] market is now turned upon its head. Far more cases are offered to funders as a first step.”
As to delivering value to the insolvent estates, Professor Walton added: “The use of a funder was also recognised by many as providing a far quicker resolution to a dispute than other options. The benefit of such speedy resolution often has the positive side-effect of keeping down overall costs and so leads to a higher recovery. In contrast, it was recognised by some who were interviewed that a legal team instructed on the basis of a CFA will usually benefit more the longer an action continues, with a consequential increase in overall costs.”
Here, Professor Walton is summarising the views of IPs he interviewed from a wide spectrum of firms. The IPs he referenced had used Third Party Funding and CFAs and were therefore able to make a credible comparison on the returns to creditors, having used both models.
Professor Walton’s comments are important. Vital in fact – the main duty of the IP is to maximise the creditor return, of course.
The Bespoke Insolvency Litigation Financing Solution
Unlike many other companies' funding models, Manolete’s finance to IPs is very deliberately structured to ensure there is complete alignment with the insolvent estate’s interest: Manolete only receives a penny back once the insolvent estate is receiving cash. And the insolvent estate always receives more than Manolete. There is a mutual, and fully aligned, interest in keeping legal and associated costs under control and proportionate to the realistic recoverable amount of the claim. If a case is lost or no recovery made, Manolete bears the full cost (including adverse costs). The estate, the IP and the lawyers are always fully protected.
Almost all lawyers we have worked with over the last 11 years of Manolete’s existence are fully in support of this principle. Their aim is to pursue claims and deliver value back to the creditors. The lawyers also fully appreciate that under our model, their costs are paid rapidly, by Manolete, as they are incurred. But they obviously want every stakeholder to benefit whenever possible. That supports their relationships with IPs and those relationships are sacrosanct to us. Manolete exists simply to provide the financial support to the outstanding work done by IPs and their chosen law firms.
Now that we have worked with so many IPs and lawyers (and they have seen how the Manolete model works so effectively in practice), we hear only very occasionally, one ill-informed grumble:
“Why does Manolete get up to 50% of the net proceeds? Surely that is a major drain on creditor returns – it is too expensive!”
At a superficial level that may be a reasonable observation but we call it the “50% fallacy”. Generalisations are never easy to justify in every case, but over the many thousands of cases we have now seen, the simple answer to it is this:
Without Manolete, that recovery would never have existed. At all.
In the vast majority of the claims we back, it is obvious when the papers come to us that the IP and their lawyers have tried very hard indeed to get the other side to the table. But they simply won’t engage at all, or not in any meaningful way, at least.
Almost miraculously, the defendant’s outlook very often changes as soon as the other side learn Manolete has taken an assignment of the claim or is funding the IP to pursue it.
We bring financial credibility, expertise and genuine muscle to your claim – large or small.
Either the defendants will research who we are or their own lawyers will inform them: we are the UK’s leading insolvency litigation finance experts with the backing of a London Stock Exchange market listing. We are built to take the case to court. When we win, the defendants will face a major cost burden as well as the damages. If we lose, the IP is fully indemnified. We will not hesitate to issue the claim and we won’t go away until we have a satisfactory resolution. That is our calling card.
As one London IP once said to me: “Using you guys, we get to bring a howitzer to a gun fight”.
It is the strength and effectiveness of the model that brings fast resolutions to claims for IPs. The speed of execution means proceeds (after costs) are maximised. We don’t use ATE, so there is no insurance cost leakage either. The defendants are usually, correctly, advised to engage in ADR as soon as possible. They know, “a Manolete case will not go away”. Better to seek an early, commercial, cost-efficient, resolution, rather than pay huge costs attempting to defend the indefensible.
Besides, the “50% to Manolete” only applies to the smaller claims (below £100,000). As recoveries on a Manolete case increase, so a greater percentage is paid to the insolvent estate. The percentage return to Manolete will often ratchet down to a significantly lower figure depending on the final cash recovery on the claim. This is always plainly set out in our investment agreements with IPs, including a clearly worked example.
A Claim Without Manolete Backing
And without Manolete on board? Often the case will drag on for years. Unpaid IP and lawyer WIP will rise relentlessly. There will be an understandable reluctance to issue the claim (due to adverse cost fears, the exorbitant cost of ATE insurance and their “hidden” broker’s commissions, lack of finance for expert reports, court costs etc) and the defendants will start to feel safe in the knowledge that if they just keep their heads down, the claim might well be abandoned. Often a best case is a derisory “nuisance-value” offer from the defendants, which is grudgingly accepted, just to defray some of the IP and lawyer WIP. As Professor Walton noted in his April 2016 report: very often the uplift success fee on a CFA is purely academic as the recovery never gets to a level to cover even the base costs anyway. What then is left for the creditors….?
And that is why I say the “50% cost” of getting Manolete involved is a fallacy. It is not a real cost at all. The outcome is usually a fantastic return to the estate where age-old WIP can finally be monetised and creditor returns are often transformed. In my favourite real-life case study, by getting Manolete involved, the IP took the creditor return from 4p in the pound to over 60p.
That kind of outcome puts the whole profession in the shining light it deserves to be.
Chief Executive, Manolete