Welcome to our third newsletter of 2020
From Steven Cooklin
Central to the viability of any business model is that it delivers for all stakeholders. We call it the “Fairness Principle”. This has been the core guiding principle for Manolete since our very first insolvency litigation cases back in 2009.
This principle is clearly reflected in the insolvency litigation financing model that we have constructed:
- We always pay an initial non-refundable amount into the estate (more on this important aspect below). So even if nothing is ever recovered from the case, the estate always benefits from engaging with us.
- The IP chooses the law firm to work on the case. We are there to support those long-established relationships, not to displace them.
- The law firm and counsel are paid as the work is done. They are never asked to work contingently. And we pay fast.
- If important additional investigation or analysis work is required from the IP’s team to support the claim, that is paid for on the same basis as the legal work. Immediately.
- If a recovery is made, Manolete gets back those costs (so we are back to ‘zero’) and only then are the remaining proceeds split between the estate and Manolete. That usually starts at a 50/50 split but the estate’s share rises as the level of recovery rises. This is set out clearly in our agreements, including a worked example. So when you read about Manolete doing very well on a case, by definition, the estate will have always done better – even on a 50/50 split of proceeds, the estate will have also received the initial consideration (referred to in the first bullet above).
- If we all fail to make a recovery, Manolete simply writes off all the costs.
- Should adverse costs become payable to the other side, they are solely for Manolete’s account.
There are two really key differentiating points here, that set our model apart from insurers’ ATE products and other Funders:
An insurer’s ATE policy premium is paid as a first slice of the realisation. The insurer has not put any money in to pay for anyone’s costs but it gets the ‘top slice’ of any recovery. Nice business, if you can get it. What’s more, many ‘Funders’ incorporate ATE into their models. But it’s not the way we do business.
That breaches our Fairness Principle.
It is very difficult for an IP or their lawyers to accurately estimate the level of ATE required at the start of a case. If they take out too much ATE cover, they risk the premium gobbling up a huge amount of the realisation, leaving little or nothing to pay for CFA legal fees, the IP’s fees and of course the creditors. If they take out too little ATE, the IP and the estate are exposed to adverse costs.
Manolete doesn’t use ATE. All adverse cost risk is covered by our clear and simple indemnity and zero cost to the case. The IP and the estate are fully protected, for free.
The element we struggled with in the early years of Manolete was the level of the initial consideration. On the large majority of cases, when the IP or law firm approached us to fund or take an assignment of a case, it was evident a huge amount of work had already been done by those professionals.
While we were still building our track record with investors and banks, Manolete simply didn’t have the funds to pay a fairer level of initial consideration that could make a proper contribution to those costs. That never sat well with us. Yes, those costs could be recovered out of the estate’s share of the recovery but it was impossible to know when that would be, of course.
Happily, that position changed in late 2018. Since our listing on the London Stock Market, we have the funds available to make very meaningful payments into the estate as soon as the Funding or Assignment Agreement has been signed. Just last week, we paid £50,000 in initial consideration on a case that we took by way of an assignment from a leading IP firm’s Cardiff office. The estate still benefits with an initial 50% share of net proceeds, rising to 70% if together we achieve a higher recovery. On a separate case this week, we have offered £22,500 to cover all historic WIP costs plus another highly attractive share of net proceeds for the benefit of the estate.
I think it is this evolution of the Manolete model that has attracted many more cases to our team over the last 18 months. IPs and insolvency lawyers are highly ethical professionals, we are delighted to have been able to develop our model to meet their requirements. Ultimately, that leads to transformational returns for creditors.
Steven Cooklin, ACA ACSI CF
Chief Executive, Manolete Partners PLC
Bright Future Software Ltd,
Manolete Partners Plc v Ellis 2020
EWHV 1674 (Ch)
By Mena Halton, Head of Legal
Wrongful trading can be a challenging cause of action, but the legislation is there to be utilised so that directors whose actions have caused loss to creditors can be required to make a contribution.
Some detractors accuse Manolete of ‘cherry picking’ or backing only ‘easy’ cases. No case is without risk and very often a case which appears at first blush to be easy can turn out to be anything but. Litigation is an unpredictable beast and insolvency litigation more so because the party bringing the claim, whether the IP or an assignee, has no direct knowledge of events. The claimant or applicant is reliant, for the most part, on books and records kept (or not) by the former directors who are very often the target of the litigation. The Insolvency Act 1986 provides a robust framework for bringing claims with various statutory presumptions to assist. However, the remedies available can be subject to judicial discretion and that applies to wrongful trading in particular.
Manolete does not shy away from challenging claims and our track record demonstrates considerable success over 257 completed cases to date, for the most part by way of ADR, but also at trial.
Bright Future Software Ltd (“BFS”) was incorporated in March 2012 and entered into CVL on 23 February 2016 with a deficit of £10,962,916, the major creditors being the public purse – the Regional Growth Fund (“RGF”) and HMRC. There were two directors, Mr Ellis and Ms Thompson. BFS carried on business as a software developer and provider of software services. BFS also provided vocational training for apprentices. Formal training of apprentices employed by BFS was undertaken through an associated company of which Mr Ellis was also a director called My Futures Bright Limited (“MFB”). MFB was publicly funded by the Skills Funding Agency. MFB was incorporated on 13 June 2012 and entered into CVL on 9 March 2016 with a deficit of in excess of £1m. BFS was also publicly funded by way of grants and repayable loans totalling £4.882m from RGF which were paid to BFS from April 2014 onwards. The public funding was to be matched by private investment of £10.2m. This was ultimately agreed in the form of a £10.2m facility between Mr Ellis and BFS, of which approximately £2m was ultimately advanced by way of loan.
BFS was unsustainably loss-making throughout and consistently failed to meet its sales forecasts; by December 2014 BFS’ sales performed at a level 90% below the sales forecast to RGF during the due diligence process. BFS’ sales revenues were projected to be:
- £346,000 by 31 March 2014;
- £4,785,000 by 31 March 2015; and
- £16,744,000 by 31 March 2016.
In the trading period from 9 March 2012 to 30 April 2013, BFS made a loss of £244,767 and had net liabilities of £144,767.
At the end of December 2014, BFS’ management accounts recorded sales of £24,119 for that month and net liabilities of £1,591,517.
At the end of October 2015, BFS’ management accounts recorded sales of £38,206 for that month, a loss for that month of £567,225 and net liabilities of £4,599,977.
Mr Ellis ceased to fund BFS under the £10.2m facility from October 2014. By December 2014 the directors had fully drawn the RGF grant and resolved to draw down the RGF loan of £2m by the use of borrowing from MFB (whose funding was government money from the Skills Funding Agency).
The liquidators investigated and identified claims against Mr Ellis and Ms Thompson. There were no monies in the estate and the claims were assigned to Manolete to enable them to be advanced at no risk to the liquidators or the estate. A bankruptcy order had been made against Ms Thompson and proceedings were issued against Mr Ellis. The claim against Mr Ellis was in wrongful trading for the sum of £6,659,168 being the increase in the deficiency of BFS’ assets in the period January 2015 to February 2016. Had Mr Ellis ceased in January 2015 the net deficiency would have been £4,393,747 rather than the actual deficiency of £10,962,916.
The matter was tried in March 2020 by Richard Spearman QC sitting as a Deputy Judge of the Chancery Division. Ms Thompson had made an extensive witness statement on behalf of Mr Ellis and it was Mr Ellis’s evidence that he relied upon Ms Thompson. Shortly before Ms Thompson was due to give evidence, we were informed that she would not be called as a witness.
The judge concluded that on the subjective test Mr Ellis did not know there was no reasonable prospect of BFS avoiding insolvent liquidation.
On the objective test and without the benefit of hindsight, the judge found that Mr Ellis ought not to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation. The judge made this finding on the objective test because third parties had not expressed concerns. Dismissing the wrongful trading claim, the judge held that it would be very harsh on Mr Ellis if he was held liable for wrongful trading. In reaching his conclusions the judge relied on the monitoring carried out by RGF with input from BFS’ accountants and the fact that KPMG (approached in autumn 2015 in connection with a possible business arrangement) did not advise the directors in December 2015 to wind up BFS.
A contrary view might be that a director acting in accordance with his duties must make his own investigation by looking at the financial information such as cash flows. It is not the case that a director is trading wrongfully only when he is informed so by a third party; in particular when he has not asked the question or sought advice. The judge found that it was sufficient for Mr Ellis to rely on Hurst & Co and RGF. Mr Ellis’s evidence was that he relied on Ms Thompson and it must be questionable as to whether such reliance is sufficient for a director who is obliged to satisfy himself of the finances of the company, both present and looking forward, as to how revenue is to be generated.
There were two smaller heads of claim, a TUV/breach of duty claim in respect of the sum of £325,000 paid to Mr Ellis between May and September 2014 and a preference claim in respect of a payment of £188,769 to Mr Ellis in March 2015.
The judge dismissed the TUV claim and his conclusion for doing so was dependant on rectification of the £10.2 facility agreement. Dismissing the breach of duty claim, the judge did not conclude that between May and September 2014 BFS could not reasonably be expected to meet its liabilities; in particular because BFS’ accountants/RGF did not express concerns.
The preference claim succeeded.
This was a claim which the liquidators, Manolete and our legal advisors considered to have strong merits and which, if successful, would have ensured a very significant realisation for the public purse which suffered very large losses. We fully appreciated the risks involved and as experienced litigators are cognisant of the uncertainties of trial. It was important the claim was brought and the liquidators given an opportunity to seek redress, which opportunity would otherwise have been stifled due to lack of funds. We recognise litigation risk and continue to assume that risk to ensure claims are pursued at no risk to the IP, the estate or the solicitors and barristers instructed.
Manolete does not use CFAs or ATE, we assume full liability for all own and adverse costs and have the financial strength to meet all liabilities.
Head of Legal
Appointment as Deputy District Judge to the Midlands Circuit
By Alison Kirby, Associate Director
I am proud to say I have recently been appointed a Deputy District Judge on the Midlands Circuit. The initial appointment is for a four year term and if I do the job well I can remain appointed until my 70th birthday.
The requirement is to sit for a minimum of 30 days and a maximum of 50 days per year. So my Manolete commitment will not change.
Due to the global pandemic, I have not been able to take the next step of the week-long residential induction seminar and at the current time, for understandable reasons, I do not have a date for that.
It was a year-long process, commencing with five short written pieces addressing each judicial competency standard. I spent time over several months honing them – with only 250 words per competency, every word had to count. I was fortunate to have some colleagues who had been appointed in previous years to review and feedback.
The next steps were a series of timed online assessments designed to test whether, under pressure, I could meet the competencies which I had spent so long writing about. After each test there was a wait of a couple of months; if I passed, the details of the next test were revealed.
The final day was gruelling. There were two timed role plays with 20 minutes to read four A4 typed sheets of information and then into the Court room. Two actors played the parties in dispute and the Court was mine apart from the three other parties from the Judicial Appointment Commission observing my every move, word and expression – copious notes were made. Curve balls were thrown by the actors or Court staff just as you thought you might be feeling comfortable.
After the role plays it was straight off to an interview, the panel of which had been observing me in Court. It is fair to say I survived the day with copious amounts of chocolate! I am delighted to be appointed. I am looking forward to developing my skill set further and meeting my judicial colleagues when the rules permit.
Associate Director for the Eastern Region
By Stephen Baister
Someone recently sent me a short video clip of an American legal luminary talking to what looked like a gathering of students. He told his audience one of those stories about a zany case that most lawyers enjoy. In this one the American lawyer bought a box of expensive cigars and insured them. He then smoked them and claimed on the insurance policy - before he had even paid the premium (a nice touch, I thought). He sued the insurers when they refused to cough up, but they decided the case wasn’t worth fighting. They paid up, but then had the lawyer arrested for arson.
I suspect the case was fictional, as many in these stories are. Be that as it may, I liked the ending because I hadn’t expected it. I thought the insurers would counterclaim damages for the destruction of the insured property on some tortious or other basis and recover more than they had to pay out. But I was wrong. And that’s the problem with litigation: the story often doesn’t end as you thought or hoped it would; there’s always an element of gambling.
There’s nothing Manolete can do to make it otherwise. We have, in fact, just lost a case, a happily rare occurrence: most of our cases settle early and only about 5% go to trial. The corridors of the courts are littered with the debris of unlosable cases that were lost and unwinnable cases that were won. What Manolete can do is even up the odds. We look at each new case with a fresh, critical eye before we take it on. That means that if we decide to purchase or finance an action, we believe in it, which is why we almost invariably take it as far as it needs to go. That in turn adds to our clients’ confidence and should make defendants think carefully before incurring costs themselves and more inclined to settle, and do so quickly, than might otherwise be the case. But we recognise that litigation is always a risk and there will be times when we lose. It is our job to take that risk from the shoulders of the office holder and bear it ourselves. Which is why every so often, but not too often, we hope, we have to live with down side as well as the up side of going all the way.
*An unexpected ending to a phrase, sentence or text.