Insolvency firm which funded litigation must pay third-party costs

Zacaroli: Uplift was justified

A firm of insolvency practitioners which contributed almost £500,000 to fund a liquidator and former company’s claim against its directors has been ordered to pay the same amount in third-party costs.

Mr Justice Zacaroli said the liquidator, Stephen Hunt, one of the two equity partners of Griffins, had himself described the £478,000 provided by the firm as “third-party funding” in a report for creditors.

Zacaroli J said the “essential question” for the High Court was whether Griffins had acted as ‘commercial funders’ of the case by doing more than merely facilitating access to justice for Burnden Holdings, and instead become a “real party” to the litigation.

The judge said Mr Hunt “sought his appointment and commenced his action”, knowing that the only asset in the liquidation was the company’s claim against Gary and Sally Fielding.

Mr Hunt already had a “vested interest” in the claim succeeding because the only source of funding for his fees would be what could be recovered in the action, an interest which was “substantially increased” by his entitlement to fees based on 50% of recoveries.

Although there was a distinction “properly to be drawn” between Mr Hunt and Griffins, “the fact remained that the firm stood to gain financially” from his fees.

Zacaroli J said Griffins had negotiated an uplift of 2.25x on its investment of £478,000 in the case, an uplift which “was justified given that there was no certainty as to repayment of the funds advanced and no interest payable”.

For all these reasons the judge concluded that Griffins had a “sufficient interest in the proceedings” to “warrant characterising them as a real party for the purposes of the third-party costs jurisdiction” under section 51 of the Senior Courts Act 1981.

The High Court heard in Burnden Holdings UK and another v Fielding [2019] EWHC 2995 (Ch) that Zacaroli J dismissed the claimants’ claims in June this year, ordering Burnden to pay £1.2m on account of costs.

Since then, the parties agreed that Mr Hunt should pay 15% of the Fieldings’ costs, and the main third-party funder, Project Appledene PC, part of a company incorporated in Jersey, should pay a further £1m in addition to the £1.2m.

Zacaroli J said Mr Hunt was appointed liquidator in 2012 and launched proceedings against the Fieldings in 2013. The following year the action was struck out on limitation grounds, but Griffins helped fund an appeal to the Court of Appeal to get it back on track.

The judge said there was “no documentary record” of the terms of the funding, which began in 2015, but it was advanced on the basis that Griffins would receive its money back plus an additional amount, which ended up as a total of more than twice (2.25 times) the amount of their original investment.

Zacaroli J said the funding was “necessary in order to enable the action to continue” and the “return on investment for which they bargained was a fair reflection of the credit risk they took in advancing funds on an interest-free basis”.

He applied the Arkin cap to Griffins’ liability, limiting it to the amount of the funding – £478,265. The order was also limited to the defendants’ costs during the period during which Griffins provided funding.

On the cap, the judge noted that the funding was for the limited purpose of getting the action – at that point struck out and inadequately pleaded – back on track so that funding could be obtained from a professional funder.

He concluded that applying the cap struck a balance “between the entitlement of the defendants, as the successful party, to be paid their costs and the risk of discouraging funding which facilitates access to justice”.

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