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Liquidators “should have at least a little creditor support” before pursuing funded legal action

Liquidators had to balance benefit and risk of not using litigation funding

Liquidators had to balance benefit and risk of not using litigation funding

Liquidators who want to pursue a legal action against the Department for Business, Innovation and Skills (BIS) with the backing of a litigation funder do not need creditors’ formal backing to do so, but should not act if all of them are opposed to it, the High Court has ruled.

Mr Justice Snowden was ruling in Allen & Anor, Re Longmeade Ltd (In Liquidation) (Rev 1) [2016] EWHC 356 (Ch) [1], where 99.73% of the creditors by value opposed the action.

Longmeade was part of the UK Lehman Brothers group and went into compulsory liquidation in England on 24 November 2010. The liquidators claim that BIS’s actions meant that Longmeade missed out on a payment from a debtor in the US and said counsel’s advice was that the claim had at least a 60% prospect of success

Litigation funder Manolete Partners had agreed to pay for the claim, and also deposit £1m to provide cover against any adverse costs orders, in return for a “substantial share” of any recoveries. Manolete also offered an indemnity in relation to the additional management costs of keeping the Longmeade liquidation open to pursue the claim.

“In short, the position has been reached that the litigation could be pursued at no financial cost or risk to Longmeade, albeit that if successful, Longmeade would be required to pay Manolete a significant share of the recoveries,” said the judge.

The projected future dividend in the liquidation if the claim was not pursued or was unsuccessful was 9.4 pence in the pound. This would rise to 20.3p if the claim succeeded with Manolete’s funding. If the claim was pursued without this funding, the estimated dividend would be 27.4p if successful but fall to 7.1p if not.

“On this basis, the liquidators formed the firm view that on any straightforward analysis of the commercial risks and benefits, the appropriate course for them to take in the interests of Longmeade and its body of creditors as a whole would be to accept Manolete’s offer of funding and cause Longmeade to pursue the claim in negligence against BIS,” recorded Snowden J.

However, 99.73% by value of Longmeade’s creditors opposed the action and so the liquidators sought directions from the court.

HM Revenue & Customs was the largest creditor, and Snowden J said its opposition was “of course, entirely rational if regard is had to HMRC’s particular interest as a government department”.

He explained: “Viewed from the perspective of the public purse, it makes no sense to litigate to force BIS to pay 100% of the damages to Longmeade, but for HMRC only to recover an enhanced distribution of 49.29% of the net balance of those damages (after deduction of irrecoverable costs or Manolete’s share of recoveries).

“But such considerations have nothing to do with HMRC’s position as a creditor of Longmeade per se or the merits of the claim against BIS.”

The judge was similarly unimpressed with the opposition of the other main creditor, Lehman Brothers Holdings Inc (LBHI), which said the case would delay the closure of the insolvency – the judge said it could simply sell its claim – and risked bad publicity.

“It is far from obvious to me what further reputational damage could be inflicted upon those companies which were part of the US Lehman Brothers group that collapsed into insolvency procedures over seven years ago, have not traded since and will not trade again,” he said.

Both LBHI and HMRC said that if the case were to go ahead, the costs should be borne by Longmeade rather than funded by Manolete. This suggested, said Snowden J, that they thought “the prospects for the claim are good and/or that the costs of the litigation would not be too great, because they would prefer to risk a diminution in the current assets of the estate rather than take no risk but have to share the proceeds of the claim with the funder”.

Of the three remaining creditors, one – in which LBHI was interested – was opposed but had given no reasons for this, while the other two’s views were unclear.

Snowden J said that since changes to the Insolvency Act regime in force from 26 May 2015, the liquidators were not obliged to summon a meeting of the creditors – the wishes of most of the creditors had already been expressed and in any case the liquidators would not be bound by the vote at such a meeting.

“Further, I think that the liquidators would in any event be entitled to discount the views of the two largest creditor groups, who are plainly influenced by extraneous and individual considerations…

“What, however, I think that the liquidators ought to do, is to give [the other three creditors] a last opportunity to clarify and explain their wishes in correspondence… If these creditors clearly indicate that they do not wish the claim to be brought, so that all [his emphasis] of the creditors are agreed, then I do not think that the liquidators should bring the claim.

“If, however, any of the creditors remain either in favour of the claim being brought or are simply neutral, it will be for the liquidators to take a commercial decision in the interests of the creditors as a whole as to whether to commence the claim and, if so, how to fund it.”

As regards the decision to commence litigation, Snowden J said that “although it is not for the court to take that decision for the liquidators, the circumstances of this case are highly unusual and I think that some reassurance [for them] is appropriate.

“In my view, if there remain one or more creditors, even for comparatively small amounts, who would lose the opportunity for a materially increased distribution if the claim were not to be pursued, then on the basis of counsel’s advice and the other material placed before me which demonstrates that the majority of creditors are pursuing their own agendas, I think that a decision by the liquidators that Longmeade should pursue the claim at no financial risk with the assistance of funding from Manolete would be within the range of decisions that a reasonable liquidator could properly take”.

As to whether to go with the funding, he said the liquidators should have regard to the creditors’ views, but added: “As well as the merits, the liquidators should also consider the adequacy of the funds available in the liquidation, the likely costs (and hence risk of diminution in future dividends) to which Longmeade would be exposed if the claim were to fail, and the proportion of the damages to be shared with Manolete if the claim were to be successful.

“The overriding requirement is for liquidators to exercise their professional judgment in what they believe to be the best interests of creditors. It is obvious that they should not voluntarily do something that is likely (i.e. more probable than not) to result in loss to the estate. But that does not mean that they cannot properly run some risk of loss: otherwise no liquidator could ever embark upon litigation without a 100% costs indemnity from a third party.”

Snowden J also expressed a provisional view that the liquidators should be allowed to assign the action to a third party, including Manolete.