Objection to insolvency funder buying case “irrelevant”

Spearman: Harsh to rule against defendant

The High Court has dismissed as irrelevant objections to leading insolvency funder Manolete Partners buying assignment of a claim, but then only awarded 2.5% of the £7m sought.

Richard Spearman QC, sitting as a deputy judge in the Chancery Division, said he understood the defendant’s “sense of grievance” at being sued, but it did not affect the case.

Manolete has grown significantly since becoming a listed company in December 2018 – its model is to buy claims and run them itself.

In Manolete Partners Plc v Ellis [2020] EWHC 1674 (Ch), it obtained an assignment of the claims of Bright Future Software (BFS) and its liquidators against former directors Eudora Thompson and Robin Ellis, who are also partners.

BFS was Ms Thompson’s brainchild and she was at all times the largest shareholder. Mr Ellis held a 30% stake but the claims were pursued against him alone because Ms Thompson has no substantial assets.

There were three principal heads of claim, the first, and much the largest, was £6.6m for wrongful trading.

Mr Ellis’s counsel pointed out that Manolete acquired the claim for an up-front payment of only £5,000, and would obtain a substantial share of any recoveries, with the remainder being shared between the liquidators and the creditors of BFS.

Manolete responded that there was nothing out of the ordinary in this: “As BFS lacked the necessary funds, the liquidators had to obtain external funding in order to attempt to realise assets for the benefit of creditors; and any attack on the conduct of the liquidators, including in fixing their remuneration and striking a deal with Manolete, would need to be properly formulated and made the subject of separate proceedings, which neither Mr Ellis nor anyone else has sought to do”.

Mr Spearman said: “In light of Mr Ellis’ sense of grievance at being made the subject of these proceedings, I understand why these points were made. However, I do not consider that they have any bearing on the issues which I have to decide.”

But in a lengthy ruling, he went on to dismiss the wrongful trading claim, saying it would be “very harsh on Mr Ellis if he was held liable for wrongful trading on the facts of this case. He was not irresponsible, and nor did he close his eyes to the reality of BFS’ position, or allow BFS to carry on trading after it was or should have been obvious to him that BFS was insolvent and had no reasonable prospect of trading out of difficulty”.

A second claim for £325,000, based on a transaction at an undervalue or breach of duty, also failed, although Manolete did succeed in recovering three payments to Mr Ellis totalling £188,00, which the court found to be preferences within the meaning of section 239 of the Insolvency Act.

Unusually, Manolete issued a stock market announcement on the case yesterday, saying that the claim was held in Manolete’s books at a fair value of just £395,000 and capitalised costs of approximately £54,000. It is “reviewing its options for appeal”.

Chief executive Steven Cooklin said: “It is very rare for Manolete cases to be heard at trial. Over the past 11 years of our operations 95% of our 263 completed cases have completed pre-trial.

“This case had the potential for a large upside for creditors and our shareholders alike but the fair value was immaterial in our accounts.”

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