In PGD (in liquidation) Manolete Partners plc v Hope Mr Justice Zacaroli considered whether it was possible and/or appropriate to limit the quantum of relief granted in insolvency litigation to the amount required to pay the liquidation debts, costs and expenses where the claim had been assigned to a third-party litigation funder.
Zacaroli J held it was not clear whether the court possessed the power to do so but, even if the jurisdiction did exist, it should not be exercised to deny a third-party litigation funder innocent of any wrongdoing from the proceeds of the claim.
(The below article first appeared on LexisPSL R&I and is republished with consent. It was written by Paul Wright, a barrister at 9 Stone Buildings who appeared for the appellant in this matter (with Joe Curl QC) and was instructed by Squire Patton Boggs)
What are the practical implications of this case?
There are a number of previous decisions where the court has imposed a ‘cap’ on its award, for example, to stop money from going around in circles, or to stop a third party tainted by some wrongdoing from profiting from any award. Those previous decisions were, however, all made in the context of claims brought using the summary procedure available for such claims under section 212 of the Insolvency Act 1986 (IA 1986) . P G D appears to be one of the first occasions where the court has had to consider the existence of this jurisdiction outside of IA 1985 s212.
Though the court did not come to a final conclusion on this issue, litigation funders and those who they instruct will welcome the fact that the judge found, in unusually strong terms, that any jurisdiction that might exist should not be exercised to deprive a litigation funder of the proceeds of a claim.
Had the court found otherwise, decisions as to whether to fund certain insolvency claims would have become even more complex. It would be difficult, if not impossible, to accurately value a potential claim where that value depends upon the estimated deficiency at the time of enforcement (likely a number of years in the future).
Viewed from the contrary perspective of directors to such actions, however, the practical effect of P G D may be that directors are required to pay a greater sum where a claim is brought by a litigation funder than might have otherwise been the case had the claim been brought by a liquidator under IA 1986 s212.
What was the background?
Before they sold their shares in 2014, the respondents had been the directors and shareholders of P G D (the ‘Company’). The consideration for the sale of the shares was paid to the respondents by the Company itself, as the purchasers lacked the personal means to make payment.
Following the liquidation of the Company, its liquidator assigned various causes of action to a litigation funder, Manolete Partners plc. The terms of that assignment provided that the proceeds of any successful claim brought by Manolete would be shared with the Company.
At first instance, before ICC Judge Prentis, Manolete succeeded on its claim:
- to recover certain dividends paid by the respondents to themselves (both as unlawful distributions and as breaches of their directors’ duties), and
- that payments of the consideration by the Company constituted transactions at an undervalue
Having delivered judgment, however, ICC Judge Prentis indicated that he intended to impose in his order a ‘cap’ on recoveries such that the total amount to be paid by the respondents would not exceed the amount required to satisfy the Company’s liquidation debts, costs and expenses. Counsel then representing Manolete objected to the proposed ‘cap’ by email. The judge delivered a supplemental judgment setting out his reasons for continuing to impose the ‘cap’. This was appealed by Manolete.
Between the trial and the hearing of the appeal, each of the respondents were declared bankrupt on their own applications. The trustee of their bankruptcy estates adopted a neutral stance on the appeal, and was not represented on the appeal.
What did the court decide?
Counsel representing Manolete on the appeal submitted that, other than claims brought under IA 1986 s212, the court had no jurisdiction to cap its award where a director has otherwise been found liable. Having heard submissions from only one party on the appeal, however, Zacaroli J declined to reach any conclusion on this issue.
The judge, instead, disposed of the appeal on the basis that, even if such a jurisdiction did exist, it would be wrong in principle to exercise that jurisdiction in the circumstances of this case.
First, Zacaroli J found the ‘cap’ would be difficult to apply in practice as the amount required to satisfy the liquidation debts, costs and expenses would be unknown while the liquidation continued.
Second, the judge accepted that the effect of the ‘cap’ would be to leave Manolete out of pocket by preventing part of its recoveries.
Third, the judge disagreed with the first instance judge’s reason for imposing the ‘cap’ (i.e., that the identity of the claimant ought not result in any different recoveries). Though an assignee stands in the shoes of the assignor, that meant only that the assignee can assert no better cause of action than the assignor. The discretion to ‘cap’ recoveries was not an element of (or defect in) the cause of action, but a factor relevant to the proceeds of the cause of action.
Finally, the judge held that it would be wrong in principle to deprive an innocent assignee of any part of an order by the exercise of a discretion intended to prevent tainted third parties from benefiting from their wrongdoing. Where the litigation funder was, like Manolete, innocent of any wrongdoing, the quantum of the award should not be limited.