Are funders pure or professional or something in between?

Are funders pure or professional or something in between?
Author:
Jeremy Marshall
Senior Investment Manager - England

A recent decision has got the funding community talking and would, if times were different, have led to some water cooler moments. The decision is a mere 19 paragraphs long and, as will become evident, is perhaps as important for what it did not say as for what it did say.

Marcus Smith J ruled on a third party costs application brought by Laser Trust (Laser) against Colosseum Consulting (Colosseum). Colosseum had been revealed as the funder of litigation as between Laser and CFL Finance (CFL) and Laser had costs orders outstanding against CFL to the tune of around £330,000. Colosseum had been joined for the purposes of costs.

The judge found that Colosseum had control “of an extraordinary high order” and he stated that “it is quite clear that under the terms of the funding agreement, the control that Colosseum had was massive”. Whilst it was not the absolute control that Laser asserted, Marcus Smith J found “it was very close to that”. What was not so clear was whether the control was actually exercised during the litigation but, based on the fact that CFL and Colosseum did not provide full and frank answers about that, the judge proceeded on the basis of the level of control as set out in the funding agreement.

In consequence, Marcus Smith J ordered Colosseum to pay the costs as already assessed. The nature of the interest of Colosseum was such that the judge flung off the Arkin cap (previously perceived to be some sort of stop loss to the level of a funder’s actual outlay). He may have been influenced in this regard by the fact that the sole director of Colosseum, on the day that the costs application was served, resolved to place Colosseum into voluntary liquidation. Colosseum was, as can be seen, not a paid-up member of the ALF.

The recent exhortation to professional funders is that we all need to be wary of the levels of control that we seek to exercise in our funding agreements otherwise we are for the high jump.

In truth, the decision is not as radical as first appears. For a start, Colosseum was deemed to be a “pure” funder. The distinction between a “pure” funder and a “professional” funder goes back to the Court of Appeal case of Hamilton v Al Fayed [2002]. “Pure” funders were said to be those “with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course”.  In those circumstances, orders for costs would rarely be made against them. However, in the Al Fayed case the Court also stated that it would be very exceptional that a situation would arise where it would not be just or reasonable to make a costs order against a “professional” funder. The Court also referred to an earlier case where a costs order was made, where the judge had described the underwriters as “the defendants in all but name”, having earlier observed that “it must be rare for litigation to be funded, controlled and directed by a third party motivated entirely by its own interests”. In those circumstances he had regarded it as “a paradigm case” for a costs order.

Turning to the facts of the case, CFL provided a short term facility (in 2008) to a company called Lanza Holdings that had been guaranteed by a Mr Gertner. In the face on non-payment, CFL commenced proceedings against Mr Gertner under the guarantee. They were later settled on terms that Mr Gertner made a series of payments. He did not honour all the payments and so CFL ultimately presented a bankruptcy petition (in 2015). With interest, the debt had now increased to £11 million. In the face of the bankruptcy petition, Mr Gartner took advice and proposed an IVA, Mr Gartner having a number of other creditors. Indeed, the estimate in his statement of affairs was that he owed nearly £583 million. His proposal was that a third party would pay £487,500 to his creditors (who would receive 0.07p in the pound) and that would be that. He proposal was approved by creditors, and it transpired that one creditor (Kaupthing Bank) constituted 90% of the creditors by value. Kaupthing’s debt was also based on a guarantee. CFL (and one other creditor) voted against the IVA. Had Kaupthing’s claim not existed, the IVA would have been rejected. What was not known at the creditors’ meeting was that Kaupthing had already entered into a settlement agreement with a number of parties, including Mr Gertner and Laser. It was a term of that agreement that Laser would pay US$6 million to Kaupthing. In consideration for the payment, Kaupthing would agree to assign its claims against Mr Gertner to Laser. CFL challenged the IVA and argued that Kaupthing was not entitled to vote. At first instance, the bankruptcy judge held that Kaupthing was indeed not a creditor. The Court of Appeal disagreed but felt that there was a material irregularity and set aside the IVA. Only at this point in the saga did Kaupthing assign its rights to Laser. Then, in 2019, CFL restored the bankruptcy petition. Now CFL’s debt had ballooned to £30 million. There was of course no Kaupthing in the new statement of affairs but Laser had now appeared, with a proof of debt of nearly £800 million (good old interest). Another IVA was proposed. There then followed another fight when CFL attempted to proceed with the petition and Laser sought a stay of it to allow for the meeting of creditors under the IVA. Mr Gertner also challenged the debt on consumer credit grounds. CFL won that particular battle and the bankruptcy was declared. The matter was then appealed by Mr Gertner and Laser and came before Marcus Smith J (in 2020). Marcus Smith J was aware by this stage that CFL was being funded (but not by whom).  The judge ruled against Mr Gertner’s consumer credit challenges but he found for Laser with the effect that the IVA could then proceed. CFL appealed again but was ordered to provide security for Laser’s costs. Having failed to do so, its appeal was struck out. Mr Gertner also appealed his consumer credit arguments and the Court of Appeal accepted his further arguments. At the end of the day, Laser and Mr Gertner had simply outgunned their opponent.

As can be deduced from the length of the preceding paragraph, the case’s complexity – and its twists and turns – rendered it entirely unsuitable for a professional funder. It could only ever therefore be advanced by alternative means. Whilst it is difficult from the judgment to understand precisely what level of control existed, a fair reading suggests that Colosseum is likely to have had some material interest over the original £30m debt (otherwise why get involved at all?) and so appears to have been trying to litigate in the same way as Laser was – ie a battle of the assignees. In these circumstances, Colosseum was hardly a “pure” funder in the strict sense of the word and its motivation was certainly not charitable.

On this analysis, there was nothing out of the ordinary in making Colosseum liable for the costs. It perhaps seems harsh to have taken away the Arkin cap, but funders in the position of Colosseum – not pure, not professional, but somewhere in no man’s land – need to assume that they will be treated by the rules that apply to professionals. There certainly is no need for professional funders to start reassessing their funding agreements. If anything, as has been shown by previous cases like Excalibur, this case probably cried out for the exercise of a degree of objective control from a professional funder. The benefit of the involvement of a professional funder is that disputes such as this one, being anchored in a personal scrap, would not have likely taken up so much of the Court’s time. The challenge for the Courts is that these sorts of cases make the professionals run for the hills.