Liquidator's firm liable for opponent's costs after funding litigation

Out-Law Legal Update | 10 Jan 2020 | 2:20 pm | 3 min. read

The High Court has characterised a liquidator's firm as a real party to the litigation which it funded as it stood to make financial gain from the action and was therefore found not to be a pure funder facilitating access to justice.

The firm's liability for costs was, however, limited to the period for which it funded the action.

The court's decision sought to strike a balance between a successful party's entitlement to be reimbursed and the risk of discouraging funding which facilitates access to justice. While the court maintained the distinction between an insolvency practitioner and their firm, this decision must be considered by professional firms when funding litigation as the level of benefit they stand to receive from such action could result in them being liable for costs.

Burnden Holdings (UK) Ltd (BHUK) went into administration in October 2008 and compulsory liquidation in December 2009. Stephen Hunt of Griffins was appointed as liquidator in December 2012. At the time of his appointment the only material assets left in the business were potential claims against the directors. Claims were issued, but were struck out on limitation grounds.

Griffins advanced money to appeal the limitation decision, as BHUK had been unable to obtain commercial litigation funding whilst the claims were struck out. If the litigation succeeded Griffins would be repaid the advance plus an uplift and Griffins would also receive the benefit of the liquidator's remuneration. The only source of the liquidator's fees was recoveries in the liquidation.

The limitation litigation succeeded in the Supreme Court, the claims against the directors were reinstated and an agreement was entered into with a third-party funder. However, the claims against the directors were unsuccessful and BHUK was ordered to pay an element of the directors' costs. A settlement was reached with between the directors and the third-party funder, it was also agreed that the liquidator would pay a proportion of the costs. The court was left to decide whether Griffins was liable to pay any part of the directors' costs on the grounds that it was a third party funder and, if so, the extent of such liability.

The court initially considered the general power to award costs under section 51 Senior Courts Act 1981. It was common ground that where a non-party both funds litigation and also substantially controls or benefits from the litigation, they should ordinarily be liable to pay the successful party's costs if the proceedings fail. Such a party, in these circumstances, would be seeking to gain access to justice for its own purposes.

The court said that Griffins had sufficient interest in the proceedings to warrant such characterisation, noting that at the time of the liquidator's appointment and the funding, the only assets in liquidation were the claims against the directors. Therefore, both the liquidator and Griffins had a vested interest in the litigation succeeding, as the only source for payment of the liquidator's fees and repayments on the monies advanced and uplift would be via the recoveries in the action. The court noted that the proposed uplift was appropriate recognition of the risk taken by Griffins in advancing the funds; it nevertheless represented a substantial financial interest in the outcome of the proceedings.

Having decided Griffins was liable for the directors' costs, the court was then asked to decide the extent of this liability. In doing so, it considered the extent to which the costs incurred by the directors were caused by the firm's funding of proceedings. Here, the court held that Griffins was only liable for the director's costs incurred during the specific period of litigation which they funded. Further, the court applied the Arkin Cap, whereby a professional funder of part of a party's litigation costs should only be liable for the opponent's costs to the extent of that funding provided. Griffins' liability was therefore capped to the amount of funding advanced.

Insolvency practitioners and their firms should consider this judgment when contemplating funding litigation directly. While it is accepted that a firm is separate and distinct from its practitioners, this does not necessarily exclude a firm from liability for costs in the litigation it funds. Practitioners and their firms must consider the extent to which they stand to gain from litigation, as a substantial benefit, based upon a successful action, may lead to their characterisation as a real party to the proceedings.

It is not yet known if there is any intention to appeal this decision but it should be noted that this area is developing and the decision in Davey v Money, which was applied by the High Court in this case, has an appeal currently pending.

Co-authored by Molly Dyas, a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com