In a recent decision in the group litigation brought in respect of the Ingenious Media film partnerships, the High Court has granted the defendants’ application for security for costs against the claimants’ litigation funder, Therium: Rowe v Ingenious Media Holdings PLC  EWHC 235 (Ch).
The decision follows the court’s approach to security applications against litigation funders in the RBS Rights Issue Litigation  EWHC 3161 (Ch) (considered here) and is the first successful such application against a member of the Association of Litigation Funders.
As in the RBS case, it was a significant factor in granting security that, if the claim failed, the claimants would each be liable for only a proportion of the defendant’s costs, in light of the court’s order providing for several rather than joint liability. It was also significant that the funder had provided no evidence as to its financial position, and therefore the court could not be confident that it would meet any order for costs made against it. Whilst some value was attributed to the after-the-event (ATE) insurance policies the claimants had in place in respect of their potential adverse costs liability, those policies were not a complete answer to the application given the risk that they would not respond in full.
Damien Byrne Hill, John Mathew and Holly McCann consider the decision further below.
In another recent development affecting litigation funders and defendants to funded claims, the Court of Appeal has recently found that there is no fixed limit on a funder’s liability for adverse costs when the claim fails. See our blog post on that decision here.
The applications were made as part of the Ingenious Litigation, in which claims are brought by over 500 individual claimants in relation to their investments in the Ingenious Media film partnerships. The Ingenious partnerships were promoted from 2002 to 2007 as tax-efficient vehicles involved in the production of films and video games, through which investors could set off the trading losses of the relevant partnership against their own taxable income. HMRC challenged the tax treatment of the partnerships, and that challenge was upheld on appeal to the First Tier Tribunal and the Upper Tribunal. The result is that, subject to any further appeal, no loss relief is available to investors.
The claimants seek to recover their losses from various companies and individuals associated with the Ingenious Media group. A large number of the claimants also claim against the financial institution which provided lending to facilitate the investments, and some of the claimants claim against the financial advisers to the claimants. The majority, but not all, of the claims are funded by Therium Litigation Finance AF IC. The claims are being case managed together, though no Group Litigation Order (“GLO”) has been made. The vast majority of the claims have been stayed while a few select claims proceed through to trial as test claims.
The claimants applied for an order that their potential liability for adverse costs should be several and not joint, and that each claimant’s liability should be pro-rated to the value of their individual investments in the partnerships rather than per capita. The defendants applied for security for costs against Therium.
The High Court (Nugee J) granted both applications.
Several vs joint liability
Nugee J did not accept that the starting point was that the claimants would be jointly and severally liable for adverse costs. He commented, “Costs are always in the discretion of the court, and cases vary infinitely.” In a simple case where two parties have a joint claim, or bring what is in effect a single case, one would expect them to be jointly liable for adverse costs. But it did not follow that the same applied to litigation with hundreds of individual claimants, who each have their own independent claims which vary in value. In such cases it was not obvious that the claimants should be jointly and severally liable for the potentially large costs of the proceedings, regardless of how small their personal stake may be, simply because the claims are being heard together.
The appropriate question for the court was not therefore whether to depart from the default position of joint and several liability, but rather whether it was just in all the circumstances for a several liability order to be made. This turned on the question of whether the risk of non-collection from individual claimants should lie with the defendants or with the other claimants.
Nugee J referred to the decision in Ward v Guinness Mahon plc  1 WLR 894, in which the Court of Appeal considered it to be demonstrably fairer that the defendants should bear this risk, rather than a small number of claimants being forced to pay the entire amount and failing to be reimbursed by the remaining claimants.
Nugee J did not consider that changes in the legal landscape since the decision in Ward, namely the rise of litigation funders and ATE insurance, mitigated against the risk of individual claimants’ claims being stymied by the threat of substantial adverse costs orders. There was no reason to think the risk of joint liability had ceased to limit access to justice for individual claimants; those of modest means were likely to consider substantial costs risks to outweigh the benefits of recovery, and wealthier claimants were likely to fear being a defendant’s first port of call for satisfaction of a joint and several costs award. He noted that he had not been shown any example of a case in which joint liability had been imposed for adverse costs, either under a formal GLO or where cases had been managed together without a GLO.
He therefore ordered that the claimants’ liability for adverse costs should be several.
Apportionment of liability
While the Ingenious Litigation is not subject to a formal GLO, Nugee J considered that the principles set out in CPR 46.6 regarding costs sharing in group litigation should apply in the same way, as it is characteristic of the sort of case which would be suitable for a GLO.
The default position under CPR 46.6 is that liability for common costs in group claims will be shared equally by each claimant (ie per capita), but the court can order that costs be shared some other way, and this was done in RBS. In his judgment in that case, Hildyard J stated:
“Where there is … a very considerable disparity between the values of the claims of different parties, if they are all unsuccessful the default rule is unlikely to meet the requirement of fairness. It is not fair or equitable that an institutional investor with millions, in some cases hundreds of millions, at stake should pay an equal contribution as an individual claimant with claims in the hundreds, or even hundreds of thousands.”
Nugee J agreed with this statement, saying it seemed fairer that the risks to a claimant of participating in the litigation should be proportionate to the reward they might obtain from the litigation. In the present case, the claimants’ investments ranged from £36,000 to £10.5 million. While the disparity was greater in RBS, the principles did not only apply in the most extreme cases. Nugee J therefore held that the appropriate order would be to apportion liability pro rata by reference to the amount of each claimant’s investment in the partnerships.
Security for costs
It was common ground that the court had jurisdiction to order security for costs against Therium under CPR 25.14(2)(b), which allows security to be granted against those who fund litigation in return for a share of the proceeds.
But it was not appropriate to order security against Therium in respect of the self-funded claims, as opposed to the claims Therium was funding, as there was no principled basis on which Therium could be made liable for the costs of those claims under s.51 of the Supreme Court Act 1981. However, this was subject to exceptional circumstances; it was in theory possible that Therium might behave in such a way as to render itself open to an order for costs in relation to the self-funded claimants, but the circumstances would have to be “fairly unusual”.
Nugee J referred to the principles set out by Hildyard J in RBS in considering an order for security for costs against a funder. In particular, while the whole matter must be looked at in the round, the most significant question for the court is whether there is a real and not fanciful risk that the defendants will not be paid if they obtain an adverse costs order in their favour.
In considering that question, it was necessary to assess the level of costs that each defendant might reasonably expect to recover. For those defendants facing allegations of dishonesty, Nugee J held that there was a real possibility that they would be awarded costs on the indemnity basis if successful, and therefore it was appropriate to order security for 75% of the costs. In relation to the claims which do not involve allegations of dishonesty, and would most likely fall to be assessed on the standard basis, and given the reasonableness of the costs of the defendants in this case, a figure of 70% was appropriate.
Nugee J considered whether the defendants would have recourse to sufficient resources to meet any adverse costs order in their favour, so that there was no need for any security. He adopted the following approach in relation to each of the sources potentially available to meet such liability:
The litigation funder, Therium: Nugee J noted that it was “striking” that Therium (a Jersey-incorporated entity) provided no information in relation to its financial position but instead relied on the fact that it was a founding member of the Association of Litigation Funders (“ALF”), was subject to the ALF Code in relation to capital adequacy requirements and had a track record of having been involved in over 50 cases to date without having defaulted on any adverse costs liability. Nugee J was not persuaded that this was sufficient to remove the risk to the defendants.
The claimants’ own resources: The claimants’ solicitors provided some financial information regarding the wealth of the 33 claimants with the largest investments, but provided no indication as to their assets or ease of enforcement against those assets. Nugee J commented that a snapshot of a person’s wealth at the present moment did not give any guarantee that the position will be the same in a number of years’ time when the proceedings have concluded. A number of the claimants are facing demands from HMRC and some have become bankrupt since the proceedings began.
Further, the provision of financial information for the largest investors only provided comfort that the defendants would recover those claimants’ shares of their costs. In light of Nugee J’s decision regarding the apportionment of adverse costs liability between the claimants, this amounted to less than 50%. The fact that there were a number of wealthy claimants therefore did not mean that there was no real risk of the defendants not being paid.
The ATE policies: While the claimants had the benefit of ATE insurance, Nugee J found the ATE policies to provide inadequate protection to the defendants against the risk of non-recovery. First, the amount of cover was insufficient to meet the defendants’ costs in the percentages set out above. Second, there was a real risk that the policies would not respond (through, for example, the likelihood that insurers might seek to avoid cover if the judge expressed adverse views as to the claimants’ truthfulness, in light of the fraud/deliberate non-disclosure provisions in the policies). Accordingly, Nugee J discounted the value attributable to the ATE policies to account for these deficiencies.
Given the above, Nugee J held that there was a real risk that the defendants would not recover their costs and he awarded security in the above percentages, while giving credit for between one half and two thirds of the cover available to the funded claimants under the ATE policies to reduce the amount of security to be paid.