[Opinión] Letters from London: Some Practical Questions on Litigation Financing in England and Wales (II)

Josep Galvez | 13/04/2021 7:48

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In a distant 1981, during the first mandate of Margaret Thatcher at 10 Downing Street, an unknown young man named Neil Woodford has just graduated in economics from the University of Exeter, thus beginning the most successful professional career in the extremely competitive investment world of the “City”.

Thanks to his long-term vision but, above all, to his tough-as-steel character, for 25 years Neil Woodford was considered the best fund manager in the country, managing masterfully more than 15 billion pounds (about 17,000 million euros).

Then the honors would come to him from the highest levels.

Thus, in 2013 Woodford was appointed commander of the Order of the British Empire (“CBE”) for his services to the UK economy in avoiding the worst effects of the 2007 financial crisis, one of many important public accolades for this successful, self-made man.

In 2014, to the surprise of some, Woodford decided to leave his brand new position and create su propia firma, “Woodford Investment Management”, registering “Woodford Equity Income Fund”, a fund to manage around 3.7 billion pounds (4,269 million euros), the savings of more than 300,000 individuals, who deposited the future of their pensions in the hands of this financial genius.

THE LARGEST FINANCIAL SCANDAL OF THE DECADE

After several years of poor results, in 2019 Woodford was subjected to serious accusations after the newspaper “The Times” uncovered in an investigation that the fund concealed from its investors the existence of unjustified and high-risk operations, which led to a massive wave of investors who demanded the immediate return of your money.

Following the liquidation of the fund in 2019, several official investigations are still ongoing and some book about the case, the law firms representing the thousands of investors who were trapped, are preparing to take the matter to court against the man who was called in his day “The British Warren Buffett.”

And as, litigation funding funds are also in the case, launching its services to fund the participants in the multi-million dollar class action, bearing the costs of the lawsuit.

As you can imagine in the Woodford case, there will be several days of views In which “QC’s”, experts and experts, whose fees are expected to be monumental, will intervene, so it is worth asking:

What if there was a costs against the plaintiffs?

Recall that in the jurisdiction of England and Wales there is something similar to the expiration principle, the so-called “English rule”, Meaning that, as a general rule, the loser in the lawsuit will have to reimburse the costs incurred by the winner in terms of professional fees.

On the contrary, the potential cost penalty is a risk that the English financing funds they do not assume in their contracts, since they only accept to cover the cost of the fees of those professionals involved in defense of the financed, not of the opponents.

But do not worry that everything is planned, as almost always.

“AFTER THE EVENT INSURANCE”

Indeed, in much the same way as the role of third-party financing of lawsuits, the famous Jackson report, which we discussed a few weeks ago, warned that full access to justice also required the creation of specific insurance for the case of conviction in costs.

In this regard, the Government of the United Kingdom went to the insurance sector and requested the creation of insurance to protect potential plaintiffs against the risk of losing a case and being ordered to pay the costs.

The result was the creation of insurance “ATE”, responding to the initials of insurance “After The Event Insurance”Or insurance“ after the event ”, the potential cost penalty being the insured risk.

Therefore, the “ATE” is currently a type of insurance that provides coverage for the legal costs incurred in litigation and arbitration in the case of conviction in costs, being able to contract for almost all areas, except for family and criminal law matters, where due to its characteristics this form of insurance is not allowed.

Thus, a client who has obtained the financing of his litigation by a fund and also has an “ATE” insurance policy, even if he loses the litigation You will not have to pay a penny since both risks, your own costs and those of the opposite, they are covered.

In fact, the insurance sector in the “ATE” field has evolved and is currently so widely accepted that this coverage is included as part of the funding package of the funds, being negotiated in a set for the convenience of the plaintiff and whose before it is usually paid by the insured as the stages of the process unfold.

On the other hand, it is procedurally required that, if there is a party that has subscribed an “ATE” insurance policy whose premium can be recovered via costs, You will have to notify the court and the rest of the parties in advance, as well as the total level of coverage expected.

In such a way, the lack of this notification will prevent What next can claim the total premium paid to the losing party in the litigation.

Interestingly, the existence of this obligation to notify the courts is being used strategically to reach an initial agreement that avoids the lawsuit, since the opposing party, as the lawsuit progresses, will see how it will go significantly increasing the amount to be paid in concept of “ATE” premiums if you finally lose the lawsuit and are sentenced to pay costs.

And I already warn you that the premiums, cheap, have nothing.

A NOTICE TO NAVIGATORS: THE “SHARP & ORS V BLANK & ORS” MATTER

This case – also known as the affair “Lloyds/HBOS”- in addition to being the first judgment in a shareholders class action in England and Wales, highlights the serious risks involved in collective litigation in this jurisdiction, both for the plaintiffs and for the funders themselves if things go wrong.

Very briefly, the “Lloyds” issue is as follows:

In October 2008, the bank LLOYDS TSB was in serious financial difficulty, largely due to the problems derived from the purchase shortly before the financial institution Halifax Bank of Scotland PLC (HBOS)It is therefore necessary for the government of the United Kingdom to intervene by means of a public checkbook to ensure its continuity.

Soon after, in turn, HBOS announced a loss of 12.25 billion pounds (about 14,000 million euros), putting LLOYDS on the brink of insolvency, which then forced the British government to intervene again and further increase public aid.

As a consequence of all this, thousands of LLOYDS shareholders found themselves assuming some multimillion dollar losses on your investments in the bank.

Feeling misled by the bank, 5,800 shareholders of LLOYDS joined in a class action (“Group Litigation Order” or “GLE”) against the five former directors of the entity, including its president, Sir Victor Blank, in claim of 385 million pounds (just over 444 million euros) for damages considering that they hid the truth by recommending the acquisition of HBOS at the height of the crisis.

It is important to note that, although the claim filed against the former directors was financed by the litigation financing fund, “Therium”, The terms of the collective action established that each plaintiff should be jointly and severally liable for the defendants’ costs in case the case is lost.

Precisely, to avoid the risk of being sentenced to costs, the shareholders subscribed an insurance policy “ATE” for a total of 6.5 million pounds (7.5 million euros) in the face of a potential cost judgment in favor of the defendants.

In addition, Therium also provided an additional coverage policy for excess exposure of claimants above said primary coverage of the ATE policy, reaching the £ 14.95 million (17.25 million euros).

Thus, between the “ATE” insurance coverage and that additionally granted by the fund, a total of 21.45 million pounds (24.75 million euros).

THE BETS ARE DONE, NO MORE!

Well, what happened was what the shareholders did not think would happen: the claim was dismissed by the London High Court in the marathon sentence Sharp v Blank [2019] EWHC 3078 (Ch), where 280 pages of English legal literature ruin the aspirations of the plaintiffs.

Without going into the grounds for rejection, which would lead us to other issues and complexities that would arise for several articles, the English court had to decide accordingly on the order to pay costs.

And now is where it gets more interesting, if possible.

Indeed, in the sentence Sharp v Blank [2020] EWHC 1870 (Ch), From the past January 29, 2020, the High Court finally resolved several points on the matter, including the “Therium” fund itself as an interested party in this procedure.

Indeed, one of the main problems to be solved by the court is that the defendants claimed the plaintiffs for the costs of the litigation. over 30 million pounds (almost 35 million euros), so even with the second layer of protection at the bottom, coverage was clearly insufficient to meet the conviction.

Can you imagine what the High Court decided on the coasts?

We will find out next week.

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