“Tax doesn’t have to be taxing.” HMRC.
“The taxman’s taken all my dough.” The Kinks.
The claimants in the Ingenious Litigation contend that Ray Davies had it right, and that they weren’t warned that this might be the case.
The Ingenious Litigation
For those unfamiliar with the claims, they arise out of investments in the film industry in the early 2000s. Ingenious produced a series of investment vehicles which it anticipated would allow individuals to take advantage of sideways loss relief (which allows a loss made by a partner in a partnership to set that loss off against his/her personal tax bill provided that certain conditions are met). Very roughly, the idea was that individuals would invest in an LLP, which would produce a film or computer game and in so doing make a loss in its first year; that loss would be allocated to the individual partner, who would recoup the vast majority if not all of his/her investment in tax relief in the initial year. Thereafter, the investor would have an asset which produced a steady income stream with tax paid on that income.
Many hundreds of people took advantage of these schemes. HMRC challenged each in turn, including in both the First Tier and Upper Tribunals, and on appeal to the Upper Tribunal. The result for the investors is that their claims to sideways loss relief have been refused, and some significant tax bills have been issued.
Over 500 of these investors now seek to recover their losses from the various Ingenious entities and from intermediaries, including accountants and financial advisers involved in recommending or facilitating the investment vehicles, broadly on the basis that the schemes were misrepresented to them as being risk free so far as HMRC was concerned.
These claims are not the subject of a group litigation order but are being collectively managed by Nugee J under the rubric of the “Ingenious Litigation“. Many of the claimants are funded by a litigation funder, Therium Litigation Finance AF IC (Therium), a Jersey-incorporated company.
The costs issues
A number of costs issues arose, which will be of interest to those conducting group litigation. Chief among them were:
- On what basis would the claimants be liable to the defendants in respect of their costs if they lost.
- Whether Therium should have to provide security for costs.
In deciding this second issue, Nugee J provided particularly valuable guidance on the approach to be taken to after the event (ATE) insurance policies when considering the question of security, as well as whether a cross undertaking could or should be ordered.
Joint and several or several liability? And on what basis?
Where a GLO is in place, the default position is that the claimants proceeding under it are severally liable for the defendants’ costs, in equal proportions: CPR 46.6(3). This might be described as a liability pro rata and per capita. The claimants’ position was that in the absence of a GLO, they were (absent further order) all jointly and severally liable for adverse costs. The defendants were content to accept that as the position, and were happy with it; although some claimants were bankrupt, and there was little visibility about the assets of others, a number were wealthy and could shoulder more than just their burden.
The claimants applied for an order that the default position broadly be varied such that they were each severally liable, and severally liable pro rata their cash contributions into the LLPs. Nugee J granted them that order, and observed that despite the claimants’ concession that the starting point would be that costs were joint and several, he was “not persuaded” that this was in truth the default position. Rather, he viewed the issue as more at large, and to be determined in light of the findings in the case. In deciding whether or not a default position of several liability should be established at this point in time, he followed the guidance laid out in Ward v Guinness Mahon plc, and asked “what does fairness demand”; he concluded that each claimant should in principle be liable for a several share of the costs incurred. The several share was likely to include a share (pro rata to their capital contributions) of the “common” costs incurred in the litigation, and the individual costs in pursuing their specific claims. However, it was also held that, on the facts of this case, it was premature to put in place the architecture for identifying precisely what would be common and what would be individual costs. In deciding this issue, Nugee J was concerned that a given claimant was not exposed to a disproportionate liability. He took into account that some invested low thousands and stood primarily to recoup those monies, while others had invested millions.
Security for costs
The defendants’ applications for security were against Therium under CPR 25.14, which funds part of two of the three groups of claimants. A third claimant group is funded by a different litigation funder, Harbour. A proportion of the claimants are also self-funding.
There was no security for costs application against Harbour, as Harbour had agreed at an early stage to provide a satisfactory indemnity to the defendants which its claimants pursued.
In ordering Therium to provide security, Nugee J explained a number of points of principle and practicality. We focus on five, below.
First, the jurisdiction was only available as regards the costs of the claimants which it funded. A sum in respect of the self-funded claimants needed to be stripped out. This is on the basis that it would be highly unusual for the court to exercise its power to order Therium to pay any other party’s costs under section 51 of the Senior Court’s Act 1981. Nugee J allowed that there might be exceptional circumstances in which Therium behaved in such a way as to render itself so-liable, but it would not be the case in “normal circumstances”. This is because the basis of the liability is that a funder substantially controls or is to benefit from the proceedings, which was not considered the case in respect of the self-funded claimants.
Second, one approaches an application for security for costs against a funder on the basis that the funder’s potential liability for costs is not secondary to that of the claimants. However, the fact of that potential liability for costs does not itself expose the funder to an order for security for costs on its own. In common with Hildyard J in The RBS Rights Litigation, Nugee J accepted that there needs to be something more when the matter is considered in the round. In that consideration, the most important question is whether there is a real as opposed to a fanciful risk that the relevant defendants will not be paid if they succeed in obtaining a costs order. A summary of the relevant principles is set out at paragraphs 84-86 of the judgment.
Third, in answering that most important of questions, it is (unsurprisingly) necessary to have regard to each of the sources from which the costs orders may be paid, which included the relevant claimants’ own funds, Therium, and their various ATE policies.
Fourth, practically speaking, the court will need to be satisfied on the evidence. This might be thought to go without saying, but it was a peculiarity of the response to the security for costs applications that the claimants sought to prove their means by the most high level analysis of a portion of their number. That was inadequate. Apart from anything else, it begged the question: what about the claimants about whom no information was provided. It should be a reminder to practitioners of the need to provide detailed evidence in response to such an application.
In this case, the approach transcended the claimants, and affected Therium too. Therium sought to rely upon its good name and its membership of the Association of Litigation Funders, as an indicator that it would comply with any order at the conclusion of the case. That was simply not good enough, and so Nugee J dismissed wholesale the suggestion that Therium could offer any comfort to the defendants.
Fifth, the detail of the ATE policies relied upon can be and will be scrutinised. Nugee J’s decision is yet another reminder (for others see Premier Motorauctions Ltd (in liquidation) v PricewaterhouseCoopersLLP, for example) that while ATE could be an answer to an application for security, whether it is in an individual case would depend on the terms of the policy in question, particularly as an ATE policy is not generally designed as security for costs for the defendants. The question is whether there is a real and not a fanciful risk that the ATE policies will not respond or respond in full. Nugee J’s reasoning indicates that in large multi-party litigation, the sorts of concerns that practitioners should be considering are:
- What are the redactions? Could they contain terms relevant to cover such as excesses?
- To which claims against which defendants does the policy respond? Are there defendants who are not making security applications whose costs need to be taken into account?
- Which claimants are covered?
- In what circumstances can insurers avoid or terminate cover? Where there are multiple insureds, will avoidance against one affect the cover of the others? And how do those circumstances interplay with the allegations being made; are findings of dishonesty likely to be made at trial? And what about notification of any changes to defendants?
- What other costs are covered by the policy that might erode cover? Own disbursements?
- Are there any other calls on the ATE policies, such as rights afforded to funders? This was a particular issue in this case, because of a clause in the funding agreement that Therium would be assigned the ATE if it was required to provide security.
If, as was Nugee J’s conclusion, the ATE cover which had been taken out suffered from inadequacies which meant that the defendants’ interests were not appropriately protected, the further question arises as to whether any credit at all can or should be given to the claimants in respect of the ATE policy. Here, Nugee J again treated the question as very fact sensitive. In so doing, distinguished Chernukhin and others v Danilina, where Hamblen LJ ascribed the ATE a nil value. Instead, he ascribed it a discounted value (as had Foskett J in Bailey v GlaxoSmithKline UK Ltd). However, it is a measure of the problems with the factual situation presented by the policies relied upon that even that was only subject to the claimants satisfying a raft of conditions.
The upshot of this hearing was therefore that Therium was ordered to provide security in the total amount of £3.95 million in respect of the initial phases of the litigation, with the prospect that:
- That would go up significantly if the conditions were not met.
- Further security could be applied for in due course.
A final mention goes to the various attempts made by Therium and the claimants to obtain a cross undertaking as to damages, as something of a price for security. The Commercial Court Guide refers to the fact that a cross undertaking might be ordered. But that doesn’t mean that it should be ordered. On this application, the approach taken by the claimants and Therium was at different times that one or both of them should have the benefit of a cross undertaking. In support of this proposition, it was finally explained that the claimants and Therium had agreed terms to the effect that: if Therium was ordered to provide security, then it would charge the claimants a multiple of the amount to be provided as an additional funding fee payable out of the proceeds (if any) of the litigation. The problem with this, of course, was that Therium would therefore stand to make a gain out of the provision of security, which was no basis upon which to provide it with any sort of cross undertaking; conversely, the claimants had agreed to give up some of their expected proceeds as an additional funding fee. Nugee J explained that this was not a loss sounding in damages, but simply a reallocation of the proceeds of the litigation. No cross undertaking was therefore ordered.
This is a topic of particular current interest, as more and more respondents to security applications seek to argue for cross undertakings, spurred on by the mention in the Commercial Court Guide, and Hildyard J’s decision in RBS. However, in addition to Nugee J’s consideration of the issue in this case, Marcus Smith J has recently refused a similar application in TBD (Owen Holland) Ltd v Andrew Simons, where he emphasised that it was an unusual order to grant, and a very open-ended and dangerous jurisdiction which the court was being invited to exercise; further, the circumstances in which such a cross undertaking should sound would be that the security was in hindsight wrongly granted. One might take from this that it is not generally going to be simply the fact that the case was won by the claimants.
Further developments on funders’ liability
Another matter which was raised in response to the security applications in the Ingenious Litigation was the so-called Arkin cap limiting a third party funder’s liability to pay costs to the amount of funding it had provided. The suggestion that Therium’s liability to provide security should be limited by the Arkin cap was not ultimately pressed by Therium at the hearing, and so did not feature prominently in Nugee J’s judgment. However, to the extent that such an argument was ever available to a funder, it has now likely been watered down significantly by the subsequent decision by the Court of Appeal in Chapelgate Credit Opportunity Master Fund v Money, in which the Arkin cap was not applied. In that case, the court explained that while there may be occasions where that approach should be followed, it was not a binding rule to be applied, and judges were entitled to consider the full factual matrix including what the funder stood to gain, and whether the funder was in fact the “real party” to the litigation.
Ben Quiney QC, Carlo Taczalski, and Frederick Simpson are instructed by Martin Chesher, Laura Hurst and Henry Saunders of Kennedys Law LLP on behalf of SRLV (a firm), which is one of the Lead Intermediary Defendants in the Ingenious Litigation, and one of the parties which successfully applied for security for costs against Therium.