When a business enters insolvency, creditors often face a frustrating reality: there may be viable claims against directors or third parties, but no money in the pot to pursue them. This is where litigation funding has become an increasingly valuable tool for insolvency practitioners (“IPs”).
What is litigation funding?
Litigation funding (also known as third-party funding or litigation financing) allows IPs to pursue legal claims arising out of an insolvency procedure by alleviating the financial pressures of litigation. Specialist funders can provide the capital needed to bring proceedings, covering legal fees, disbursements, and other costs associated with litigation.
In return, the funder often receives an agreed percentage of any recovery made from pursuing the claim. If the claim fails, the funder typically bears the loss, with the insolvent estate and, crucially, its creditors, not prejudiced.
What types of claims attract funding?
Litigation funders will review any possible claims to determine whether they have strong prospects of success and the potential for meaningful recovery. Insolvency claims that may be funded can include:
- Wrongful trading
- Fraudulent trading
- Preference claims
- Transactions at undervalue
- Breach of duty by a director
Funders will consider both legal merits and realistic prospects of recovering sufficient funds before deciding to fund or finance a claim.
What are the advantages of litigation funding within insolvency?
Litigation can be expensive and often requires significant upfront costs that insolvent companies and IPs are unable to finance.
Litigation funding changes this dynamic entirely. It enables:
Recovery for creditors: Claims that would otherwise be difficult to pursue due to limited funds can often proceed with litigation funding and claims pursued may result in higher recoveries, potentially generating returns for creditors who would have received little or nothing.
Accountability: Directors who have acted improperly can be held to account where funds may not have been available to pursue the claims against them.
Risk-free pursuit: Litigation is known for its risks, however, funders will take on the risk of the litigation and its financial burden, reducing risk exposure for IPs and the insolvent company’s creditors.
Speed: Pursuing insolvency claims can typically involve drawn-out pre-action correspondence with respondents who are reluctant to engage and stop-start litigation. Funding allows claims to be pursued swiftly.
The benefits beyond funding
Litigation funders bring more than just capital. Experienced funders often provide:
- Strategic input: Helping shape litigation strategy and settlement negotiations.
- Commercial discipline: Ensuring cases are run efficiently and costs are justified.
- Credibility: Litigation funders’ willingness to back a claim is often indicative of a claim’s strength to opponents.
- Insurance: ATE insurance protects against adverse costs orders.
This combination can strengthen both the claim itself and the IP’s negotiating position.
Challenges and considerations
Litigation funding isn’t without complexity. Key considerations for IPs include:
Funder returns: The funder’s share of any recoveries can be substantial, though this must be weighed against the alternative of no recovery for creditors at all.
Control: Funders typically require oversight and assignment of the claims, or may have a say in key decisions, including settlement offers.
Disclosure: Funding arrangements may need to be disclosed to the court and opposing parties in certain circumstances.
Ethical duties: IPs must consider their duties to the creditors of the insolvent company when considering litigation funding.
Despite these considerations, the availability of litigation funding has transformed insolvency litigation, enabling claims to be pursued that would previously have been inherently difficult to bring.
A powerful tool for creditor recovery
For IPs, litigation funding offers a way to pursue justice and recover assets without gambling with the insolvent company’s limited resources. For creditors, it represents hope that wrongdoing won’t go unchallenged simply due to a lack of available funds.
As insolvency law continues to evolve, litigation funding has established itself as an essential mechanism for IPs to ensure accountability and maximise returns for the estate when otherwise claims might not be pursued.
How can we help
Abbie Fotheringham is an Associate in our expert Restructuring & Insolvency team. Abbie specialises corporate and personal insolvency matters, including advising on trust and property issues within the context of bankruptcy.
If you have any questions in relation to the subjects discussed above, please contact Abbie or another member of the team in Derby, Leicester or Nottingham on 0808 258 0461 or via our online form.
Contact usIf this article relates to a specific case/cases, please note that the facts of this case/cases are correct at the time of writing.