Key questions for IPs to ask funders
The monthly insolvency statistics for October 2022 (published by the Insolvency Service in November) show that corporate insolvencies have risen 38% from the same month in the previous year and are 32% higher than pre-pandemic. Insolvency practitioners, lawyers and advisers are therefore gearing up for further rises in insolvencies as the economic climate is expected to worsen, thereby fuelling insolvency litigation, fraud and asset-tracing disputes.
In this context, the third-party litigation funding market is developing fast, and funders will undoubtedly be focused on insolvency estates in the expectation that related claims will generate profitable and speedy returns on their investment.
So, how are the current market conditions likely to prove fruitful for third-party litigation funders? In which circumstances might insolvency practitioners, lawyers and advisers seek a third-party litigation funder; and what key questions should they ask when looking for a funding partner?
By its very nature, an insolvent estate is usually impecunious and, while many have strong claims and good prospects of enforcement, lack of funding can become a real obstacle in pursuing those claims. In this setting, a tension can often arise between the lack of available funding to pursue litigation and the insolvency practitioner’s duty to act in the best interests of the creditors, which may well be to pursue the estate’s claims. In wrestling with that tension, it is incumbent on insolvency practitioners, their lawyers and advisers to carefully explore third-party litigation funding options.
Considering insolvency appointments are expected to continue to rise significantly and with more third-party litigation funders than ever coming to market, this exploration becomes more necessary. The possibility of considering third-party litigation funding should no longer be on the periphery and reserved for the largest of cases, but should be front and centre when looking at all contentious insolvency assignments.
While early engagement with third-party funders is recommended, it can also be considered for cases that are not in their infancy, particularly where the litigation has been long-running and funds are starting to dry up, which may hinder a fully effective enforcement strategy in the event of success.
It is important when approaching third-party funders to have a firm eye – aside from the merits of the case – on the economics, as the funder will be most attracted to cases where the difference between the claim value and the funding committed by the funder is largest. Timing is also a key factor, given that funders are typically looking for a quick return, and so is enforcement risk, particularly where there are overseas targets, assets or potential insolvent defendants.
The process itself can really assist with providing additional strategic input into the litigation and offers a further independent review of the merits. The funding itself, of course, also assists with risk reduction for the professional stakeholders in play, reduces the burden of unpaid work in progress and allows insolvent estates to pursue claims that might not have otherwise been brought.
Finding the right funder
Third-party litigation funding can enable insolvency practitioners and their lawyers to bring more claims for insolvent estates and achieve more for them by capitalising on the third-party funding options available. With a growing number of players in the market, finding the right funder is important. Some of the key questions insolvency practitioners and their lawyers should ask when considering a funding partner are:
– Is the funder likely to fit in and work well with you and your team?
– Do they have dependable access to capital and how open are they to providing further funding if that became necessary?
– Do they add value beyond putting up capital?
– Have they successfully funded similar cases?
– Do they have any unique terms in their funding arrangements that others do not?
– Is the funding non-recourse regarding the insolvent estate? (i.e. there is no obligation to repay the funder if there is no recovery made from the dispute.)
– How do they deal with adverse costs and issues surrounding security for costs?
With the economic outlook bleak and the rise in insolvencies inevitable, we can expect to see an increase in insolvency, fraud and asset-tracing claims generally, and widespread uncertainty means insolvent companies are likely to have fewer resources than ever to pursue litigation.
We can therefore expect to see more cases than ever being supported by third-party litigation funding and, while some readers would undoubtedly prefer not to share any upside with third-party funders, the prospect seems unavoidable in many cases.
This article first appeared in the Winter 2022 edition of RECOVERY .