Insolvency litigation funding has become an increasingly significant financial mechanism in the legal landscape, particularly in the context of insolvency proceedings. It provides a means for insolvent companies or individuals to access capital to pursue legal claims, without the need to bear the upfront costs associated with litigation. This practice, sometimes referred to as third-party litigation funding, allows a claimant to pursue a legal action with the backing of an external investor who assumes the financial risk in exchange for a potential share of the recovery or damages.
Insolvent companies often face significant financial constraints, making it difficult for them to pursue claims that could ultimately yield substantial recoveries. These claims may arise from breaches of contract, fraud, mismanagement, or other actions that contributed to the financial failure of the business. The costs associated with litigation, including legal fees, expert witness costs, and court fees can be prohibitive, especially for companies with limited resources.
Insolvency litigation funding allows these companies to pursue valuable claims by alleviating the financial pressure of litigation. By securing external funding, insolvency practitioners (IPs) or trustees are able to initiate claims on behalf of creditors, shareholders, or other stakeholders without depleting the estate or requiring personal financial guarantees.
The process typically begins when an insolvency practitioner or trustee identifies a potential legal claim that could generate value for creditors. The insolvency practitioner then approaches a litigation funder to assess the merits of the case. After conducting a due diligence investigation into the strength of the claim, the funder may agree to finance the legal action, covering all associated costs in exchange for a share of any successful outcome.
The legal team representing the claimant is usually paid by the funder, who also has a say in selecting the lawyers and overseeing the progress of the case. This ensures that the litigation is conducted efficiently, as the funder has a vested interest in the outcome.
There are several advantages to insolvency funding as set out below:
- Access to Justice: Insolvent companies or individuals often lack the financial means to pursue legal claims. Litigation funding enables them to seek justice and potentially recover substantial damages that would otherwise be out of reach.
- Risk Mitigation: Litigation is inherently risky. Funders take on the financial burden of litigation, reducing the risk to the claimant and their creditors. This arrangement allows insolvency practitioners to pursue claims that have significant upside potential without jeopardising the estate’s assets.
- Maximising Recovery for Creditors: Insolvency practitioners are often tasked with maximising returns for creditors. Litigation funding offers an opportunity to pursue legal claims that may result in higher recoveries, improving the outcomes for all stakeholders involved.
While insolvency litigation funding has numerous benefits, it is not without its potential downsides. One key concern is the cost of funding, as the share of the recovery paid to the funder can be substantial, reducing the amount available to creditors. The terms of the funding agreement may also influence the control and decision-making process in the litigation, as the funder may have significant input on the strategy and approach.
Insolvency litigation funding plays a crucial role in enabling insolvent entities to pursue legal claims without financial strain. By alleviating the upfront costs of litigation and sharing the risks of legal action, it offers a pathway for maximising recoveries in insolvency proceedings. While the costs and potential risks involved should be carefully considered, insolvency litigation funding can be an invaluable tool in the complex world of insolvency law.
For further information on this topic or on any other legal area, please contact John Szepietowski or Kay Stewart at Audley Chaucer Solicitors on 01372 303444 or email admin@audleychaucer.com or visit our Linkedin page.
Molly Ross
This information was correct as of November 2024
