Monetising Officeholder Claims: All ChangeRocco Pirozzolo, Director of Litigation Funding, Harbour Litigation Funding Ltd, London, UK
Officeholders and their legal advisers can be involved in the painstaking exercise of identifying and reviewing claims against former directors or parties who have improperly received funds prior to the onset of insolvency. Once a meritorious claim is uncovered, the next issue is how to monetise these officeholder claims.
Recent changes, as set out below, mean that officeholders will consider whether it is in the creditors’ best interests to litigate or to assign the claim. Whether litigation is an option depends on whether funding can be arranged, particularly where there is little or no money in the estate with which to bring a claim.
Between 1 April 2000 and 6 April 2016, the most common way of funding insolvency proceedings in England and Wales was with conditional fee agreements (CFAs) coupled with after the event (ATE) insurance.
CFAs enabled officeholders to instruct solicitors and counsel and share the risk in pursuing a claim on a ‘no win, no fee’ basis or, if there was some money in the estate to pay a portion of the lawyers’ hourly rates, on a ‘no win, low fee’ basis. If the claim settled or succeeded at trial, the success fees due to the lawyers, along with the other costs incurred in pursuing the claim, would be claimed from the losing opponent. If the claim was unsuccessful, the lawyers would not be entitled to any payment under the CFA.
In order to complete the funding package, ATE insurance was taken out for adverse costs and perhaps also for the disbursements incurred in pursuing the claim. Contrary to the usual practice when buying insurance, it was common for many ATE policies to be issued on the basis that the premium was not paid before the inception of the policy but that it was either due at the conclusion of the claim or only payable in the event of the claim being successful. In the former instance, the deferred premium would be insured under the policy if the claim was unsuccessful; and in the latter, the premium would only be paid if there was a successful outcome. Similar to success fees, ATE premiums were claimed from a losing opponent.
The Legal Aid, Sentencing and Punishment of Offenders Act 2012 abolished the recovery of success fees and ATE premiums from losing opponents for most claims from 1 April 2013. Insolvency proceedings were temporarily exempted from this reform. However, on 6 April 2016, this ‘carve out’ was brought to an end,
despite the campaign to continue the exemption run by R3, the Association of Business Recovery Professionals. The concern is whether there could be a funding vacuum created by success fees and ATE premiums no longer being recoverable.
This article will explore the funding options now available to officeholders to litigate a claim as well as recent changes to insolvency legislation in the United Kingdom. These legislative changes allow officeholders to decide that it is in the creditors’ best interests to monetise a claim by assigning it rather than through litigation.
Creditor funding is an option that has always been available. However, there is an understandable aversion for creditors to fund and speculate to accumulate, particularly when they are financially ‘down’ by reason of the insolvency.
Nonetheless, creditors may be willing to fund an initial stage to investigate whether a claim exists and whether it is worth pursuing. Invariably, this is with a view to attracting interest from other stakeholders who would be willing to fund the claim thereafter.
Of course, there are certain claims that lend themselves to creditor funding: where the claim value is significant and where the further investment required to litigate can be regarded as commercially justified by the potentially attractive return on making a recovery.
Litigation (or third party) funding grew out of insolvency disputes and so these types of claims have been of interest to most funders over the years.
Funders are typically approached to pay all of the costs associated with pursuing a claim – solicitor’s fees, counsel’s fees, expert fees and other disbursements – as well as an ATE premium for an adverse costs ATE policy in return for a share of the damages. In this way, litigation funding can act as a ‘one stop shop’ that transfers the risk of litigating in full to a funder.