Vol 14 (2017) - Issue 4

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Next Generation Litigation Finance: The Portfolio Approach

Insolvency litigation poses a unique challenge. At the most basic level, legal claims often represent a crucial asset for insolvent estates, as they’re often the only means of recovery for unsecured creditors – but pursuing those claims requires capital and an appetite for risk that are generally lacking in insolvency scenarios. So, although creditors’ repayment may be contingent upon successful litigation recoveries, potentially valuable claims may not be pursued at all or settled for a value below the amount that could be realised with proper resources.
It is, therefore, often necessary for insolvent estates to consider outside financing to pursue pending legal claims. And that necessity for outside financing means that in many jurisdictions, litigation finance – which generally refers to using the asset value of a litigation claim as a basis for a financing transaction – has expanded alongside insolvency litigation. Indeed, in some jurisdictions it is not too much to say that litigation finance has grown entirely within the insolvency context. This is obvious in Hong Kong, for example, which limits third-party funding of litigation to bankruptcy scenarios.

Growing need to finance insolvency litigation
The need for a satisfactory means of financing insolvency has become even more urgent for practitioners in the UK, now that the Jackson carve-out on recoverability in insolvency cases has ended. As a result, insolvent estates and their trustees have increasingly started exploring financing alternatives, including litigation finance.
The end of the insolvency carve-out has been met with heavy criticism in the UK. Indeed, one critic, Phillip Sykes, president of the insolvency trade body R3, declared it a triumph for ‘rogue directors and others who refuse to repay money owed to creditors after an insolvency’.
During the carve-out, certain costs – such as success fees and after the event (ATE) insurance – could be reclaimed from losing defendants in insolvency litigation. Among those defendants may be people who owe money to the company but are refusing to pay. The end of the regime has clear implications: insolvency practitioners face new hurdles in pursuing legal claims that have the potential to make estate beneficiaries whole – so there is greater need than ever before to find suitable financing solutions. But because complex insolvencies are not always good fits for simple case funding, industry players have had to think creatively when exploring new financing options.
Arguably, it is time for a next generation approach: not 'third-party funding' but 'litigation finance'. And instead of limiting the application of financing to single cases, more sophisticated insolvency lawyers and practitioners – and clients – are embracing a portfolio approach.