Vol 13 (2016) - Issue 1

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Litigation Funding for Insolvency Claims

Third party litigation funding is generally regarded as having emanated from the funding of insolvency cases. In the late 1990s, the ancient rules of maintenance and champerty still prohibited a 'stranger' participating in litigation for profit in many common law jurisdictions. However, the funding of claims by liquidators and trustees in bankruptcy under their statutory powers to sell assets (including claims) was a recognised exception to those rules.
In recent years, the high costs of litigation and concerns about access to justice have driven an increasing acceptance of litigation funding in many countries for both insolvency and non-insolvency claims. The funding industry has grown significantly and become more competitive. Funding for litigation is now offered through a wide range of structures, including public and private companies and private funds. Nevertheless, many insolvency practitioners are still unaware, or uncertain, of how third party litigation funding works. This article provides a summary of the funding process, the types of insolvency cases funded by litigation funders, some of the benefits and risks of the process and what to look for when seeking funding and negotiating a funding agreement.

What is litigation funding?
Third party litigation funding generally involves a commercial funder agreeing to pay some or all of the claimant’s legal costs and disbursements, including adverse costs and security for costs. In an insolvency case, the funder may also agree to pay some or all of the insolvency practitioner’s fees associated with the case.
The funder is not paid if the case fails and only paid if there is a successful recovery (whether by way of a settlement or judgment). The method of calculating the funder’s fee varies, but it often comprises reimbursement of the funder’s outlays and a share of the recoveries, typically a percentage in the range of 25 per cent to 45 per cent (the median figure is around a third), depending on the time taken to resolve the case and the costs and risks involved in funding it.