The current economic news presents a bleak picture. Whilst Covid lockdowns have eased, businesses and consumers now face inflation levels not seen in a generation as well as rising interest rates.
All businesses will be impacted by reduced consumer spending power and higher energy costs. Given this, it is not surprising that recent statistics report that insolvencies are up by 13 per cent in three months and are 81 per cent higher than the same period last year. There is a risk that this trend will not reverse any time soon.
At a time of high costs, it may be even more difficult for insolvency practitioners (“IP’s”) to fund recovery actions to realise assets for creditors. Litigation finance is a way of allowing meritorious claims to be run without draining company – or IP – resources.
This form of finance is available to IPs to help them investigate potential legal claims and pursue those that are meritorious. Claims against fraudulent directors and third parties, wrongful trading and unfair preferences are likely to be important to increase the return that may be distributed to creditors.
IP’s have long had access to litigation finance to assist with litigation. As a recap, litigation finance is available both on an individual case level and also on a portfolio of cases. On an individual case level, a litigation funder will meet the costs of the litigation, and protect the insolvent estate from the risk of adverse costs if the case loses, in return for a pre-determined share of any recoveries. It allows the IP to run a case even if there are no assets or cash in the estate. Litigation funders will often cover the IPs’ costs as well as those of the legal team. If the case is unsuccessful the IP or estate pays nothing – the risk and any loss is the funder’s alone.
Portfolio funding is available where an insolvency practitioner may have a number of similar claims, such as against a set of suppliers or competitors. Grouping these claims usually allows a litigation funder to spread the risk of funding, enabling the relevant insolvent estates to keep a greater share of any recoveries.
There is also the option of a funding facility for the insolvency firm. This works in the way of a working capital loan allowing the insolvency practitioner to work on risk and provides up front funding for things like additional staff and technology that can be put to work on contentious cases.
An increase in insolvencies and general economic downturn has a knock-on effect on other participants in the market. Many creditors including suppliers, banks and other organisations have consequently been or will be left floundering to recover the funds they are owed from insolvent businesses.
At a time like this, budgets for litigation for solvent entities are likely to be very tight. In good times a company with a claim against a competitor or counter-party to a business contract may have been able to fund that litigation from its own resources. Where resources are scarce, in-house counsel and the Board may have to think twice before embarking on costly litigation, preferring to keep risk and cost off the balance sheet, and focus working capital on core business. It is in this context that businesses are turning to litigation finance to fund court proceedings or arbitrations.
Important for corporates is that whilst a litigation funder pays the bills and recoveries a return from recoveries, the corporate continues to control the litigation and instructs the legal team of its choice. Litigation finance is now a well-established service. Previously used by impecunious claimants and insolvency practitioners, Harbour is now seeing an increased interest from corporate clients who see the benefits of litigation funding as a risk management tool.