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Michael Leeds, director, and Nick Wood, partner, of the Fraud Insolvency Division (FInD) of Grant Thornton UK LLP discuss some of the issues insolvency practitioners consider when contemplating the use of funding.
This is part two of a three-part blog series on litigation funding republished with the permission of Vannin Capital. The links to the other articles are provided at the end of the article.
In many insolvency cases there are likely to be limited assets or, in especially desperate cases, no assets at all. So, how can the Insolvency Practitioner (IP) realise value for the creditors if there is a suspicion that assets have been dissipated and there is an angry creditor (or angry creditors) who want their money back?
A number of cases within our FInD portfolio have no assets and yet either fraud is suspected or there may be potential claims against third parties. We are engaged on the following scenarios:
Usually there are pro-active creditors looking for a route to money where they have been unable to recover anything. They have taken steps to put the company into an insolvency process to enable an investigation to be undertaken and assets recovered using the powers given to the IP under the Insolvency Act 1986.
As set out above it is often the case that an insolvent company will have no assets on its balance sheet and no cash at bank. What the IP focusses on is recovering assets which are off the balance sheet.
Is there a misfeasance claim against the directors who caused the collapse of the company or is there a claim for wrongful trading against them? Or have assets been intentionally stripped out of the company and transferred to third parties which can be recovered by the IP?
The key to a successful asset tracing and recovery case is to have the right team in place, with the right expertise in the right jurisdictions who work collaboratively as a genuine team. This includes onshore solicitors, counsel, offshore solicitors, digital forensic experts and investigators. This is pricey…so access to funding can be critical.
Much is made of identifying and then recovering ‘low-hanging fruit’ on insolvency cases, but in practice it is rarely there to pick. There may be some debtors or a VAT refund available but the reality is that, even if such assets can be brought into an estate, there will be insufficient cash to fund a meaty £multi-million claim against a party that has taken your money…the stakes are high, so how can you get a case up and running?
There are a number of things an IP can do:
The role of the IP is to distribute the company’s assets to creditors by maximising realisations and minimising costs. This is an important consideration in the decision about how to fund a case. The decision to self-fund or seek external funding comes down to price and the appetite of your other partners.
This scenario creates tension in insolvency cases where funding is required given the costs associated with taking such an approach. Here is an example of how this dilemma works in practice.
The IP has identified a property where a bankrupt individual resides, however, it is held by a third party. The property is worth £10m and is unencumbered. Following an investigation, the IP believes that there is a claim that can be brought that will bring the property into the bankruptcy estate. Let’s assume that this claim will be hotly contested, therefore how does the IP maximise the recoveries? If they go down the route of bringing the claim then it could be difficult to do so on an unfunded basis so funding is required. Different litigation funders offer different funding options and investment terms. As an IP it is important to ensure that you are acting in the best interests of the creditors. This means ensuring that the funding terms offered are reasonable in all of the circumstances. What this means in practice varies on a case by case basis and is normally dependent upon a balance between the value of the claim and the level of funding required.
Funding is not always the cheapest solution but, as noted above, it may be the most commercial. Indeed, without funding, it may not be possible to bring the claim at all. If the IP and legal team acted on a CFA, the creditors are unlikely to be better offer and, in practice, that commitment can be difficult so funding on a non-recourse basis is more attractive. And, if a creditor is unwilling to invest further sums, then there should be some uplift for a party that is willing to take the risk of funding the case on.
However, it is often a difficult judgement call for the IP to make when assessing the funding route and requires scenario planning.
There are a number of factors that the IP and the funder will take into account when deciding whether to fund a case or not, as follows:
Working with an IP
We tend to find that funders can be more comfortable going into battle with an IP, given that they are a professional, have some skin in the game and are therefore less likely to seek funding on hopeless or speculative cases. There is unlikely to be any emotion in the decision to litigate against a party on the part of the IP, unlike with an aggrieved litigant.
Funders will undertake their own due-diligence to assess the legal merits of any case. This means engaging with a lawyer or barrister to provide an opinion on the case. Claimants must have a strong case before issuing a decision to fund. Looking at a case ‘cold’ has both upsides and downsides as far as the IP is concerned.
Number of cases and level of funding sought
Size does matter when it comes to litigation funding because potential funders will evaluate the time and resources required to pursue a claim. Bringing multiple cases to the same funder can also help reduce the cost of funding so an IP with a portfolio of cases may seek to enter into an exclusive arrangement with a funder.
Recoverability of assets and perception of risk
Funders seek assurances that, even in the strongest of legal cases, a defendant has the requisite assets to pay a claimant and that these assets can be recovered easily following a judgment. It is important to identify assets to enforce against and often there can be difficulties if assets are hidden in offshore structures. There is no point going after a pyrrhic victory. Funders will look at the recoverability of assets and in practice an IP should have undertaken that exercise themselves before seeking funding. If they have obtained freezing orders or restrictions, even better.
External or commercial factors
Litigation funders are likely to look at cases holistically, spending time evaluating the external or commercial factors that might have a positive or negative influence on the outcome of a case. These factors are likely to put pressure on a defendant to reach a settlement.
Claims record and relationship with IP
A strong track record in similar types of disputes gives litigation funders greater confidence about the chances of success in subsequent matters. Similarly, a close working relationship with individual IPs or legal teams can eliminate levels of uncertainty for potential funders; they are more likely to provide funding to firms they find easy to work with.
Funders will require an ATE insurance product
This will protect the IP against adverse costs but also protects the funder against a court order that says the third party pays the other side’s costs.
So, overall, there are a number of factors to consider when considering funding for both the IP and the funder. Cost will always be a key concern for the IP and merits of the case and recoverability of assets will be on the agenda for the funder.
Saying that, the insolvency funding market is developing and we expect to see an on-going evolution of the products offered, which is good for IPs and claimants more generally. Going forward, we expect to see:
The first article was published on Tuesday 30 August 2016 on our Dispute Resolution blog: The court steps in—recent developments in the regulation of litigation funding in Australia
On Thursday 1 September 2016, we will publish the final article on legal developments funding in the UAE (on the Dispute Resolution blog).
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