Nick Rowles-Davies of litigation funder Burford considers the new financing options being explored in insolvency litigation.
The UK insolvency space is changing, due to both market and legislative changes. To manage costs more effectively and still fulfill their duties to estate beneficiaries, office holders are increasingly exploring new financing options—including innovative financing structures that enable trustees to pursue a wide range of cases.
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 realized with proper resources. It is, therefore, often necessary for insolvent estates to consider outside financing to pursue pending legal claims.
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.
Emerging challenges in the UK
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.
A new approach to financing insolvency litigation
Grant Thornton, a leading professional services company based in London, had a financing need that is not at all uncommon in the insolvency space, but which nevertheless had no clear-cut solution. The firm needed financing across a portfolio of insolvency cases in which Grant Thornton partners were trustees. Unable to find a suitable out-of-the-box solution, the firm engaged Burford to move forward with an innovative £9 million facility against one insolvent estate’s litigation portfolio.
The arrangement is unique in permitting Grant Thornton the flexibility it needs to administer all of the claims by and against the estate instead of being limited to funding legal fees for claims, as is the case in standard insolvency funding arrangements. Its portfolio design accommodates defense costs, declaratory matters, administration costs and importantly the IP’s fees and expenses. The arrangement also streamlines the financing process, obviating the need for Grant Thornton to deal with financing the cases on a one-by-one basis and marking a real shift from traditional third party funding of legal fees to the financing of the whole estate.
Transforming the space
With the end of the Jackson carve-out, insolvency practitioners in the UK have more reason than ever before to explore alternative financing solutions. But outside financing should not be considered a last resort; rather, it should be seen as an opportunity to pursue claims (and achieve recoveries) that otherwise would not have been possible. Indeed, as the Grant Thornton facility demonstrates, the use of outside financing in insolvency matters extends far beyond simply paying legal fees—and has the potential to transform the way practitioners approach insolvency litigation.
Nick Rowles-Davies is a managing director of litigation funder Burford and leads its business in the UK.