Litigation funding can form a useful part of the arsenal of an insolvency practitioner when attempting to maximise the return to creditors. Yet funders can be met with suspicion by creditors and courts alike, depending on the country in which you pursue your litigation.
This break out session sought to highlight key issues for funders and borrowers, and regional differences in how litigation funding is perceived and applied.
The panel, chaired by Nick Rowles-Davies, covered, among other jurisdictions, the relatively robust Australian market for litigation funding (Clive Bowman, IMF Bentham), the US position for funders (Michael Epstein, Deloitte CRG), and the significantly more circumspect position of offshore jurisdictions (Paul Smith, Conyers Dill & Pearman), like the Caymans.
The principles of maintenance (the funding of the litigation of another person) and champerty (litigation funding on the basis that the funder will be entitled to a share of the proceeds) have traditionally acted as brakes imposed by the common law on funders otherwise willing to assist parties pursue litigation. In Australia, these restrictions have largely been removed. In some Asian jurisdictions, like Hong Kong and Singapore, they remain in place. Court approval can play a role in mitigating the risk of litigation funding in those jurisdictions.
The session highlighted:
- The need for due diligence by both the litigation funder and the funded party. Funders naturally need to consider the amount and prospects of a claim, as well as the capacity of the defendant party or its insurer to meet the claim made. Those seeking funding may wish to consider investigating whether the funder has adequate capital to be able to support all stages of a case. Being left in the latter stages of litigation unfunded, and without an ability to seek to recover the costs of the litigation, can be a real risk in the case of larger pieces of litigation;
- Litigation funders need to be aware of the English decision in Excalibur Ventures LLC v Texas Keystone Inc. & Ors (2014). In that case several co-funders were held jointly and severally liable, together with the claimant, for the costs of litigation on an indemnity basis to the extent of their funding. Orders were also made against the parent entities of the special purpose vehicles where only their subsidiaries were the contractual counterparts to the funding agreements. The court justified this on the basis that the parent companies were the ultimate funders.
- Pricing options for litigation funders include a straight percentage of the proceeds recovered in the case, or alternatively an agreed multiple of the costs of funding the litigation. The new ability of liquidators to assign claims for voidable transactions under the Australian Insolvency Law Reform Act 2016 which commences on 1 September 2017 was noted. That option has some attraction in that it allows a liquidator to avoid the delay of drawn out litigation, facilitates an early dividend, and may allow the winding up of the company to be concluded sooner.
- The ability to use litigation funding for the risk management of costs of litigation by liquidators was noted, even where the company has sufficient funds to support its litigation.
Knowing the risks and potential pitfalls of litigation funding can assist both sides to use such facilities to their best advantage. Used wisely, such funding can assist insolvency practitioners to bring their appointments more swiftly to a conclusion with a better return to creditors.