When a company enters into insolvency it can sometimes have valid legal claims but there is no capital in the estate to fund those claims, and so litigation funding is used to fund those claims in insolvency situations.
Types of Claim Funders Will Consider
Claim types that litigation funders commonly support include preference claims, wrongful trading claims, misfeasance claims and asset recovery claims. These types of claims commonly involve defendants who are known and who have money to pay a large claim. Importantly, there must be clear losses which can be easily quantified by the funder.
Who Can Apply on Behalf of the Estate
Liquidators, administrators and even a creditors’ committee can approach funding providers. However, the person who signs the funding agreement will typically need to be a licensed insolvency practitioner who has obtained authority from the creditors or from the Court as appropriate.
How Funders Assess an Insolvency Claim
The key factors for a funder assessing the claim are: (i) evidence; (ii) defendant’s ability to pay; and (iii) recovery compared to cost of funding. It is essential that there is clear and full documentation of the relevant transactions and that the defendant was a solvent company at the time.
Repayment and Priority in the Estate
The funder is usually repaid from the recovery proceeds of an insolvency claim before any other unsecured creditor. Funding agreements specify whether the funder’s return will be by way of a fixed sum or a percentage of the total sum recovered by the claimant.
Pairing Funding with ATE Insurance
By combining litigation funding with an ATE policy the maximum return can be realised by the estate. A useful reference for UK Litigation Funding is novo-modo.co.uk/litigation-funding.
It’s also worth noting that preparing a claim for consideration by funders with full transaction records and a clear explanation of the damages being claimed will be key to securing funding for an insolvency claim.