Posted on the 26th July 2016

breach of contract damages

Mark Beaumont explores the options for funding insolvency litigation in 2016.

This article originally appeared in Recovery Magazine’s Spring 2016 edition.

In early 2013, before the Jackson Reforms came into force, I recall senior people at litigation funders telling me that Annecto Legal was wasting time exploring the insolvency sector: That there was simply no appetite among IPs for litigation funding. This seemed strange to me, and as we spoke to more and more IPs a different truth emerged.

The reality for many IPs is that the concept of funding is attractive (if the price is right) but that in practice it has been nigh on impossible for them to secure funding for a specific action: Funders wanted cases over £10m in damages; they wanted forensic reports; asset tracing reports; an opinion on merits from a QC…

For many IPs, the reason they needed funding was actually to move forward and get a QC opinion, or do the asset tracing or other investigative work. There was clearly a major disconnect between the expectations of funders and the majority of IPs.

What is Third Party Litigation Funding?

Litigation funding is not a loan, it is non-recourse finance: Any funding provided is only paid back if a claim is successful. If a case fails then the funder loses their money. Funders often work in conjunction with after-the-event (ATE) legal expenses insurers, were the funder carries the upfront costs of litigation and the ATE covers the risk of an adverse costs award. Commonly, a funder will take on 100% of the litigation costs in return for between 10% and 30% of the funds recovered in successful litigation.

In order to be a successful litigation funder it makes sense to run a large and diversified portfolio of claims in order to spread risk. Running lots of litigation obviously means having deep pockets, and so funders are usually hedge funds, wealth managers, private equity houses or listed businesses.

Alongside case funding there is also a growing market for the acquisition of claims by third parties, given the legislative changes in October 2015. Some third party funders are moving into this market, but there are also distressed debt specialists and other well-financed entities operating in this space.

Who funds insolvency litigation?

There are around twenty third party litigation funding firms active in the UK market (and a dozen or so ATE providers) and most have an appetite for funding insolvency litigation. In fact most funders prefer to work with IPs because they are perceived as being more commercially sensible and less emotional than some other litigants. Having an appetite and being a specialist is very different though. Not all funders are specialists in insolvency and funders often need educating about the nuances. This can include the need to support IPs fees during litigation – Something that funders of other commercial cases are not used too, as they would never be expected to fund a client ordinarily.

Perhaps the most well-known brand within the insolvency space is Manolete Partners PLC with a strong track record of acquiring claims from IPs and then pursuing them to conclusion. Manolete can also fund litigation without purchasing outright and they stress their ability to take over the day-to-day management of the cases.

The Association of Litigation Funders (ALF) lists seven funders as members and some will be familiar names within the insolvency world, including Redress Solutions PLC, Harbour Litigation Funding Ltd and Burford Capital LLC. Across the ALF membership there’s a mixed bag of experience within insolvency litigation, as well as different appetites towards case sizes, international elements and investor returns.

Aside from Manolete and the ALF members, there are a number of other funders operating in (or trying to operate in) the UK insolvency arena, including Orchard Global Asset Management, Cavendish IP Solutions, Bentham Europe Ltd and Augusta Ventures LLP.

This is not an exhaustive list, but clearly there is a growing number of serious players in the insolvency space. The good news is that this is driving genuine innovation.

What can litigation funding actually do?

Funding insolvency litigation a few years ago was nothing like funding now. Over the last three years enormous hard work has been put into developing funding solutions that actually match the needs of the insolvency sector. For example, it’s now possible to:

  • draw down pre-issue funding for IPs to do further investigation work;
  • fund WIP across a contentious insolvency practice;
  • use staged funding agreements to maximise returns to creditors;
  • fund actions without an immediate pay-off (recovering property or patents etc);
  • fund one-off cases with recoveries of just £100,000;
  • sell individual claims or bulk claims.

There are many ways that risk management tools such as third party litigation funding and ATE insurance can be used to pursue claims. When used in conjunction with conditional fee agreements (CFAs), discounted CFAs, fixed fees or other retainers such as Damages Based Agreements (DBAs) the options are vast.

The consequence of this is that there should be very few circumstances now that a claim which is proportionate and has merits can not be pursued, so long as there is some degree of confidence that a recovery can be made from the Defendants.

With this is mind, it is important for contentious insolvency practitioners (and their solicitors) to have:

  • up-to-date knowledge of the market for funding and ATE;
  • access to the most appropriate products for any particular case;
  • the ability to differentiate between providers;
  • an understanding of how to pitch cases to particular funders and underwriters;
  • the confidence that they have fully tested the market in order to achieve best outcomes for stakeholders.

My own view is that brokers have an important role to play in this process, but only if they genuinely work with the full market and only of they understand the particular needs of IPs. There are a number of brokers operating in funding and/or ATE insurance and they include AJ Gallaghers, Annecto Legal Ltd, JLT, Maxima, The Judge, ULP and others – Although I believe that my own firm, Annecto Legal, is unique among brokers in being paid for maximising client returns rather than funder returns… Something worth keeping in mind perhaps!

Mark Beaumont, co-founder, Annecto Legal Ltd