Funding Insolvency Disputes: There are more options than you think

The use of litigation funding is commonplace in insolvency disputes. Most IPs and insolvency solicitors have first-hand experience of putting funding in place and have “go to” contacts that they use when the need arises. But familiarity can lead to complacency. Whilst it’s tempting to repeat purchase the same products from the same providers, the market is evolving rapidly, and yesterday’s solution may no longer be the best option today.

Litigation funding remains a great solution for claimants with cash flow concerns but it’s typically difficult to obtain in the pre-investigation stage in the absence of a portfolio arrangement with the funder. So how else can a cash poor claimant get their case off the ground?

WIP Insurance that facilitates the lawyer’s ability to offer a CFA or DBA
The insolvency arena has been at the forefront of the CFA revolution. However, not all law firms can stomach the risk on many cases at any one time. WIP insurance can offer a solution to this economic dilemma by providing the law firm with the financial comfort needed to offer a CFA or DBA, on day 1 if need be, with the guarantee that the law firm will receive some fee income, typically 50%, regardless of the outcome of the case.

If the case is lost or the recovery is low, the insurer reimburses the law firm for an agreed percentage of fees. The emphasis is on actual recovery and so the premium is only payable to the extent that there are sufficient funds left in the firm’s success fee after the firm’s fees have been paid.

Litigation funding and WIP insurance need not be mutually exclusive. Funding could still be used for disbursements and/or to provide the law firm with some cash flow assistance during the life of the case. The policy can also cover 100% of counsel’s fees and disbursements that the law firm has paid on the claimant’s behalf. Of course, if the funding is underpinned by an insurance policy, it should be cheaper when the funder is taking a risk on the case.

Protected use of early recoveries for subsequent actions
An insolvency situation does not always mean that the moneybox is entirely empty. There may be a pot of money in existence or early recoveries that could, technically, be put towards the legal fees of a subsequent action for the further benefit of creditors. However, in many scenarios, the IP may not be in a position to put those monies at risk to fund the legal fees of a subsequent action. But what if the money would not ultimately be at risk? We have structured arrangements whereby such a pot of money has been used to alleviate the cash flow needs of bringing a subsequent claim, or has been combined with funding to reduce the borrowing required, but has been insured through an own fee insurance policy that provides reimbursement of the funds if the case is unsuccessful. As with adverse costs insurance, the premium for such a policy can be deferred and contingent upon success and is usually available at a fraction of the cost of traditional litigation funding.

What of the IP’s fees?
Where the IP is willing to fund disbursements on behalf of the client, an ATE insurance policy can be arranged to reimburse the IP in the event of a loss. This is likely to be far more cost effective than obtaining litigation funding to pay for the IP’s fees. It is worth noting that IP fees are often not considered a disbursement as standard but that cover for IP fees may be negotiated.

There is an escape clause
IPs can also monetise part or all of the claim as a speedy way to release funds from a dispute. This usually takes the form of an upfront purchase of the claim, or purchase for a nominal fee with an agreement to split the net proceeds. In selling the claim, the officeholder is immediately de-risked. If going down this route, the best way to realised maximum value for the creditors, in line with the IP’s duties, is to carry out a market search across multiple providers at the same time. Whilst this sounds like a lot of work, specialist brokers such as TheJudge will undertake this task at no additional cost to the IP or the claimant and will be able to provide a declaration that the best terms have been obtained.

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