Administrators and liquidators have always had to take a creative approach to funding insolvency claims. Often lacking the funds to pay legal fees, they have been amongst those to benefit the most from the ability to combine CFAs, litigation funding and after-the-event (ATE) insurance to create a scenario in which an officeholder can pursue litigation with no liability for their own solicitor’s fees, nor that of their opponents, if a claim is unsuccessful.
Whilst, post the Legal Aid, Sentencing and Punishment of Offenders Act, there is no longer a funding solution that completely ringfences the creditor’s recovery in insolvency claims, there are various products that can assist with the payment of legal fees and/or minimise the financial risks inherent in bringing an insolvency related claim. Here are some points you should consider when arranging funding and insurance for insolvency disputes.
Carefully consider your obligations
Both insolvency practitioners (IPs) and solicitors should be aware of their obligations surrounding litigation funding and ATE insurance under the Insolvency Code of Ethics and the SRA Handbook, respectively. IPs have a general duty to ensure they have up-to-date knowledge, are in line with market practice and that they look after the interests of their creditors. Solicitors have a duty to put their client in an informed position to make decisions on fees (including those related to insurance and funding). However, solicitors also face additional obligations when assisting clients with ATE insurance arrangements stemming from the EU Insurance Distribution Directive (EU) 2016/97. These obligations are incorporated into the SRA Handbook and carry severe penalties for non-compliance, including criminal sanctions.
Short cuts don’t pay off
While it may be tempting to have “go-to” funders and insurers, a market search is the only way to ensure you’re getting the best commercial terms for the creditor. The litigation funding and insurance market is far from static. We continue to see a steady flow of new entrants, alongside rather rapid expansion in existing teams and the constant development of innovative new products. Even if you have arranged insurance or funding recently, don’t rely on a previous market search and assume the winning provider on that occasion represents the best option this time. The market responds very differently from one matter to another and standard policy wordings and contract terms can change overnight. Undertaking a search of the market can help IPs to meet the duties owed to creditors and remove any risk that there has been a failure to obtain the maximum possible recovery from the litigation through their choice of case financing. A specialist broker will undertake such a search at no cost to the IP or the claimant.
Anticipate cost applications
Whilst security for costs applications should not be allowed to stifle genuine claims, they are a frequently used tool in insolvency disputes. Obtaining an ATE policy is the most common way for IPs to deal with security for costs. However, as the decisions in cases such as Premier Motorauctions[1] and Lewis Thermal[2] demonstrate, not all ATE policies are created equal. An ATE policy alone may fail to satisfy a security for costs application where clauses within the policy allow the insurer to void it. However, additional steps can be taken to ensure the claimant has adequate protection. These include removing offending clauses prior to policy inception, providing an anti-voidance endorsement to an existing policy or obtaining additional cover in the form of a deed of indemnity or a bond under which the provider guarantees security. Not all providers offer the same options and, while may not choose to purchase a product like a deed of indemnity at the outset of a matter, the option to do so may become outcome-determinative at a later stage.
WIP insurance (also called CFA/DBA insurance)[3]
WIP insurance is a policy taken out by the firm to cover a portion of their fees at risk under a no win no fee agreement to ensure they receive some fee income regardless of the outcome of the case. If the case is lost, the insurer reimburses the firm for the insured fees incurred. The policy can also cover counsel’s fees and disbursements. The emphasis is on actual recovery and so the premium is only payable to the extent there are sufficient funds after the firm’s fees have been paid.
Think carefully about who gets paid what and when
Beware of binary terms which trigger a payment to an insurer or funder upon settlement or receipt of an award but do not consider the actual level of recovery. It is preferable to know what will happen in the event of a shortfall at the outset, rather than having to negotiate a separate settlement agreement with insurers and funders once a matter has progressed.
It is also essential to carefully consider the priority order or ‘waterfall’ terms of any ATE and funding arrangement. Assess how a shortfall in damages could impact payment of your fees and the return to the claimant. Typically, a litigation funder will take the first bite of the apple, if not in respect of their full success fee then at least to recover the funds they have invested. The waterfall may be negotiable on a bespoke basis to protect a higher percentage of your fees and/or to ensure the claimant receives a certain level of damages.
How will disbursements be funded?
Certain matters may benefit from a package which funds disbursement costs on an ongoing basis and others from a policy that reimburses the costs in the event of a loss. Remember insurance will likely be cheaper than funding. Where it is envisaged the creditor will be liable for disbursements, a funding arrangement can take the costs of litigation ‘off balance sheet’ and convince them to pursue a meritorious claim with minimal outlay for legal expenses. However, where the IP operates a pot from which disbursements are paid, an ATE insurance policy that reimburses the pot in the event of a loss may offer a commercial solution. Remember that insurers and funders may be willing to retrospectively cover disbursements that have been incurred prior to your discussions with them. It is worth noting that IP fees are often not considered a disbursement as standard but that cover for IP fees may be negotiated.
Explore the monetisation option
IPs also have the option of monetising the claim through litigation acquisition, or “claims factoring”, as a speedy way to release some funds from a dispute. Claims factoring involves the sale of a claim, or portion thereof, by way of assignment to a funder. The purchase price 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, as the claim has been assigned to the funder there is no longer any risk of personal liability for an adverse costs order arising from the litigation. When arranging ‘sale’ of the claim, the law firm can maintain management of the claim without fear of the funder taking over.
Consider whether better terms could be available through a portfolio arrangement
Where an IP or a law firm has a volume of business, or a group of claims, they may benefit from the significant benefits a portfolio arrangement can offer, including: –
- Cheaper prices: More claims equal a greater spread of risk for the funder or insurer and, therefore, cheaper prices. If your funder is still looking to take an arbitrary 3x or high percentage of the damages under a portfolio arrangement, then you need to consider other providers.
- Pre-investigation funding: It can be difficult to obtain even limited funding on a one-off basis towards the cost of the initial investigation into the claim. However, if you can offer repeat instructions, you may be able to negotiate an arrangement through which you can draw down a small amount per claim to fund the investigation stage.
- WIP insurance: If you are acting on a contingent basis in more than a handful of cases per year you could insure a percentage of your fees on a portfolio basis, guaranteeing you a minimum level of fees across the outcome of all of the cases combined. The premium for a portfolio arrangement should be significantly cheaper than insurance on a case-by-case basis. If cash flow assistance is required, it can be underpinned by the insurance arrangement, making it more cost effective than traditional litigation funding.
- Tailored policy wording: A tailored wording could incorporate security for costs protection, a favourable waterfall provision, and cover for IP fees as standard.
It is important to distinguish a portfolio arrangement from the “special relationship” you may have from simply using the same provider. The former is based on a negotiated set of favourable terms, compared with the market and agreed in advance. The latter arrangement rarely offers a true discernible benefit and could open a solicitor/IPs to claims of negligence or misconduct.
This was first published on the Practical Law Dispute Resolution blog here.
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[1] Premier Motorauctions Ltd (in liquidation) and another v Pricewaterhousecoopers LLP and another [2017] EWCA Civ 1872, [2017] All ER (D) 197 (Nov)
[2] Lewis Thermal Limited v Cleveland Cable Co Limited [2018]
[3] How law firms are using insurance to overcome their fear of damages based agreements