For any insolvency practitioner, pursuing claims on behalf of insolvent companies is often essential to maximising recoveries for creditors. However, insolvency litigation comes with a fundamental challenge: how to fund claims when the insolvent estates themselves lack the financial resources to cover legal costs and the risk of adverse outcomes.

Fortunately, modern funding solutions mean that funding insolvency no longer needs to involve significant financial exposure. By using a combination of litigation funders and ATE insurance, insolvency practitioners can pursue strong insolvency claims without putting the estate – or themselves – at risk.

The challenges of funding insolvency litigation

When dealing with insolvent companies, cash flow is either extremely limited or non-existent. Yet bringing insolvency litigation – whether for wrongful trading, preferences, transactions at undervalue, or misfeasance – requires upfront investment in legal fees, expert reports, and court costs.

The biggest concern for any insolvency practitioner is not just the cost of bringing a claim, but the potential liability for adverse costs if the claim fails. In many cases, this risk alone can prevent valid insolvency claims from being pursued, leaving creditors without recovery.

Litigation funding: removing the upfront burden

Insolvency litigation funding has become a key solution for insolvency practitioners seeking to pursue claims without financial risk. Litigation funders provide the capital required to cover legal fees and other expenses associated with insolvency litigation.

In return, the funder receives an agreed return from any recoveries achieved, often calculated by reference to their level of investment in the claim. Alternatively, the claim could be assigned but that could lead to much higher returns to the Assignee. Crucially, if the claim is unsuccessful, the funder usually bears the financial loss, meaning the IP and the estate are not exposed to adverse financial consequences (subject to the structure of the arrangement).

This approach allows insolvency practitioners to unlock value from claims that would otherwise remain dormant due to a lack of funding. It also ensures that funding insolvency cases is aligned with commercial outcomes, as litigation funders will only support claims with strong prospects of success.

Insolvency litigation funding options

In recent years, insolvency litigation funding options have advanced considerably, providing insolvency practitioners with a variety of flexible solutions to pursue insolvency claims on behalf of insolvent companies without placing the estate at undue financial risk.

Instead of depending on a single method, most approaches to funding insolvency litigation now involve a blend of funding tools, carefully structured around the nature of the claim, its risk profile, and the prospects of success.

Options include:

Third party litigation funding – One of the most widely used choices is third party funding by specialist funders. Under this model, a funder agrees to pay some or all of the legal fees and legal costs associated with pursuing a claim. In return, they receive a percentage of recovery.

Key features:

• No upfront cost to the insolvent estate
• Funder assumes financial risk if the claim fails
• Return is contingent on success
• Often used for higher-value insolvency claims

This is particularly attractive where insolvency practitioners identify strong claims but lack liquidity to pursue them.

Conditional fee agreements (CFAs) – A law firm may agree to act under a Conditional Fee Agreement, often referred to as a “no win, no fee” arrangement.

Under a CFA:

• The firm postpones payment of some or all legal fees
• A success fee becomes payable if the claim is successful
• If the claim fails, the firm may waive part or all its fees

Damages-based agreements (DBAs) – A damages-based agreement enables a law firm to take a percentage of the damages recovered instead of charging standard legal fees.

Key features:

• Payment is entirely dependent on a successful outcome
• Aligns the interests of the insolvency practitioner and legal representatives
• Often used alongside other funding mechanisms
• While more complex to structure, DBAs are becoming increasingly common in insolvency litigation funding arrangements 

After-the-event (ATE) legal insurance – Although not a funding method in itself, ATE insurance is a vital element of many funding structures. It provides protection against the risk of having to pay the opponent’s legal costs if the claim is unsuccessful, as well as dealing with any Security for Costs issues in a cost-effective fashion.

Advantages:

• Protects the insolvent estate from adverse costs exposure
• Frequently a requirement of litigation funders
• Premiums are typically deferred and only payable upon successful recoveries

For insolvency practitioners, ATE insurance plays a key role in managing litigation risk effectively.

Assignment of Claims – In certain circumstances, insolvency practitioners may opt to assign or sell insolvency claims to a third party.

Under this arrangement:

• Ownership of the claim is transferred to a purchaser
• The estate receives either an upfront sum or a share of any future recoveries
• The purchaser takes on responsibility for progressing the claim

Of course, assignment passes over control to the assignee, and this is not always preferable. The assignee will also in many cases take around half of any recoveries, which may not compare favourably with alternative funding options. It’s important to consider the pros and cons before committing to any solution, especially as creditors and regulators could ask to see the process taken to reach any decision to assign.

Assessing the prospects of success

Both litigation funders and ATE insurance providers will carefully assess the prospects of success before agreeing to support a claim. This due diligence process is beneficial for insolvency practitioners, as it provides an independent validation of the strength of the case.

Typically, funders and insurers look for claims with strong legal merits, clear evidence, and a realistic route to recovery. While this may mean that weaker claims are not funded, it ensures that resources are focused on cases with the highest likelihood of delivering returns for creditors.

Benefit for insolvency practitioners and creditors

Using litigation funding and ATE insurance offers several key advantages:

• Risk-free litigation: No exposure to legal costs or adverse costs
• Improved recoveries: Ability to pursue claims that would otherwise be abandoned
• Cash flow neutrality: No need to use limited estate funds to finance litigation
• Expert support: Access to experienced funders and insurers who understand insolvency litigation

For creditors, this approach ensures that all viable insolvency claims are explored, maximising potential returns from insolvent estates.

How can Annecto Legal assist?

Disputes arising in insolvency proceedings can be costly and procedurally challenging. Annecto Legal regularly assists licensed practitioners and liquidators who are involved in the administration or liquidation of a company.

We assist a wide range of clients in finding the appropriate insolvency litigation funding, assignment options and after-the-event (ATE) insurance. We ensure you meet your professional obligations in a cost-effective manner and provide written reports on file.

If you are in the process of pursuing or defending an insolvency dispute and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal.