In today’s challenging economic climate, insolvency practitioners (IPs) are increasingly required to pursue claims on behalf of insolvent companies to maximise recoveries for creditors. However, one of the most significant barriers to bringing these claims is the cost associated with litigation. This is where insolvency litigation funding plays a crucial role.

What is insolvency litigation funding?

Insolvency litigation funding for insolvency practitioners is a form of third party funding whereby litigation funders provide the capital required to pursue claims on behalf of an insolvent estate. This funding typically covers legal fees, disbursements, court costs, and other associated legal costs.

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 and that often leads to much higher returns to the funder. 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 model enables insolvency practitioners to pursue meritorious claims that would otherwise be commercially unviable.

Insolvency litigation funding options

Insolvency litigation funding options have evolved significantly in recent years, giving insolvency practitioners a range of flexible ways to pursue insolvency claims on behalf of insolvent companies without exposing the estate to unnecessary financial risk.

Rather than relying on a single approach, most insolvency litigation funding strategies involve a combination of funding tools tailored to the specific claim, risk profile, and recovery prospects.

Options include:

Third party litigation funding– One of the most widely used choices is third party funding provided 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 any successful 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, commonly known as a “no win, no fee” arrangement.

Under a CFA:

• The law firm defers some or all legal fees
• A success fee is payable if the claim succeeds
• If unsuccessful, the firm may write off part or all of its fees

Damages-based agreements (DBAs) – A damages-based agreement allows a law firm to take a percentage of the damages recovered rather than charging traditional legal fees.

Key points:

• Payment is entirely contingent on success
• Aligns the interests of the IP and the legal team
• Typically used in conjunction with other funding options

DBAs can be complex to structure but are increasingly used in insolvency litigation funding strategies.

After-the-event (ATE) legal insurance – While not funding in itself, ATE insurance is a critical component of most funding arrangements. It protects against the risk of paying the opponent’s legal costs if the claim fails.

Benefits:

• Shields the insolvent estate from adverse cost exposure
• Often required by litigation funders
• Premiums are usually deferred and contingent on success

For insolvency practitioners, ATE insurance is essential to managing litigation risk responsibly.

Assignment of litigation – In some cases, insolvency practitioners may choose to assign or sell insolvency claims to a third party.

Under this option:

• The claim is transferred to a purchaser
• The estate receives an upfront payment or a share of recoveries
• The purchaser assumes responsibility for pursuing the claim

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.