Insolvency professionals - why take the risk? Some reasons why you should consider litigation funding for litigated recoveries

For litigated claims in Australia, it is usually a case of “loser pays”. This cost shifting rule raises the stakes in litigated recoveries as it magnifies the financial consequences if the claim is lost. In addition to the costs it has incurred on its own account, a party to litigation may also be required to pay the costs of the opposing party (or parties). These costs can often be substantial.

Many litigants who may wish to pursue a strong claim may be deterred by these risks and may simply let their claim waste. Insolvency professionals have obligations to do all they reasonably can to increase the assets available for distribution to creditors and so letting claims waste is not a sensible option. There are a number of solutions to assist an insolvency professional to manage the financial risks of litigation.

One solution is funding provided by a commercial litigation funder. A litigation funder will usually agree to pay the costs required to pursue a recovery and should the claim fail, to pay any adverse costs order which may be made for the period when the funder is on risk.

For insolvency professionals, litigation funding can be an important tool in creating additional funds for distribution while allowing a liquidator or receiver to manage the risks associated with litigation. By using litigation funding, an insolvency professional can protect themselves and the insolvent estate from litigation risk. If litigation is not being funded from the insolvent estate, any funds which would have otherwise been available for distribution can be distributed and funds are not locked in the estate for long periods of time.

Another benefit of litigation funding is that it offers the insolvency professional “equality of arms” with large well-resourced defendants who may see advantage in drawing out litigation to exhaust the claimant’s financial resources. This dynamic should not be underestimated.

At the outset of any litigation, it is critical to consider the risks and benefits of all funding options with particular focus on managing adverse costs exposure.

Deciding to use funds in the insolvent estate requires vigilant monitoring of legal and other costs and of potential adverse costs exposure to ensure that sufficient funds are retained. Creditors or a committee of inspection may need to be consulted regarding funding options and to provide their views on which option should be adopted.

Seeking funding from creditors can also be an option but again requires constant vigilance to ensure that the creditor retains capacity to pay and is able to meet any adverse costs order.

While a litigant is exposed to credit risk on a litigation funder, this risk can be managed by full financial due diligence and ensuring that you only deal with a funder with demonstrated and transparent financial capacity and with an experienced team of investment managers. Once funding is in place, the insolvency professional can then focus their attention on the litigated claim in the knowledge that the financial risks arising from the litigation have been addressed. 

If you have an insolvency matter you would like to discuss with one of IMF Bentham's Investment Managers, please contact us by visiting our website for contact details.