Insights on dispute resolution finance for insolvency-related claims
In this podcast, IMF Bentham’s Tom Glasgow and insolvency practitioner Luke Furler discuss dispute resolution finance for insolvency-related claims.
Tom is IMF Bentham’s Chief Investment Officer - Asia and Luke heads the Singapore office of leading independent restructuring, insolvency and advisory firm AJCapital Advisory. They are currently working together on the first insolvency matter funded by a commercial third-party funder in Singapore. IMF Bentham is funding the liquidators’ investigations and potential claims in relation to a major corporate collapse that cost Singaporean retail investors hundreds of millions of dollars.
In the podcast, Tom and Luke provide valuable insights from the perspectives of a funder and a funded insolvency practitioner. They explain and provide their views on:
- The types of insolvency claims that are suitable for third-party funding and what makes them suitable.
- Benefits of using a commercial third-party funder, differences with creditor funding and factors to consider when choosing between different funding options.
- Practical aspects of the insolvency funding process including who instructs the lawyers and how any differences of opinion between the funder and insolvency practitioner are dealt with.
For a PDF of the transcript, click here.
Welcome and thanks for tuning in to the latest episode of our podcast series, In Conversation with IMF Bentham. I’m Justin McLernon and I am an Investment Manager with global dispute resolution funder, IMF Bentham Limited.
Today, I'm joined by two guests. Firstly, my colleague, Tom Glasgow. Tom is IMF's Chief Investment Officer for Asia. Also joining us with Tom is Luke Furler. Luke is a chartered accountant and insolvency practitioner, with leading independent restructuring, insolvency and advisory firm, AJ Capital Advisory. Luke heads up AJ Capital's Singapore operations.
Tom and Luke are based in Singapore, but both work throughout Asia and beyond, and both have significant experience. I'm sure they'll offer some very interesting perspectives on today's topic, dispute resolution finance for insolvency-related claims.
Tom and Luke, you're currently working together on a matter linked to the collapse of Indonesian telco, Trikomsel. And, we'll return to that a little later on in the podcast. But for now, gentlemen, welcome.
Tom, in an earlier podcast, you talked about some of the recent developments in dispute resolution finance in the Asia-Pac region and how funding generally works there. Today, we're focusing on insolvency claim funding in Singapore and generally again within the Asia-Pac region.
My first question, which I think could probably be directed to both of you, is what types of insolvency claims are suitable for third party funding? And what makes them suitable?
Well, I guess what makes claims arising out of insolvent situations suitable for funding is that there's often a need for capital in order to pursue claims. In insolvent situations, whether it's a bankruptcy or a liquidation or even a distressed company situation, the cash may not be available in order to pay lawyers’ fees or court fees, or whatever may be required to investigate and pursue claims.
So, litigation funding really provides access to justice and much-needed capital to pursue claims in this category. And within that, we see a number of different sorts of cases. And perhaps the most obvious ones are in the context of liquidations or personal bankruptcies. And there we'll be working with liquidators or trustees, in the case of bankruptcies, to pursue claims against third parties on behalf of the insolvent company or bankrupt estate. For instance, against debtors or existing contractual claims that may have existed prior to the insolvency.
We also, in the case of company insolvencies, sometimes fund claims against former officers of the company. And that's, in particular, in the case of unexpected corporate collapses. So, we might be funding cases against former directors for breach of directors’ duties. And in a number of recent examples, in Hong Kong we funded cases against auditors who have acted negligently in relation to their functions for the company that's gone into insolvency.
As well as those claims really on behalf of the company or the bankrupt estate, we can fund liquidator claims, or trustee claims, like claw-back actions, regathering preference payments or unwinding an undervalue transactions, for instance, to bring funds back into the insolvent estate for the benefit of creditors. All of those cases are fundable under Hong Kong and Singapore law. And we, as IMF, have been involved in cases of this sort in Australia and Hong Kong, Singapore and elsewhere, in the US, for instance.
Look I think it's important Justin, to answer that question, really to go back and look at what are the duties of a liquidator, as it relates particularly to insolvency-related claims. And the duty of a liquidator, if you boil it down, is ultimately to get the best return, the maximum return, to creditors of the insolvent estate. And there, I think, are a number of ways to look at how you can do that. And there's the very traditional ways of selling assets, but there hasn't been available to insolvency practitioners in Singapore prior to recent amendments here, the ability to take third party funding and funds and, you know, claims through a litigation where the company doesn't have sufficient assets.
Or in other cases, where the company may have some assets and there may be cash in bank, or proceeds from the realization of other assets that could be used to fund a claim. But as a liquidator, you're balancing an immediate or near term distribution of what those assets may be, perhaps at the opportunity cost of giving up a claim. So, I think, for litigation funding and where it suits, it's in a situation where you may have some funding but want to share some of the risk with a third party to fund that claim. I think that's a very useful tool that is now available to IPs in the region.
So, I think, coming back to your question of what types of insolvency-related claims are suited for funding, I do think there needs to be a slight mindset shift, with some of the IPs here that look at, maybe non-traditional assets that they may not have thought about before, that are available through tools like this, third party funding. So, the claims, you know, are very wide, I think, that can be assessed. And the funding that IMF provides can be very useful for that.
Thanks, Luke. So, I think it’s fair to say, it covers all the various insolvent administrations. There's a wide variety of the types of claims, traditional and other claims that liquidators et cetera can bring. And various targets that can be the subject of those claims.
That's right, Justin. And perhaps to add to that, it's not only in situations where there has been a winding-up or we're in the liquidation phase, that third party funding is being used. IPs and financial controllers of corporations are also now thinking about litigation finance in distressed situations. And really, it's a mindset shift as Luke said. Insolvency professionals and finance professionals are starting to think about litigation or arbitration as another asset. An asset that can be leveraged or traded or otherwise monetized, using third party funding, or other means, to bring cash into a company where it's in a distressed situation.
And so, Luke, whether it's, I guess I can call it, an informal or a non-formal appointment situation, a restructuring circumstance, or a formal appointment, a liquidation or administration, what stage of that process would you typically be looking to engage with a third party funder?
Look I think that having the benefit of working on a live case at the moment, I am a big advocate of engaging with the third party funders early. My view is that IPs, restructuring advisors, should look to the funders as more than just funders. My experience is that they are an immensely valuable resource of information, both from a legal experience point of view, litigation experience point of view. But typically, paired with some very commercial investment managers who can help, either in a pre-insolvency or earlier stage insolvency, process or restructuring, in really helping to quantify potential avenues of recovery.
So, I think the earlier you engage, and the more tools and more options you have to present to your creditors or your stakeholders, depending on who you're advising, certainly from my point of view, I would encourage those to engage very early.
And so, Luke, what do you think are the main practical differences between a situation where creditors are providing you with funding to pursue a claim, or want to provide you with that funding, and where you are seeking to obtain funding from a professional third party funder like IMF. Are there, typically, pros and cons that are attached to each of those situations? Or do you think there is a clear preference from your perspective?
Look, I think there's certainly probably cases that are suited for creditor funding, existing creditor funding. Those cases might be where there is a smaller quantum of funding required. Or there might be a history with the creditors and the claim, or some form of commonality between creditors and shareholders, where there's deep technical expertise that might be useful for creditors to help fund. But I think there's a clear difference, speaking quite generally, between having creditors fund and have a third party independent funder come in.
And some of those differences, from my experience, creditors often have a history, they are somewhat tied emotionally or otherwise to claims. And that may somewhat cloud some of the judgement; whereas working with a litigation funder, they're typically independent, look at the merits of the claim, fund…
Have a dispassionate view, perhaps, of the litigation?
Yeah, exactly. I mean two other really important points, one is that a litigation funder, this is their business. This is what they do day-to-day. They have the stamina and the patience for what can be quite long cases, particularly in some Asian jurisdictions, which comes with a need to be able to fund these things.
So, litigation funders have got access to, typically, greater amounts of capital. At the outset everyone goes in with the best intentions but sometimes things drag out and require the deployment of pretty significant amounts of cash that may not be available from creditors. So, while I wouldn't rule out creditors funding claims, third party litigation funders, when you're looking at claims that potentially require a significant amount of funding over a long period of time, and as the complexity increases, I think it leans itself towards a third party funder more so than a creditor funder.
And Tom, on that point, if I can turn to you for a moment. So, say Luke then calls you and he says "Tom, I've got a claim. I'm the liquidator of this company and I've got a bundle of claims that I'd like you to have a look at and tell me whether you think they’re suitable for funding." What can you tell us about the criteria that IMF would apply in that situation, where there's a decision that's made as to whether a particular claim is suitable for funding? And do some of those criteria take on more importance than others? If you can just tell us a little bit about that situation.
Sure. I mean, for every single claim, there's three things that we look for. And that's the merits, recoverability and the economics of the case. And, in taking each of those in turn. The merits probably speaks for itself. We're interested in funding good claims. We're not in the business of speculating. And so, we'll want to understand what the legal basis of the claim is, what the evidential support for that claim is, any potential defences that might be raised to the claim, and form a view objectively that the claim is more likely than not to succeed. So that's the first thing. It needs to be a good claim.
Secondly, we need to be able to recover. Litigation funding is typically given on a non-recourse basis which means that we don't receive a reimbursement or a return on our investment unless there is a recovery and we're able to share in that recovery. So, the ability to take any judgment or award, and enforce it, or leverage a settlement, is incredibly important. So, recoverability is something that we look at very closely and we often will do additional work around that.
The third thing, and perhaps what is the most important actually, is the economics of the case. And by that, we mean the proportionality between the likely size of the recoveries and the cost of getting there. What we don't want is a situation where there is a recovery but all of the benefit of that recovery flows really to the lawyers, any advisors and the funder. We want to make sure that there's enough recovery there, so that once all the costs have been paid, and our funding fees have been paid, there's a meaningful recovery for the creditors. And to do that, we typically look for a ratio of around ten to one, or more, between the likely recoveries and the cost of getting to that point. Anything narrower than that and it becomes difficult to ensure that there's meaningful benefit for the creditors in pursuing and funding the project.
So those three things we look at together in a single claim.
And they're all essential, are they?
All of those things need to be present in a single claim.
What I would say, is that we're increasingly looking at portfolios of claims these days. And that can include, in the context of an insolvency, say a liquidation, where there are half a dozen different sorts of claims, they may all be different sizes, they may have varying prospects of success, and varying prospects of recovery. If we fund all of those as a portfolio, as a package, then we essentially can diversify our risk across that portfolio which means we can allow the liquidators to pursue more claims, or potentially claims that they wouldn't have been able to pursue on a stand-alone basis.
So, in the context of a portfolio, there may be a bit more give and take, around each of those three criteria. But we'll still look at them, but we'll look at it more on a portfolio holistic basis.
I think that's a really useful tool for liquidators here and probably in most other jurisdictions as well, because there often are more than one claim that we will look at in, particularly, a cross-border contentious liquidation here. And it might sound obvious that a liquidator shouldn't do anything that's ultimately not for the benefit of creditors unless they’re obliged to do it under the relevant laws.
But I think, where you have a multitude of claims, it really does allow you to leverage up some that may not be as strong as others, but still get access to capital, to explore and fund that.
That’s right and exploring additional claims might be useful as well. So, leveraging claim value, perhaps, to help liquidators investigate other aspects of the liquidation.
Well, I think that actually provides a good segue into my next question, Tom, which is, in addition to this full-service funding that IMF offers, whether that's to insolvency practitioners for the purposes of pursuing a single claim or a number of claims that form part of a wider portfolio, what are some of the other funding products that are available to insolvency professionals, to assist with investigating claims?
Yes, so we do and often can provide, what we call seed funding, which is an initial investment that we might make investigating, ensuring up the viability of claims. And indeed, that's part of what the packages that we've agreed with Luke in the case that we're working on together at the moment. And with that, it can enable the liquidators to meet lawyers’ fees, court costs, to make applications that might be required for court-ordered disclosure of documents, for instance, it might include carrying out some investigation of the potential defendants or respondents to ensure that we're able to recover from them, those aspects of the project.
You know, I think that's fundamental for us as liquidators here. We may think we have the best claim and on the merits review of the claim we're further encouraged that we have a strong claim to bring. But the recoverability of that, if we're successful is always key.
So, on the case that I'm working with IMF at the moment, to be able to use some of that seed funding to really firm up and do some investigations into what that might look like, is vital for us in pursuing a claim.
What are some of the things that you look for when you're considering a proposed funding transaction? What factors are likely to resonate most strongly for you, particularly where you've got a number of options. You may have a proposal from creditors, or if it's a more complex claim, or bundle of claims, that would require some really significant fire power, a big war chest, you may have offers from several funders. In that sort of competitive funding situation, what's most important to you, to get you over the line?
Yeah, thanks Justin. You know, having the benefit of bringing Trikomsel before the courts in Singapore here, which was the first third party funded insolvency case, we were obviously quite cautious in, and thorough in, our review of the various third party funders that were available, particularly in Singapore at the time. Together with our counsel, BlackOak, we went through and we met with a number of these funders and while commercial terms are obviously important, as you've said, it was very obvious through this process that there's much more to choosing a third party funder than just a commercial or financial terms.
And some of those factors that really were key for us, were having an experienced team on the ground, in the region. And back to one of my opening remarks that IPs should be seeing the third party funders as strategic partners in their assignments. And this is really key.
So, they have people here that you can meet with in person and talk to, and really bounce some of the ideas of what you're looking at off, in real time, is really key. So, that was one big factor for us. The depth of the team sort of builds on that. The team has access to multiple resources around the world and heavy experience in funding litigation, particularly in the Asian region for us. So, they were really, really key in our assessment.
And Tom, if I can ask you a question now. Where there is an insolvency matter that's funded by IMF, who instructs the lawyers? Because the lawyers obviously are the ones who perform the work, perform the litigation. They may brief counsel and experts et cetera, but who's responsible for providing those instructions?
In terms of the conduct of the proceedings and instruction of the lawyers, it's very clear under case law in Singapore, as I think it probably is in common law jurisdictions, that the claim remains the company's claim in the liquidation. And the liquidators are the ones that are conducting the claim and instructing the lawyers. And it's important that funders are not having control, and the case law in Singapore makes that clear.
Although it does also acknowledge that funders will want to have some degree of protections around the investment that they are making and acknowledge that funders may, quite rightly, have a say in things like settlement or the selection of counsel. So, who the lawyers are, as opposed to the instructions they are given.
So, that's sort of the formal position. In practice, we have a lot of strategic value that we can add as funders, as Luke's alluded to. And, we do see ourselves as providing more than just finance, and so we do want to know what's going on. We do want to share our thoughts on how to maximize recoveries and maximize the prospects of success. We're there, very much to assist, not to interfere and control things, but to try and improve the prospects of the overall project, really. And I think that, in most circumstances, that sort of collaborative approach is very well received both by the insolvency practitioners and the lawyers and it all works very well.
We try as much as possible to understand what the proposed strategy is, and the direction in which things are going to head before we invest, so that there are no surprises. But, there are things that can crop up and there might be differences of opinion, and I think that is all the more reason why there needs to be a strong relationship and degree of trust amongst the three parties, the lawyers, the insolvency practitioners and the funders, to work through those issues and to keep the overall project in mind and try and achieve success. And I think we do achieve that.
There is a mechanism under the funding agreement, typically, to deal with disagreements around settlements. We would usually insist at least in a single case scenario that the case cannot be settled without approval from the funder. But there's mechanism to refer any disagreement on the reasonableness of a settlement offer to a third party, usually to a senior lawyer, if there's any disagreement there. But I think I'm right in saying that we've never had to use that mechanism in the history of IMF, because we are able to resolve any differences between us and the liquidators.
So, there are mechanisms there if we need them. But I think, the best way of dealing with any potential issues is by having discussions and seeking to resolve issues between us.
Yeah look I would say my experience in working with, particularly with IMF on the matter at the moment is, I talk to Tom and his team probably as much as I talk to my own counsel, on the matter. So, as we walk through the process, I don't think there are any surprises for Tom or his team. And as we come up against important decisions, everybody is on the same page, in which at the risk of repeating myself again, it just makes it more important to build your relationships with your third party funders and really look to them as more of a strategic resource, which I've certainly done with Tom and the team.
Tom and Luke thanks for that, those detailed responses. I think you've both dealt comprehensively with each of the questions I asked. So, I'd like to thank you both, Tom and Luke, for joining us.
And that wraps up today's episode. I hope you can take away a better idea of the types of insolvency claims that are suitable for third party funding, and Tom and Luke have obviously spent some time talking about that today. And how that process works and some of the benefits and tips for insolvency practitioners.
Tom, how can listeners learn more about IMF's insolvency funding offerings in the Asia-Pacific region?
The best way is to give me a call.
Terrific. Thanks Tom. If you'd like a transcript of this podcast, or you wish to subscribe to future podcasts, blogs and e-bulletins regarding dispute resolution finance, just head over to www.imf.com.au/newsroom/blog and follow the prompts.
Look forward to welcoming you next time. Thanks for listening and bye for now.