What insolvency practitioners should know about financing claims in a COVID world
As the COVID-19 pandemic and related global economic slowdown continues, corporate insolvencies are on the rise —and so too is the need for capital to pursue insolvency-related claims. Litigation and arbitration claims are often high value assets of insolvent estates and can be used to generate income during difficult financial times. However, substantial economic resources are usually required to realize their full value. This is where dispute financing provides an important tool at the insolvency practitioner’s disposal.
Omni Bridgeway expanded its investment management team before the COVID outbreak foreshadowing a change in the economic environment. Earlier this year, Heather Collins joined Omni Bridgeway’s Australian operations as an investment manager with a specific focus on financing insolvency claims. Heather was previously with Baker McKenzie and has more than 15 years of litigation experience, including nine as an insolvency law specialist. Heather adds to Omni Bridgeway’s world-wide team of investment managers with extensive corporate insolvency, restructuring and finance experience.
In this blog, Heather addresses some of the most critical questions insolvency practitioners, companies, and creditors have about insolvency related claims and dispute financing.
What is happening with insolvencies around the globe?
In many jurisdictions, corporations and their stakeholders are taking a wait-and-see approach as the full economic fallout of the COVID-19 pandemic unfolds. Companies have taken measures to preserve cash and bolster solvency by taking advantage of government stimulus initiatives. In some of our key markets we are seeing the following:
- In Australia, insolvency practitioners anticipate a wave of appointments starting in September, when government initiatives wind down, and companies are more likely to become distressed or collapse altogether. As the pandemic began, many companies sought insolvency advice. However, most directors were advised to take advantage of government programs and save their cash. As a result, the insolvency market is presently relatively quiet, with insolvency appointments down 30 to 50 per cent.
- Similarly, Canadian companies are waiting to see how long the crisis lasts and holding on as long as they can. However, the country’s oil and gas industries are struggling due to low crude oil prices and the impacts of COVID-19 on demand. We expect companies in that sector to be among the first wave of insolvencies.
- In the United States, the number of companies seeking bankruptcy protection in recent weeks has increased substantially - heading toward the highest number of corporate bankruptcies since the first six months of 2009. Driven by liquidity issues, companies have also shown a marked increase in interest in monetising their litigation assets.
- In Singapore and Hong Kong, a mix of government stimulus and protective temporary legislation has provided businesses affected by COVID-19 with some breathing space. However, these temporary measures are unlikely to shield some industries against the longer-term impact of the crisis, including shifts in demand for travel, tourism, hospitality and commercial property. The impact on Hong Kong’s economy is also compounded by the recent political and civil unrest. Many businesses are taking the opportunity to restructure debts and seeking to enforce their legal rights with the aid of dispute finance to leverage the value in contingent claims. In both jurisdictions, insolvency practitioners are anticipating a significant increase in insolvencies towards the end of 2020 and beyond.
- A similar situation has occurred in the UK. Statutory measures that came into force at the end of June 2020 introduced a moratorium (20 business days but extendable) to allow companies to develop a business rescue plan, protecting them from immediate creditor pressure and creating a presumption that a director was not guilty of wrongful trading during a six-month period (between 1st March and 30th September 2020). For a similar period, a creditor cannot present a winding-up petition, except in certain circumstances. The measures have been a welcome relief for many. However, when they expire (which will coincide with the end of payment holidays and state-backed furlough schemes supporting millions of UK workers), there is anticipated to be a significant increase in business failures.
- In other parts of Western Europe there has been a notable increase in the number of companies seeking bankruptcy protection and more are expected. According to recent research, the amount of company bankruptcies in the Netherlands will increase by 36 per cent in 2020 and 2021 compared with 2019. Affected sectors include transport and retail. The French economy has had its worst quarter since 1949 and the Spanish and Italian economies are also experiencing record lows.
Which types of insolvency claims are suitable for funding and why?
There is a wide variety of claims stemming from liquidations and corporate restructurings that may be suitable for funding. These include claims against third parties on behalf of insolvent companies and bankrupt estates, contractual disputes leading up to an insolvency event, claims against directors and officers for breaches of duties that cause or contribute to a corporate collapse and claims against auditors or other professionals accused of negligence related to a company’s insolvency.
In jurisdictions including Australia, Hong Kong and Singapore, dispute funding is often used for these types of liquidator or trustee claims. Preference claims and claims relating to uncommercial transactions may also be good candidates for funding.
Omni Bridgeway can provide early stage funding to appointed insolvency professionals to help cover the cost of public examinations, expert reports, counsel opinions and other cost items necessary to support and nurture the development of meritorious legal actions.
And while our involvement may come at any stage of the case - prior to filing, during the dispute, on appeal or at the enforcement stage - it is best if we are involved early in a dispute to assess the viability of the claims and the case strategy.
In “loser pay” jurisdictions, claims are particularly suited to dispute financing because insolvency practitioners and the estates they represent wish to avoid exposure to adverse costs which are typically payable in the event the case is unsuccessful. Further, in several jurisdictions, including Australia, courts regularly require insolvency practitioners to pay money into court as security in respect of any such adverse costs orders. When Omni Bridgeway funds a case, for the duration of the funding agreement we agree to provide any security for costs and to pay any adverse costs ordered by the court.
What are the benefits of working with a funder versus other financing options?
Dispute funding companies like Omni Bridgeway provide non-recourse capital to level the playing field and resolve disputes. We only receive a return on our investment if the claim is successful. We only receive a return on our investment if the claim is successful. If the claim is lost, we are owed nothing and, where required, we pay any adverse costs. The non-recourse nature of our funding ensures that estate creditors will not be saddled with the costs of bringing an unsuccessful action. In addition, because the funded claimant’s repayment obligation is contingent upon a successful outcome, no liability is reported on the balance sheet.
Experienced funders bring more to the table than just money. As former practising lawyers, we work closely with insolvency practitioners in the early stages of an insolvency or restructuring to help to identify and assess the merits of claims and determine their potential value.
What are the practical aspects of the funding process?
For each claim, Omni Bridgeway examines:
- The merits of the case. We only finance meritorious claims with good prospects of success. We investigate the legal basis of the claim, the evidence, and any potential defences that may arise. Armed with this information, we form an independent view on whether a claim is likely to succeed.
- Recoverability. Because we only receive a return on our investment in the event of a successful recovery, we need to determine the likelihood that a defendant in a claim can pay a settlement, judgment, or award. If a defendant appears to have capacity to pay, but is unwilling or there is some other difficulty recovering a judgment or settlement, we have a global specialist enforcement team comprised of financial, business intelligence and asset tracing experts.
- The economics of the case. How much will a claim cost to pursue versus the potential payout from a successful recovery? We typically seek a ratio of around 10-to-1 or more between the likely recovery and expected costs to pursue the claim. This is to ensure, where possible, that the creditors will receive a meaningful share of the proceeds once the costs and fees to bring the claim are covered.
How does Omni Bridgeway’s insolvency financing approach differ from other funders?
At Omni Bridgeway, we are client-focused, and we aim to strike a fair balance in the oversight of insolvency claims. In the US, all case-related decisions are made by the claimants and their lawyers. Outside the US, we take a jurisdiction by jurisdiction approach in our level of involvement which is always subject to the insolvency practitioner’s overriding decision.
Does Omni Bridgeway provide seed financing for investigating potential claims?
Omni Bridgeway can provide early stage funding, on a case-by-case basis, for promising claims. Insolvency practitioners are often appointed to insolvent companies that appear to have strong claims. Yet the estate lacks the financial resources to carry out early investigations and corporate intelligence to fully assess their viability and value. Seed funding allows insolvency practitioners and those they instruct, to thoroughly investigate any potential claims at an early stage of insolvency or restructuring.
Will Omni Bridgeway purchase claims?
Depending on the jurisdiction and applicable laws, Omni Bridgeway will consider purchasing certain claims outright, or having all or a portion of the claim assigned to it.
To learn more about how dispute finance can assist in an insolvency matter, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos. Or contact us for a consultation to learn more about the ways we can help you pursue meritorious claims.