Insolvency litigation funding – What should an insolvency practitioner do?

Abstract

Insolvency litigation is unlike other types of litigation. Although proceeds of successful actions are received on behalf of creditors creating a private benefit, there is also a public benefit to ensuring culpable individuals are held to account for their conduct. A significant problem often faced by insolvency practitioners, who have the power to take action on behalf of creditors, is how to fund such actions. Many insolvent estates are so impecunious that there is no funding available to support litigation. The Jackson reforms were applied to insolvency litigation in 2016. Prior to that, a insolvency practitioner would invariably employ a legal team on the basis of conditional fee agreements (“CFAs”) where, if successful, the lawyers would receive their base costs plus an uplift which was commonly 100% of the base costs. Insolvency practitioners would ensure they had potential adverse costs covered (in the event the action was lost) by after-the-event insurance (“ATE”) where the insurance premium was fully deferred and not payable if the case was lost. Prior to 2016, if insolvency litigation was successful, a losing defendant would be ordered to pay damages, base legal costs, the CFA percentage uplift on those costs and the ATE insurance premium. All that changed with the Jackson reforms. From 2016 onwards, uplifts and premiums are no longer separately recoverable but must now be paid out of any damages awarded. The result is that fewer cases are brought using CFAs and ATE than before, and less money finds its way to the creditors. In 2015, insolvency office-holder actions were made assignable to third party funders. Up until then, third party funders accounted for only a very small part of the insolvency litigation market. This was largely due to the fact that they would require a profit from any funding they provided and financially, the pre-Jackson CFA/ATE model was usually far more attractive to insolvency practitioners. The Jackson reforms have levelled this playing field. Insolvency practitioners are fiduciaries. They must act in what they believe to be the best interests of the creditors. Prior to the ability to assign office-holder actions and the Jackson reforms, in the vast majority of cases, insolvency practitioners did not have to think too carefully about how best to fund insolvency. The CFA/ATE model was dominant. That has changed in recent years. This article considers in detail the options available to insolvency practitioners and considers the factors they need to take into account in making a decision as how best to enforce legal rights on behalf of creditors. It considers recent case law and the possible pitfalls which await an unwary practitioner. It concludes with a suggested checklist which might be used each time insolvency litigation which requires some form of financial support is contemplated.