One of the primary objectives of an Insolvency Practitioner (“IP”) is to realise assets for the benefit of creditors and it is often necessary to commence proceedings pursuant to the Insolvency Act 1986 in order to maximise recoveries. However litigation costs money and funding can often be a sticky issue when deciding whether or not to commence Court proceedings especially when you take into account the risk that, if unsuccessful, the IP may become liable to pay the Respondent’s costs.
Possible funding options will be considered once potential claims have been identified. Although the appropriate (and available) funding options will depend upon the circumstances of the particular case they will usually include:
- Using the IP’s funds: This presents an obvious risk if the litigation proves to be unsuccessful. If the office holder brings proceedings in their own name they risk personal liability for costs. Seeking an indemnity from the estate/company’s assets (or elsewhere) may therefore be appropriate.
- Utilising the proceeds of sale of assets already realised: The proceeds of sale may be used to fund litigation in order to secure further recoveries for creditors.
- Third Party (Litigation) Funding: Some or all of the legal fees incurred may be financed by a third party, the terms of which may be desirable if it would not be possible to pursue proceedings otherwise or where it is desirable to share the risk in pursuing the claim. This will, however, result in a reduced share to creditors because the third party will take a share of the recoveries.
- Creditor Funding: Not often offered or available but creditors may be persuaded to provide funds to commence or continue proceedings or cover the risk of adverse costs as they will benefit from a successful claim. Creditors may be reluctant to offer such funding, especially if their interest does not justify risking such large amounts of money.
- Assignment: All or part of the claim may be assigned for cash or a share of the proceeds. Relevant considerations include the impact of assignment on the return to creditors and the possibility of third party costs orders against the IP.
- Conditional Fee Arrangement (“CFA”): In summary - legal costs are only paid and payable from recoveries. A CFA won’t usually cover disbursements such as court fees which must be covered by the IP or creditor funding.
- Insurance: Although it is not that common, it is worth checking whether an insolvent company had Before the Event (“BTE”) insurance which may cover the costs of pursuing a claim. After the Event (“ATE”) insurance, whereby an insurer indemnifies the insured for some or all of their own legal fees in bringing a claim and/or the risk of paying the opponent’s costs, can help to limit the costs risks of litigation. The cover may, however, be limited to a certain amount and the premium can be costly thereby reducing the funds available to the creditors even if the IP opts to ‘insure the premium’ so that it is only payable if successful.
If you would like more information on any of the issues raised in this article, please contact our Insolvency and Corporate Recovery team:
Deborah Nigh | [javascript protected email address] | 01604 258033
Katie Summers | [javascript protected email address] | 01604 258018
Neena Jakhu | [javascript protected email address] | 01604 258083
Sarah Lee | [javascript protected email address] | 0161 259 0403
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