In a litigation landscape post-recoverability of CFA success fees and ATE insurance premiums, Insolvency Practitioners are increasingly turning to litigation acquisition, or “claims factoring”, as a way of realising one of the major assets left in an insolvency company – the potential litigation.
Claims factoring involves the sale of a claim by way of assignment to a funder. The purchase price usually either takes the form of an upfront, outright purchase of the claim, or a purchase for a nominal fee with an agreement to split the net proceeds (after paying all legal and related costs) of the litigation between the funder and the IP.
In selling the claim, the officeholder can obtain a number of major and, in some cases, immediate benefits, one of the most important of which is that the officeholder is immediately de-risked. As the claim has been assigned to the funder, there is no longer any risk of the officeholder being personally liable for an adverse costs order arising from the litigation.
Further, in the event of an upfront, outright purchase of the claim, the officeholders can make an immediate return for the benefit of the insolvent estate or for creditors from a contingent asset (the proceeds of the litigation being contingent upon a successful conclusion of the claim and recovery) that may otherwise take years to realise.
However, IPs need to be wary when deciding when claims factoring is appropriate and when it comes to negotiating the terms of any sale. As an IP’s overriding duty is to look after the interests of creditors, it is necessary to ensure that they are achieving the maximum possible benefit or recovery when deciding to selling an asset – in this case, the litigation.
It would therefore be incumbent upon the IP to make a reasonable investigation of the terms available, and this is where the engagement of an independent broker can provide considerable benefit.
In an emerging and evolving market, a broker can assist with and/or undertake a whole market search on your behalf. In providing you with a summary of the options available, as well as discussing other potential litigation financing options such as traditional litigation funding or after-the-event (ATE) insurance, the broker can help IP’s meet the duties owed to creditors and remove any risk, however remote, that there has been a failure to obtain the maximum possible benefit for the creditors.