Litigation funding fundamentals – overview of funding for insolvency claims
This is the first article in a new series which will break down the fundamentals of litigation funding and help demystify the process of getting a claim funded. This article will provide an overview of litigation funding in the insolvency context, the types of claims LCM will fund, LCM’s investment criteria and what LCM can offer.
What is litigation funding in the insolvency context?
Litigation funding originated about 20 years ago through funding insolvency actions in Australia. LCM has been there from the start – making LCM one of the most experienced litigation funding firms globally.
Litigation funding is the practice of using funds provided by a third-party funder such as LCM to pursue a meritorious claim. These funds cover the legal costs of the claim including solicitor fees, disbursements and liquidator’s costs. The funder will also provide an indemnity for any adverse costs and arrange security for those costs within the action. Funding is usually provided on a non-recourse basis – meaning that LCM will not seek to recover any money from the lawyers, insolvency practitioner or the company if the case is unsuccessful. In return for taking on all the risk, if the case is successful, LCM will receive the capital it deployed plus a premium which is ordinarily calculated as either a percentage of the recovery or a multiple of the amount of funds advanced.
What types of claims does LCM fund?
LCM funds all types of insolvency related claims including:
- voidable transactions such as unfair preferences, uncommercial transaction, unfair loans, transactions to defeat creditors and unreasonable director-related transactions;
- company claims such as breach of contract, debts owing and misleading or deceptive conduct; and
- other claims such as breaches of director’s duties and insolvent trading claims.
What is LCM’s investment criteria?
LCM has five criteria which are applied when assessing a claim for funding. These include:
- Clear legal principles
– the claim must be based on clear legal principles and not novel areas of law.
– there must be proportionality between the size of the claim and the funding commitment.
– there must be a clear line to recovery for the claim in that it must be demonstrated that the defendant has the capacity to meet a judgment of the size which will be sought.
- Written evidence
– the claim should be supported by factual and legal analysis based on documentary evidence rather than oral testimony of witnesses and experts.
- Experienced legal team
– there must be a highly competent and experienced legal team in place with the relevant expertise to pursue the claim.
LCM understands that ticking off on all five criteria may not always be possible. A failure to sign off all five criteria may not necessarily mean failure for the application as long as there is a clear pathway to achieve sign off (eg by further due diligence or investigations).
What does LCM offer?
LCM has a comprehensive offering ranging from investigation finance such as funding public examinations and solvency reports through to providing adverse costs cover and enforcement costs. In addition to the traditional single case funding, LCM offers portfolio finance where low quantum or more speculative claims can be packaged together with stronger claims with a single facility provided to the liquidator. LCM is also one of a handful of funders that offers the option to purchase a claim from the liquidator by way of assignment. The benefits of portfolio or assignments versus single claim funding are that LCM is willing to pay an upfront payment for creditors for the claim and this model can allow a solution for claims which may not meet all five criteria and so cannot be funded on a traditional finance basis. Portfolio finance and assignments will be covered in more detail in future newsletters so stay tuned!