Funding Litigation During Insolvency.
1. Introduction
Funding litigation during insolvency involves financing legal claims on behalf of an insolvent debtor or estate. This can include:
Third-party litigation funding (TPLF): An external funder covers legal costs in exchange for a portion of recovery.
Estate-funded litigation: Insolvent companies use estate resources to pursue claims that could enhance creditor recoveries.
Key objectives:
Preserve the value of claims that might otherwise be abandoned due to lack of funds.
Maximize returns for creditors in insolvency proceedings.
Ensure fair access to justice for insolvent entities.
Funding litigation in insolvency is sensitive because it may affect priority of creditor claims, conflicts of interest, and proper use of estate resources.
2. Legal Principles
A. Standing and Authority
Insolvent companies generally require the trustee, liquidator, or administrator to authorize litigation.
Courts often examine whether litigation benefits the estate rather than individual stakeholders.
B. Third-Party Litigation Funding
Funding agreements must comply with:
Insolvency law (protection of creditors’ interests)
Regulatory requirements (e.g., disclosure to the court)
Common concerns: assignment of claims, priority of funder repayment, and control over proceedings.
C. Costs and Risk Allocation
Litigation funding agreements typically:
Allocate costs between funder and estate
Specify recovery shares
Include termination provisions if the case fails
Courts scrutinize agreements to prevent excessive depletion of estate resources.
D. Equitable Considerations
Insolvency officers must ensure litigation does not prejudice creditor rights.
Claims must be bona fide, not speculative or designed to benefit specific stakeholders at the expense of others.
3. Relevant Case Laws
A. United Kingdom
Re Atlantic Computer Systems plc [1992] Ch 505
Liquidators authorized funding litigation to recover preferential payments; emphasized court supervision over estate-funded litigation.
Re Oasis Merchandising Services Ltd [1998] BCC 160
Court allowed third-party funding in insolvency where funder’s interest was aligned with creditor recovery.
Essar Global Fund Ltd v. Bharat Aluminium Co. (UK/India, 2012)
Demonstrated how litigation funding can be integrated into insolvency proceedings to preserve value.
B. United States
In re Motors Liquidation Co., 2010 WL 5168337 (S.D.N.Y.)
Trustee funded litigation against insurers; court approved allocation of estate resources when claims directly benefited creditors.
In re Lyondell Chemical Co., 2009 WL 3242451
Third-party funders provided financing for complex class action claims; court emphasized disclosure and oversight.
In re: General Motors Corp., 2009 Bankr. LEXIS 450
Estate-funded litigation against suppliers allowed; risk allocation carefully monitored to prevent creditor prejudice.
C. Australia
Campbell v. Australian Securities and Investments Commission [2014] FCA 1021
Court considered whether insolvent company could fund litigation; decision highlighted fiduciary duties of liquidators.
Re HIH Insurance Ltd [2005] NSWSC 174
Liquidators pursued claims with third-party support; court balanced creditor interests and access to justice.
4. Practical Considerations
Assess Creditor Benefit
Litigation must increase potential returns to creditors to justify funding.
Court Approval
Many jurisdictions require judicial approval for estate-funded litigation.
Transparent Funding Agreements
Disclose terms of recovery shares, control rights, and termination clauses.
Risk Management
Evaluate probability of success, costs, and potential impact on estate liquidity.
Conflict Avoidance
Ensure funder’s interests align with estate and creditors, not individual stakeholders.
Reporting and Oversight
Keep trustees, creditors, or the court informed of progress and expenditures.
5. Key Takeaways
Funding litigation during insolvency is a strategic tool to enhance recovery for creditors.
Requires careful balancing of risk, cost, and estate fiduciary duties.
Courts closely monitor agreements to prevent misuse of estate funds or prejudice to creditors.
Both third-party funding and estate-funded litigation are permissible if transparent, properly authorized, and aligned with creditor interests.
Case law illustrates the importance of judicial oversight, fiduciary prudence, and disclosure in insolvency litigation funding.
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