Litigation Funding In Insolvency.
📌 Litigation Funding in Insolvency
Litigation funding in insolvency refers to third-party financing of legal claims pursued by an insolvent company (via a liquidator, administrator, or trustee). Because insolvent estates often lack funds, litigation funding enables office-holders to pursue valuable claims (e.g., fraudulent trading, misfeasance, antecedent transactions) that would otherwise remain unlitigated.
📌 1. Concept and Legal Basis
✅ What is Litigation Funding?
It is an arrangement where a third-party funder finances litigation costs (legal fees, court costs, expert fees) in exchange for a share of recoveries.
In insolvency, funding is typically used for:
- Avoidance actions (preferences, undervalue transactions)
- Frandulent or wrongful trading claims
- Director misfeasance proceedings
- Recovery of assets dissipated pre-insolvency
📌 2. Why It Is Important in Insolvency
🔹 Key Justifications
- Asset Maximisation – Enhances returns to creditors
- Access to Justice – Allows claims that would otherwise be abandoned
- Risk Transfer – Litigation risk shifts to funder
- Efficiency – Professional funders assess claim viability
📌 3. Legal Issues in Litigation Funding
⚖️ (A) Assignment of Claims
- Insolvency office-holders may assign or sell claims to funders.
- Courts distinguish between:
- Assignable property rights (allowed)
- Bare causes of action (restricted historically)
⚖️ (B) Champerty and Maintenance
- Historically prohibited third-party funding.
- Now relaxed in modern commercial litigation, especially in insolvency.
⚖️ (C) Control of Litigation
- Funders must not exercise excessive control.
- Office-holder retains fiduciary responsibility.
⚖️ (D) Court Approval
- In some jurisdictions (especially UK), court or creditor approval may be required depending on the transaction.
📌 4. Key Case Laws (At Least 6)
1) Re Oasis Merchandising Services Ltd [1998] Ch 170
📖 Facts
Liquidator attempted to assign a claim for wrongful trading to a third party.
⚖️ Held
Court of Appeal prohibited assignment of a “bare cause of action”.
📌 Principle
- Insolvency claims based purely on statutory rights cannot be freely assigned.
- Established a restrictive approach to litigation funding via assignment.
2) Re Movitor Pty Ltd (in liq) (1996) 64 FCR 380
📖 Facts
Liquidator entered into funding arrangement assigning part of recovery.
⚖️ Held
Court allowed funding arrangements where liquidator retained control.
📌 Principle
- Funding is valid if structured as sharing of proceeds rather than assignment of claim.
3) Grovewood Holdings plc v James Capel & Co Ltd [1995] Ch 80
📖 Facts
Concerned validity of assignment of litigation proceeds.
⚖️ Held
Assignment of proceeds of litigation (not the cause of action itself) is permissible.
📌 Principle
- Distinction between:
- ❌ Assignment of claim (restricted)
- ✅ Assignment of proceeds (allowed)
4) Re Cybervest Fund [2006] EWHC 1500 (Ch)
📖 Facts
Liquidator entered funding agreement to pursue claims.
⚖️ Held
Court upheld arrangement as valid.
📌 Principle
- Litigation funding agreements are acceptable if:
- They benefit creditors
- They do not amount to trafficking in litigation
5) Excalibur Ventures LLC v Texas Keystone Inc [2016] EWCA Civ 1144
📖 Facts
Third-party funders supported unsuccessful litigation.
⚖️ Held
Funders were ordered to pay indemnity costs.
📌 Principle
- Funders can be liable for adverse costs, especially if:
- They support speculative litigation
- They exercise control
6) Arkin v Borchard Lines Ltd [2005] EWCA Civ 655
📖 Facts
Concerned extent of funder’s liability for adverse costs.
⚖️ Held
Introduced the “Arkin cap”:
- Funder liability limited to amount funded.
📌 Principle
- Encourages funding while limiting exposure
- Later cases have softened strict application of this cap
7) Davey v Money [2019] EWHC 997 (Ch)
📖 Facts
Challenge to litigation funding arrangement in insolvency context.
⚖️ Held
Court confirmed legitimacy of funding agreements.
📌 Principle
- Funding arrangements are valid unless:
- They undermine justice
- They amount to abuse of process
8) Burnden Holdings (UK) Ltd v Fielding [2019] UKSC 14
📖 Facts
Concerned limitation issues in breach of fiduciary duty claims pursued by liquidators.
⚖️ Held
Supreme Court allowed claim to proceed beyond limitation.
📌 Relevance
- Strengthens value of claims often pursued via funding.
📌 5. Evolution of the Law
🔄 Traditional Position
- Strict prohibition (maintenance & champerty)
- Limited assignability of claims
🔄 Modern Position
- Courts recognise:
- Commercial necessity
- Benefits to creditors
- Funding widely accepted if:
- Transparent
- Not abusive
📌 6. Practical Structures of Funding
🔹 (1) Conditional Fee Agreements (CFA)
Lawyers paid only on success
🔹 (2) Damages-Based Agreements (DBA)
Lawyers receive % of recovery
🔹 (3) Third-Party Funding
External funder finances case
🔹 (4) Assignment / Sale of Claims
Permissible in limited form (post-2015 UK developments)
📌 7. Key Risks
| Risk | Explanation |
|---|---|
| Loss of control | Funders influencing litigation |
| Adverse costs liability | Funders may be liable |
| Champerty concerns | If overly exploitative |
| Regulatory scrutiny | Especially in insolvency |
📌 8. Key Takeaways
- Litigation funding is essential in modern insolvency practice.
- Courts balance:
- Access to justice
- Prevention of abuse
- The law has evolved from strict prohibition → regulated acceptance.
- Proper structuring (especially avoiding assignment of bare claims) is critical.
✅ Conclusion
Litigation funding in insolvency plays a crucial role in maximising creditor recoveries and enabling enforcement of claims. Judicial decisions—from Re Oasis to Arkin and Excalibur—show a consistent trajectory toward acceptance with safeguards, ensuring that funding supports justice without encouraging speculative or abusive litigation.
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