Meeting Insolvency Practitioner’s Obligations to Creditors Using Litigation Funding banner

Meeting Insolvency Practitioner’s Obligations to Creditors Using Litigation Funding

  • Posted on

 

Licensed insolvency practitioners (IPs) operate on behalf of companies encountering financial distress. They play a vital role in overseeing the liquidation and administration of businesses that can no longer meet their financial obligations in an organised manner. In cases of insolvency, where a company is unable to settle its debts on time, or its liabilities surpass its assets, the company may engage in various insolvency procedures.

The primary responsibility of an IP is to secure the optimal financial result for creditors. This entails realising company assets in a way that maximises returns, ensuring an equitable distribution according to the legally prescribed order of priority, and minimising expenses whenever feasible.

The Insolvency Act 1986

The Insolvency Act 1986 imposes a variety of functions. Some of the key functions relating to insolvency practitioners include:

  • The duty of a trustee and official receiver in bankruptcy to get in and realise assets pursuant to s.305 of the Insolvency Act 1986
  • The duty of a liquidator to get in, realise and distribute under ss. 143 (compulsory) and 107 (voluntary), and to investigate the causes of a company’s insolvency (necessary so as to get in assets and so as to furnish information to the OR under s. 143(2)).
  • It provides a legal framework for insolvency practitioners to investigate and recover assets that were improperly transferred or disposed of before insolvency.
  • The Act outlines procedures for both compulsory company liquidation and voluntary liquidation, specifying the role of insolvency practitioners in these processes.

Relevant case law regarding insolvency practitioners’ obligations

Brewer & Anor v Iqbal [2019] EWHC 182 (Ch), where the liquidators of ARY Digital UK Ltd successfully brought breach of duty claims against the former administrator.

The original administrator had sold the company’s business and assets (EPGs) back to the company directors in a pre-pack. The court noted the failure to (i) take specialist insolvency advice from a person in the EPG industry; (ii) advertise in publications or websites likely to attract purchasers of EPGs and not plant and machinery; and (iii) expose the assets to a proper market for a reasonable period of time. The court awarded £743,750 plus legal costs, providing a reminder to IPs to “to act with ‘single-minded’ loyalty to the Company”.

LF2 Ltd v Supperstone & Anor (Administrators of Pennyfeathers Ltd) [2018] EWHC 1776 (Ch) The Judge noted that:

“a viable claim by the company against a third party is an asset of the company. A claim which is arguably viable, is a potential asset of the company. In principle, an administrator ought to be ready to investigate whether such an asset should be preserved and pursued. If the administrator has no funds to investigate a possible claim against a third party and he receives an offer from a potential assignee of the claim to pay for an assignment, that offer will potentially constitute an asset of the company.”

 How litigation funding and insurance can help insolvency practitioners meet their obligations

Litigation funding, the assignment of claims and/or ATE insurance can play a pivotal role in assisting insolvency practitioners (IPs) in meeting their obligations. Provided below is breakdown of how they can be beneficial:

 Overcoming financial constraints:

  • When an insolvent estate lacks sufficient funds to pursue potential recoveries through litigation, IPs might be hesitant to initiate or continue with legal proceedings, given the potential costs and risks involved. A litigation funder can provide the necessary finance to cover the legal costs, thereby enabling the IP to pursue potentially valuable claims which otherwise might have been left unrealised.

After-the-event (ATE) insurance can cover the adverse costs, which means if the IP loses the litigation, the insurance will pay the other side’s costs, thereby removing a significant risk of litigation. Some ATE products can also finance disbursements, including court fees, which can allow claims to progress cost-effectively without having to assign the claim or secure expensive funding.

  • Maximising recoveries:

If third part funding is necessary to finance solicitors, disbursements or even the IP fees for investigation, then securing the right deal is vital. IPs can access top-tier legal representation and other necessary resources (e.g., expert witnesses) that might have been unaffordable without funding. This can increase the chances of success and potentially maximise recoveries for creditors.

  • Encouraging settlements:

Knowing that the IP has both financial backing from a funder and insurance cover can act as a deterrent for opponents. They may be more inclined to propose a reasonable settlement early on, realising that the IP has the means to pursue the litigation to its conclusion.

  • Meeting fiduciary obligations:

IPs have a fiduciary obligation to act in the best interests of the creditors. This includes taking necessary steps to realise all potential assets of the insolvent estate. Litigation funding and insurance can assist IPs in fulfilling this duty by enabling them to pursue claims that are in the best interests of the creditors without exposing the estate to further financial risk.

  • Preserving Estate Funds:

Using external litigation financing, the limited funds of the insolvent estate can be preserved for distribution to creditors or other essential administrative costs.

Insolvency litigation funding options

Insolvency practitioners involved in insolvency litigation can make use of the following funding methods.

  • After-the-event (ATE) legal insurance– ATE insurance is generally used to protect from adverse costs risk & Security for Costs requirements. After-the-event (ATE) legal expenses insurance is perhaps best thought as a similar to a ‘swap’. For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse costs award. The claimant has swapped their obligation to pay the defendants in the event of a loss, with the obligation to pay the insurer in the event of a win.This ‘swap’ is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.
  • Third party litigation funding– In some cases, third party litigation funders may be willing to provide funding for an insolvency dispute claim in exchange for a percentage of any financial settlement or damages awarded. This option can be attractive for individuals who cannot afford to pay for legal fees themselves but have a strong case. ATE insurance is often used in conjunction with this type of funding.

Assignment of Litigation to a third party – A purchase or funding agreement which should include a full indemnity to the estate can then ensure that realisations are made for the benefit of the estate. Whilst this model does reduce or entirely avoid risk for the IP, it is not the best route forward on every single type of claim and Assignment should only be considered alongside other options to ensure duties are fulfilled.

How can Annecto Legal assist?

At Annecto Legal, we assist a wide range of clients in finding the appropriate insolvency litigation funding, assignment options and after-the-event (ATE) insurance.

Annecto Legal regularly assists licensed insolvency practitioners and Liquidators who are involved in the administration of or liquidation of a company, as well as Trustees in Bankruptcy. If you are in the process of pursuing or defending an insolvency dispute and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal.

Primary contacts:

David Law

07540 303035

david.law@annectolegal.co.uk or

Mark Beaumont

07730 217643

mark.beaumont@annectolegal.co.uk

Office: 0800 612 6587