Top 3 Benefits of Litigation Assignment Where Claims are Held Within Insolvent Estates

Some insights here on complex legal problems by Piers Elliott, Managing Director, Henderson & Jones

Access to justice

Litigation is expensive and time consuming. Claimants may not have the funds to pursue meritorious claims – or may simply not have the appetite to risk spending more money in pursuing claims after having already suffered a loss. The assignment of litigation claims, like litigation funding, therefore helps facilitate access to justice as the costs of such claims will be borne by the assignee – enabling claims to be advanced.

Where claims sit within an insolvent estate, the situation is even more acute. The Claimant has insufficient funds to pay its debts and creditors are unlikely to want to risk the remaining assets within the estate to pursue claims. Assigning these claims to expert third parties enables claims to be advanced without the costs falling on the estate.

If the Assignee is able to make a recovery from the claims then, typically, the estate will receive a share of any such recovery without having incurred cost or risk. And if the claims ultimately fail, then it is the Assignee that loses its investment in the claims rather than the insolvent estate.

Adverse costs risks

The typical costs position in litigation in England & Wales is that the losing party will be ordered to pay the legal costs of the Defendant. This has two significant impacts upon office holders of insolvent estates holding valuable litigation claims.

First, if a Defendant knows that the Claimant is insolvent it is highly likely to seek security for costs. Defendants will more than likely be able to meet the threshold requirement in CPR 25 to show that there “is reason to believe that [the insolvent Claimant] will be unable to pay the defendant’s costs if ordered to do so”.

Second, insolvency office holders may be reluctant to commence proceedings where there is a risk of them being made personally liable for adverse costs. This risk is particularly acute where ‘office holder’ claims are advanced under the Insolvency Act 1986 (such as preference claims or claims for transactions at an undervalue) as these claims vest in the office holders themselves and therefore need to be brought in their name.

These issues can be mitigated through the use of after the event insurance. However, the Courts have not always been willing to accept that ATE policies provide sufficient security to defeat an application for security for costs. Additionally, such policies often attract a significant upfront premium which an insolvent estate may not be able to afford. Finally, office holders will want to ensure there is no risk of being under-insured – otherwise there remains a risk of them being held personally liable for any shortfall.

Alternatively, all of those issues can be solved via an assignment of claims. The assignee steps into the shoes of the Claimant and so bears the adverse costs risk of bringing claims. Most assignees will also offer office holders an indemnity against any adverse costs risk to further protect their position. A solvent assignee may also be able to defeat an application for security for costs simply by pointing to a healthy balance sheet – or via an insurance solution. But, crucially, after an assignment this becomes the assignee’s problem to solve.

Enhanced availability and return

Historically, many traditional funders would only consider funding claims valued at +£10m or more. The litigation funding market is evolving all the time and there are now certain specialist funders willing to consider funding lower value claims. But the key players in the assignment market have always been willing to consider lower value claims. Commercial assignees may therefore represent the most likely option of >£10m claims receiving offers of funding.

Further, the differences in the mechanics of how assignments work compared to traditional funding may make assignment a more viable option.

Traditional funders often seek their return as a multiple of the sum committed. This can make it economically unviable to fund lower value claims. The costs involved with taking a lower value claim to trial will likely represent a higher proportion of the overall damages claimed when compared against a higher value claim. There is a baseline level of costs involved with litigating any claim to trial – but those costs do not increase proportionately with the size of a claim. Funders will usually be comfortable that even in a settlement scenario they are likely to obtain their desired return from multi-million pound claims (such as some of the cartel damages claims seen in recent years) whereas the margins are likely to be far tighter with lower value claims.

Additionally, funders will typically seek to claim their return at the top of any payments waterfall following a recovery. As such, the funder receives its return before a penny goes back to the funded entity. This may cause a divergence of interests during settlement discussions. Given the funder takes first bite – it may stand to receive most (if not all) of any settlement offer made by a Defendant. Funders cannot force Claimants to accept offers – but they may be able to apply pressure via clauses requiring Claimants to seek positive approval from counsel prior to declining offers. With assignments, the assignee’s return is often calculated as a percentage of any recovery obtained and sits parri passu with any deferred consideration due to the insolvent estate. The assignee only makes a return if the assignor does. And the assignee’s return increases pari passu with the assignor’s. So assignees and assignors both have their commercial interests completely aligned in seeking to maximise the overall recovery.

Conclusion

Assignment has certain features that, depending on the nature of a particular claim, may offer significant advantages when compared against traditional litigation funding. Those advantages are particularly clear to see with insolvency related claims. But should also be considered by solvent claimants looking to obtain litigation funding – as assignment may provide an alternative option.