Many people had predicted a huge rise in insolvency litigation in 2021. What are you seeing, and what’s your prediction for the future?
As one of the busiest litigation insurance brokerages in the UK, we often spot trends in litigation, but we haven’t yet seen a surge of insolvency cases. All of the data shows that insolvency rates have been down significantly in England and Wales in the past two financial quarters. According to the latest set of statistics from the Insolvency Service, the number of company insolvencies in Q1 of 2021 was 38% lower than in Q1 2020.
The main reason we haven’t yet seen a wave of insolvency litigation in 2021 is that insolvency has, for the most part, been kept at bay by temporary government measures restricting the use of statutory demands, certain winding-up petitions and enhanced financial support for companies and individuals. However, the government measures will expire in September, which means the predicted insolvency wave could be on the way.
It will be interesting to see how banks, lenders, landlords and other creditors act in October when government measures come to an end. We suspect we will start to see the low insolvency trend reverse itself and a rise in insolvency litigation will likely follow.
How are legal claims treated when a company becomes insolvent?
An IP has a duty to realise all assets and potential assets for the benefit of the insolvent company’s creditors. Legal claims are treated as potential assets, so IPs must pursue a claim on behalf of the company if it is viable. An IP will ordinarily pursue the claim on behalf of the insolvent company, but in some cases, they may choose to monetise the claim (sell it) instead.
How can TheJudge assist IPs who have identified a viable claim?
When an IP has identified a viable claim, TheJudge can help to hedge the risk of litigation for the IP and increase the likelihood of reaching a recovery for creditors.
The team at TheJudge are specialists at insuring litigation costs and can help the IP conduct a search for after-the-event (ATE) legal expense insurance. The right policy will cover against the risk of having to pay the opposing side’s costs in a legal dispute (which IPs have personal liability for) and other risks. It is wise for IPs to have protection from adverse costs exposure before proceedings are commenced. The premium for an adverse-cost ATE insurance policy is ordinarily deferred, meaning it can be paid from the proceeds of the claim if/when there is a recovery. In some instances, IPs may use funds from the insolvent estate to pay an upfront premium to cover their own solicitor’s fees and disbursement costs as well. TheJudge can also help IPs secure a financial instrument that satisfies a security for costs order (which can often be a barrier to bringing insolvency litigation).
TheJudge affiliate, Erso Capital can provide competitive funding solutions to finance lawyers’ fees and disbursements (including counsel), monetise (buy) an insolvency claim from an IP to provide an immediate realisation of the asset or on the basis of a share of any recovery made by the funder. Erso also provides funding, insurance, and monetisation on a portfolio basis for IPs or law firms handling a portfolio of insolvency claims.
In what situations can insurance and litigation funding help an IP to recover damages?
Litigation can be expensive, and often the stronger the claim, the more expensive and complex it can be to pursue. Insolvent companies are typically cash-poor and complex insolvency claims, in particular those which are multijurisdictional, often require multiple legal teams working across jurisdictions and asset-tracing specialists, which can mean legal spend quickly adds up.
If there are insufficient funds for the IP to bring a claim (and creditors are not willing to contribute), the IP has a duty to explore other funding solutions. This is when a package of ATE insurance and litigation funding can help an IP and a legal team turn a strong claim into recovery for creditors.
This piece was originally published on 31 August 2021 by R3 on their online Blog ‘Recovery News’