Charles Jeffery joined Harbour as a Director of Litigation Funding in November 2020. Charles originates claims primarily within the insolvency market from insolvency practitioners and lawyers. After his first month we wanted to catch up with him about the insolvency market and what lies ahead for it in 2021.
People talk about an increase in insolvencies in 2021. What are your predictions?
UK corporate insolvencies are down 43% compared to the same time last year. However, I think it is inevitable that we will see an increase in both corporate and personal insolvencies in 2021 as a result of the COVID-19-related economic crisis.
One reason why we haven’t yet seen a wave of insolvencies in 2020 is that governments have been providing assistance to businesses of all sizes through various schemes. In the UK these schemes have now been extended to the end of March 2021. They include restrictions on creditor actions (e.g., winding up and forfeiture), and this likely explains the reduction in the number of formal corporate insolvency processes this year.
These measures are temporary though, and one recent report by the BBC suggested that once that support ends there could be more than one million corporate insolvencies as a result of COVID-19 in the UK alone. Our reach as a global litigation funder goes well beyond the UK, so 2021 is likely to be a very busy year indeed from an insolvency perspective.
What sort of businesses are most likely to become insolvent?
Businesses which were already in decline seem to have suffered the most in the last year. The pandemic has accelerated that decline. For example, the high street was already losing market share due to growing consumer preference for online retail, and physical lockdowns may have exacerbated that preference. We have already seen some large high street retailers fall into administration or liquidation. Of course, this may also have a knock-on effect for the supply chain of those businesses (such as manufacturers or logistics services providers).
Something that businesses will want to be on the lookout for is how the banks, lenders and other key creditors (e.g., landlords) react once the ability to recover debts and issue winding up petitions comes back into action. This will likely be an issue even for businesses that were not already suffering pre-pandemic. In other words, few businesses are pandemic-proof, and a wide variety of businesses (including previously healthy ones) may be exposed to insolvency risk.
How does insolvency litigation come about and who is litigating against whom?
When an insolvency practitioner (IP) is appointed in relation to an insolvent company, they will try to rescue the business, but, if that’s not possible, they have a duty to explore and realise all potential assets for the benefit of the company’s creditors.
Legal claims are treated as assets (contingent of course on settling or winning the case and recovering damages), so IPs often have duties to pursue viable claims. The IP usually pursues the claims on behalf of the company as though they were standing in the shoes of the company.
Who the defendants are depends on the nature of the claim. For example, claims could be brought against former directors or a negligent auditor (or both) arising out of the circumstances which led to the insolvency in the first place. Other more vanilla type claims can relate to debts or financial arrangements involving the insolvent company’s suppliers or affiliates. Litigation can also relate to the relative rights to distributions of the stakeholders.
What are the different types of claims in insolvency litigation?
A recent study showed that the most common claims brought by insolvency practitioners are:
- Unlawful dividends;
- Preferences (s.239 of the Insolvency Act 1986 (“IA1986”);
- Transactions at an undervalue (s.238 IA1986);
- Wrongful trading (s.214 IA1986); and
- Misfeasance / breach of duty.
In addition to these causes of action, Harbour also has particular experience of funding audit negligence claims against insolvent companies’ auditors for failure to detect fraud and other wrongdoing by the companies’ former directors and management.
In what situations can litigation funding help to obtain a positive result?
Legal costs often rack up quickly, and insolvent estates are typically illiquid. Complex insolvency claims are usually of a multijurisdictional nature and require numerous legal teams and expert asset tracers to work hand-in-hand, so insolvency litigation and third party funding are natural allies.
Indeed, where there are insufficient funds in the estate for the IP to bring a claim (and where the creditors are not willing or able to provide funds), the IP has a duty to explore third-party funding. Funding can take several forms – whether it be on a single-case or portfolio basis – depending on the extent of the claims in the estate.
One emerging trend (where permitted) is for an IP to assign all or part of a claim to a funder in return for an up-front payment. Harbour has the ability to work with IPs to purchase either: (1) an interest in a claim from the insolvent estate for a small sum, injecting immediate cash into the estate in exchange for a share of any future damages received, or (2) the claim outright for a larger upfront sum in exchange for all future damages. Depending on the needs of the IP and the insolvent estate, this can help to ensure that there are funds available for both the ongoing fees of a liquidation (including legal fees and the IP’s fees) and at the end of a liquidation for the insolvent company’s creditors.
How can Harbour assist?
When an IP has identified a claim (or several), Harbour can act quickly and efficiently to find the right solution for the IP (and the estate’s creditors), whether that be single case funding, portfolio funding or an assignment of the claim(s).
Harbour’s sister company, Harbour Underwriting Limited, provides After the Event (ATE) legal expenses insurance. ATE insurance provides cover against the risk of having to pay the opposing side’s costs in a legal dispute. IPs have personal liability for adverse costs, and they typically want protection from that exposure before proceedings are commenced. The ATE insurance premium can be funded by the insolvency estate (if there are funds available), by one or more of the creditors or by a litigation funder. A Harbour-funded insolvency case will invariably be backed by an ATE policy. Harbour Underwriting Limited can also insure own-side solicitor’s fees and disbursements as well.
Interested IPs and lawyers can check out the Insolvency Disputes page on our new website, which sets out the key details that we need to assess a claim. With a 10+ year track record, Harbour is one of the largest and most experienced litigation and arbitration funders in the world, having supported cases in 13 jurisdictions and 6 arbitral forums. Our experience of reviewing claims (over 4,000 to date) means we can quickly determine whether a case is likely to meet our funding criteria and if so, the likely pricing terms that we will offer.
