A liquidation often throws up many challenges from a claims perspective. There might be some relatively small claims mixed in with a larger, higher value claim. There might be some claims requiring defence mixed in with claims to prosecute. There might be claims that need to be pursued within a strict time limitation mixed with claims that are less urgent.
This complex mix of claims scenarios can create a headache for liquidators, or companies under external administration, in terms of deciding the best way to approach the overall claims strategy – and the best way to fund that strategic approach.
One possible solution to this complexity is to consider portfolio funding. Put simply, portfolio funding is the process of treating multiple claims under a single facility.
Up until now, the role of litigation financiers in funding insolvency claims has largely been about “cherry picking” the individual claims that appear to have the greatest chance of success. It has very much been about looking at the merits in individual claims. Often in multi-claim matters the funder will pick and choose only those claims that offer the best commercial returns.
This approach is not necessarily compatible with realising the optimal outcome for creditors. This is because there are some recoveries that might never be realised (because they can’t be funded), and because any funds that are recovered need to be shared amongst all parties with a financial interest in the claim outcome. But treating these multiple claims as a portfolio from a funding perspective can drive many benefits.
Firstly, financiers will see their risks as being diversified across a portfolio of claims. This means that they should be able to offer better terms as their risk premium will be reduced. And this leaves more of the recovery available for creditors assuming a successful outcome.
Secondly, liquidators will sometimes drive the first claim with the aim of using any proceeds from it to build a “bank” of funds that can be deployed against subsequent claims in the same liquidation. But this leaves creditors without any return until all claims have been resolved. It also leaves creditors exposed if subsequent claims are not successful and the “bank” gets exhausted pursuing the unsuccessful claims.
By using third party funds, liquidators don’t have to build their own bank. And they can return some proceeds to creditors each time they have a successful claim. In this way creditors are guaranteed a return from any successful action.
Thirdly, for certain types of claims there can be a time limitation for bringing a claim, which needs to be a consideration for the overall strategic approach. The risk is that liquidators could be squeezed into sub-optimal actions early in the process – and if these actions are unsuccessful it places undue stress on the overall claim strategy. By using third party funds liquidators can devise a claims strategy that is not adversely impacted by any timing limitations.
Finally, taking a portfolio approach to financing claims can accommodate any claims that might need to be defended. When assessing claims individually funders will not support claims that need to be defended, as recoverability is not achievable. But if funding is provided on the merits of the portfolio, then liquidators can choose to deploy some of that funding into claims that would not otherwise have been fundable on the basis of an individual assessment.
Portfolio funding might not be feasible under all conditions, but if you have large multi-claim liquidations then you should investigate third party financing across the portfolio – it might just offer a better strategic option and facilitate a better outcome for you and creditors.