Legal Funding for Insolvency Claims and Officeholders

Understanding how litigation funders and legal funding works is essential before exploring specialized funding options for specific practice areas.

Insolvency practitioners — liquidators, administrators, trustees in bankruptcy, and other officeholders — are frequently in a position where the estate they are administering has meritorious claims but insufficient cash to pursue them. Litigation funding is well suited to this context and has become a regularly used tool in the insolvency market.

This article explains how legal funding works for insolvency-related claims, what types of claims are commonly funded, how the economics work in practice, and what officeholders and their advisers should consider when exploring funding options.

Why insolvency claims are natural candidates for funding

When a company enters insolvency, its assets — including any claims it may have against third parties — vest in or fall under the control of the officeholder. Those claims might include wrongful trading allegations, preference payments, transactions at an undervalue, misfeasance, or fraud. The value of such claims can be significant, particularly in larger insolvencies.

The challenge is that the insolvent estate rarely has the liquid resources to fund litigation. Legal costs must be met from somewhere, and the officeholder has a duty to act in the interests of creditors — which means not depleting the estate on uncertain litigation.

Third party litigation funding solves this problem directly. The funder provides the capital; the estate bears no cost if the case fails; and if the case succeeds, creditors benefit from a recovery that would not otherwise have been possible.

Types of insolvency claim that can be funded

The range of claims available to insolvency officeholders is broad. Those most commonly considered for litigation funding include:

Wrongful trading claims

Where directors continued to trade after they knew or ought to have known that insolvent liquidation was inevitable and failed to take steps to minimise losses to creditors. These claims sit under the Insolvency Act 1986.

Preference claims

Where payments or other transactions were made to certain creditors within the relevant look-back period in preference to others. The officeholder can apply to have such transactions set aside.

Transactions at an undervalue

Where assets were disposed of for less than their true value in the period before insolvency, potentially to the detriment of creditors.

Misfeasance claims

Brought under section 212 of the Insolvency Act 1986 against directors or other officers who have misapplied, retained, or become liable for company assets.

Antecedent transaction claims

Including claims based on transactions defrauding creditors under section 423.

Fraud and asset tracing claims

Where assets have been extracted from the company dishonestly, funded litigation can support the recovery process, sometimes combined with asset-tracing exercises.

Professional negligence claims

Where negligent advice — from auditors, solicitors, or other professionals — contributed to the company's losses or insolvency.

How the funding economics work in an insolvency context

The economics of insolvency litigation funding follow the same basic structure as in commercial litigation funding generally: the funder covers costs, takes a share of any recovery on success, and bears the loss if the case fails. However, there are some features specific to the insolvency context that are worth understanding.

Creditor interests are central

The officeholder's primary duty is to creditors. Any funding arrangement must be structured in a way that is consistent with that duty and, where appropriate, sanctioned or approved in accordance with the relevant insolvency process.

Court sanction may be required

In some insolvency proceedings, particularly liquidations, the officeholder may need to seek court sanction or creditor approval before entering into a significant litigation funding arrangement. This should be addressed early in the process.

ATE insurance is often important

Adverse costs risk in insolvency litigation can be acute — particularly where well-resourced defendants are involved. After-the-event insurance is frequently used alongside funding to protect the estate against adverse costs orders. For more on how costs work, see our guide on how much litigation funding costs.

The priority of the funder's return

The funding agreement will set out how the funder's capital and return rank against creditor distributions. Creditors, their advisers, and the officeholder should understand this clearly before the arrangement is entered into.

Working with litigation funders as an insolvency practitioner

Officeholders typically instruct solicitors to manage the litigation, with the funder providing capital and strategic input where appropriate. The practical working relationship is similar to commercial litigation funding generally: the funder does not control the conduct of the proceedings, but expects to be kept informed and consulted on key decisions.

What distinguishes insolvency funding is the additional layer of obligations that the officeholder operates under. Funders experienced in this space understand those obligations and are accustomed to working within them. The process from initial enquiry to a funded matter can move efficiently where the key information is available and the legal team is engaged.

Early engagement with a funder is generally advantageous. In some insolvencies, valuable claims deteriorate in value — or limitation periods approach — if not acted upon promptly. Identifying fundable claims and making contact with a funder early in the administration or liquidation gives all parties the most options.

What funders look for in insolvency claims

Insolvency claims are assessed using broadly the same criteria as any commercial claim: merits, quantum, enforceability, and the cost-to-recovery ratio. There are, however, some particular considerations:

• The quality of the available evidence about pre-insolvency conduct is often critical, particularly in wrongful trading and misfeasance claims
• The financial position of the defendants — often former directors — needs careful assessment, since many insolvency claims are brought against individuals rather than companies
• The officeholder's own analysis and any pre-existing investigation work product is valuable input for the funder's due diligence
• The insolvency practitioner's reputation and experience in litigious insolvencies is relevant — funders want to work with practitioners who understand how funded litigation works

For more on the documentation funders typically need, see our guide on what documents are needed for a funding application. To check whether your claim may qualify, read our guide on whether a claim is suitable for litigation funding.