An April 2020 report in the UK by Professor Peter Walton on the impact of the ‘Jackson’ legal costs reforms on insolvency litigation reveals that the impact has not been as severe as anticipated, and that despite that market having been ‘turned upon its head’, other arrangements through funders are being devised.
The costs of litigation are the subject of attention across all jurisdictions. While Australia and the UK and comparable jurisdictions adopt a loser pays approach, a balance is sought such that costs that the loser is ordered to pay are moderated.
Jackson Reforms
The 2013 ‘Jackson Reforms’[1] took this approach in the UK to litigation costs, based on the Jackson Report’s finding that certain arrangements imposed disproportionate cost burdens on defendants, while plaintiffs’ were able to litigate essentially ‘risk free’. These were success fees under conditional fee arrangements and ‘after the event’ insurance [ATE] premiums recoverable under the costs-shifting rule. The Jackson reforms reversed this rule effective from 1 April 2013.
Costs in insolvency proceedings were initially exempted from these changes.
2014 Walton report
In a 2014 report by Professor Peter Walton on behalf of R3[2] it was argued that
‘insolvency litigation differs from ordinary civil litigation in a number of ways that should continue to be recognised by the law. Insolvency litigation is in the public interest and claims brought are not frivolous nor do they have disproportionate costs’.
The report said that the evidence suggested
‘that the Jackson reforms would have a negative impact upon insolvency litigation for returns to creditors (such as [revenue and customs] and businesses) and upon the public interest’.
However, in April 2016, that exclusion for insolvency was removed.
2020 Insolvency Litigation Funding – in the best interests of creditors?
The impact of the Jackson reforms since then is now the subject of a further report by Professor Walton of April 2020.
He reports that three in five (58%) insolvency practitioners have started to use third-party funders or increased their use. His report found that the third-party financing market had expanded significantly and estimated the total claims being pursued was likely to be in the region of £720m per annum.
‘It is clear that the Jackson Reforms have had a significant impact upon insolvency litigation with a general consensus that creditors receive a lesser return from legal action than they did before. This was predictable and is one of the obvious consequences of the Jackson Reforms’.
Professor Walton reports that funding is now an integral and important part of the system and that a proportion of the profession has decided that using third party funders or assignees is their default position for certain types of claim which would previously (before the Jackson Reforms) have been actioned using a CFA.
Australia
Australia relies on the traditional costs system in litigation, with the losing party being required to pay costs on an assessed scale basis but in what can be a significant amount. Commercial litigation funding originally began as a source of finance for insolvency recovery proceedings and is now well accepted.
‘Even if the funder receives more than 50 per cent of any judgment, 40 per cent of such if any judgment as might be obtained is a better result for the company’s creditors than nothing. Because of the terms of the funding agreement, there is no downside for creditors in the prosecution of the litigation in question. There is no risk of the liquidators or creditors having to bear an adverse costs order, as it will be borne by the funder. In those circumstances, it does not take extensive reasoning or explanation to realise that there is benefit for the company in funding this litigation to an end.[3]
The typical range of the funding fee appears to be between 20 and 45 per cent of the recovered amount, although in some insolvency cases it has been 75 per cent.[4]
The existence of a funding arrangement is most likely to be revealed when a liquidator seeks approval of the agreement under s 477(2B) of the Corporations Act: see Goyal (liquidator), in the matter of OLI 1 Pty Ltd (in liq) [2020] FCA 450.
CFAs were the subject of analysis in the report of the ALRC 134[5] to the effect that
‘conditional fee agreements are no longer novel and indeed are regulated under the various state and territory statutes that regulate the legal profession.’
The ALRC did not cover insolvency litigation funding although it recommended substantial reforms in litigation and class action funding generally.
More comment is found in the report of the Victorian Law Reform Commission – Litigation Funding and Group Proceedings.[6]
The newer ATE claims offer some protection to insolvency practitioners from personal liabilities that may arise in the event of an unsuccessful pursuit of voidable transaction proceedings. If the adverse costs risk is not directly covered by a litigation funder, ATE insurance can be purchased to cover that risk once a dispute has arisen or specific proceedings are contemplated. In the context of class actions, it is said to be “very expensive and tends to be taken out by litigation funders and law firms”.[7] Such insurance may provide sufficient security for costs.[8]
Litigation funding from FEG is becoming significant, in relation to Commonwealth employee priority claims. Speculative claims are also available. The right of an IP to assign a claim, under s 100-5, may have had some positive impact.
The courts use provisions like s 37N of the Federal Court of Australian Act – as to the ‘overarching purpose’ of ‘facilitating the just resolution of disputes according to law as quickly, inexpensively and efficiently as possible’ and to determine if the litigation has met that section’s objectives.[9]
Australia’ priority dividend provisions
Professor Walton comments favourably on Australia’s laws allowing a priority dividend for a funding creditor, under s 564 Corporations Act and s 109(10) Bankruptcy Act, but the case law indicates only limited use of those provisions. Creditors are understandably shy of throwing more good money after bad.
The Walton report was commissioned by Manolete Partners Plc, a UK insolvency litigation funder, and supported by ICAEW and the Insolvency Practitioners Association. Survey data from 173 insolvency practitioners and other industry professionals was obtained.
[1] See generally Lord Justice Jackson, Review of Civil Litigation Costs, Final Report (The Stationary Office, 2010).
[2] The Likely Effect of the Jackson Reforms on Insolvency Litigation – an Empirical Investigation by Professor Peter Walton, April 2014.
[3] In the matter of City Pacific Limited [2017] NSWSC 784, Brereton J.
[4] Litigation Funding and Group Proceedings [2018] VLRC 35 ‘[2018] VLRC 35’.
[5] Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (ALRC Report 134) [1.62].
[6] [2018] VLRC 35
[7] [2018] VLRC 35
[8] [2018] VLRC 35
[9] See Zreika v Royal (No 2) [2019] FCAFC 237
