How does legal finance work in the insolvency context?

Liz Bigham: Mike, can you start off by addressing the key question? Why does litigation pose a unique challenge for insolvent or distressed claimants?

Michael Redman: I suppose a lot of it is context, right? So when a company's insolvent, things clearly haven't gone well. They're not making the company a proactive choice to engage in litigation. Very often insolvency practitioners are appointed over the company and they take a view that certain claims need to be brought in the interest of creditors. It's not a proactive commercial-based decision. It's something that's almost forced upon them by circumstance, which is one.

I think the other unique dynamic for insolvent situations is obviously it's not just a bilateral affair between plaintiffs and defendants. You've got the creditors involved, you've got the independent insolvency practitioners involved, the office holders, and of course you have the court involved. And there are unique circumstances where the office holders have duties to creditors, they have duties to the court. Maintaining the balance between those unique duties is a delicate balance in the course of contentious proceedings.

LB: Given that, what's the role of legal finance? Why should it be considered in the insolvency context and what are its benefits?

MR: Legal finance is a useful tool in this context because the office holders come in, they take a look at the circumstances of the company, the claims on the books, both as plaintiff and potentially respondent. And they have to take a rational commercial view about what could be brought, what should be brought, and what basis they can be brought. This includes the financial basis, of course—what external finance is available for those claims if there aren't enough assets to realize short term, to produce cash to bring those proactive claims and even frankly, if there are assets to be realized in the estate. Also short-term cash available: Is it really the best use of that money to be paying lawyers court fees, expert fees on a long duration basis for an uncertain outcome? And I think that's the real role for litigation finance, where we can come in and share that risk with them to make sure that they are in a position to pursue those proceedings, but at the same time, preserve the cash that's in the estate and not adversely affect the interests of creditors who are at the end of the day looking for realizations from the insolvent estate. And that's based on cash.

LB: Speak, if you will, about some of the misconceptions that people have about the use of legal finance in an insolvency context and things that's important for potential users of legal finance to know.

MR: I suppose legal finance isn't something that office holders use every day, and some are obviously more experienced, more sophisticated in their use of external finance than others. But I think one of the misconceptions I think we've come across is the perception of control and the perception of a provider of external legal finance and the degree to which they control proceedings, settlement and everything in between. So we are always at pains to reassure them that they maintain control of the proceedings, the liquidation, and we don't seek to insert ourselves into their discretion and their decision-making. We're there to assess potential claims that they have on the books potentially, and we'll form a view about that and we'll fund on that basis we're passive providers of capital rather than seeking to insert ourselves into that process.

That kind of feeds through also into counsel selection. There is a perception, I think that we will come in, appoint our own lawyers and use that as a means to have our own way with a claim. But we very much view things as a package and very often office holders come to us with their legal advisors already appointed, if not litigation counsel already appointed. And we're not in the business of replacing anyone in that kind of situation. That's entirely the discretion of the office holders.

LB: What are some advantages of working with Burford in insolvency context and what makes our team unique or special for the clients that we work with?

MR: I suppose it boils down to two things. Partly it's just track record and experience of dealing with these kind of situations. We're aware of the sensitivities that do exist and the delicate balance that office holders have to maintain throughout these contentious proceedings. That's number one that we take into account both when we're formulating and structuring a deal and how we conduct ourselves during the investment.

The second one is we do have access to our in-house asset recovery and enforcement team, which I think is a competitive advantage for us. So many of these claims involve a question mark around collectability or collection that otherwise would be very difficult to price in at the outset and I think would be a disincentive very often or would put off external finance providers. But it's something we can therefore get more comfortable with and we can make a contribution, which isn't just the provision of money to the office holders to make sure the creditors can ultimately achieve a realization. I think that's a real competitive advantage for us.

This video was recorded in May 2023.

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