Funding Insolvency Claims in Australia

Australia’s Litigation Finance community is in a state of flux, as new regulations are implemented, and industry players scramble to remain in compliance. Understanding litigation funding for companies in liquidation is essential in order to reap maximum benefits.

Mondaq explains that if adequate funds for liquidation are not available, liquidators are in no way obligated to litigate. While it makes sense that liquidators will make every effort to widen the asset pool to distribute to creditors, inadequate funds can make that impossible. That’s where Litigation Finance can come into play.

In Australia, third-party funding for liquidations has been available since 1996. The practice is also mentioned in the Corporations Act of 2001, where it affirms that funders may enhance available funds for distribution to afford unsecured creditors a larger payout. It costs money to bring proceedings against company directors and others, yet not doing so only works to the detriment of creditors. With that in mind, it makes sense for liquidators to make use of third-party funding.

Of course, Litigation Finance in insolvency cases is complex and brings with it some caveats. Courts have expressed concerns over funding arrangements, potential conflicts of interest, and even the idea that funding will bring about more lawsuits—some of which might have insufficient merits. This concern eventually brought about a mandate that agreements between funders and liquidators will require approval from the court.

When courts vet funding agreements, they first look at control. Ideally, liquidators will retain total control and will be the ones who provide updates and instructions to the lawyers involved. Meanwhile, funders have little if any control—though they do retain the right to end their funding agreement at any time. This is part of the nature of non-recourse funding.

Currently, Litigation Finance is a positive force in the world of insolvency.