UK-WIDE: An Introduction to Litigation Funding: Insolvency

Demand for insolvency litigation finance continues to grow as the number of UK insolvencies proceeds on an upward trajectory. By way of example, in April 2025 there were 379 compulsory liquidations, a 61% increase on the number in April 2023.

In insolvency there is a very particular need for third-party finance. Typically, there are minimal or no funds left in the insolvent estate, a state of affairs often brought about by the former directors who may well be the targets of claims. The actions of a misfeasant director in the months and years prior to the company entering into administration or liquidation can result in the office holder when appointed being left without a fighting fund. Where there are funds, creditors may not be keen on those monies being placed at risk in litigation. Third-party finance can enable claims, whether against former directors or large institutions such as banks, to be pursued which otherwise would not see the light of day, whilst also de-risking the office holder and the insolvent estate.

Lawyers acting for the assignee or for the insolvency practitioner under a funding agreement can be paid for their work as the claim progresses rather than working on a contingency basis. An initial consideration on entering into the purchase or funding agreement provides an immediate cash injection into the estate. In a well-structured purchase or funding agreement the funder assumes all risk and the insolvent estate receives a minimum of 50% of the net realisation with a ratchet increasing the estate share on larger claims. Typical claims are in breach of duty against the former directors and antecedent transaction claims such as transaction at undervalue or preference. Wrongful trading and fraudulent trading are more challenging causes of action and third-party finance can ensure these claims are properly resourced and the costs of expert evidence covered in addition to solicitor and counsel fees.

The fallout from the Supreme Court decision in R (on the application of PACCAR Inc) v Competition Appeal Tribunal and Others [2023] UKSC 28 (PACCAR) continues, but has minimal impact on the finance of insolvency litigation. Given that claims are for the most part capable of assignment in insolvency, funding agreements are much less of a feature than in litigation by solvent parties.

PACCAR is not concerned with assignment by insolvency practitioners of a cause of action under their statutory powers. On assignment, the claim is advanced by the assignee as claimant or applicant. Payment is made by the assignee to the insolvency practitioner, in contrast to a funding agreement where the funded party makes payment of an agreed share of the proceeds of the claim to the funder.

For the most part, the need for funding is restricted to office holder claims in bankruptcy which are not capable of assignment and funders have adapted their funding agreements to comply with the DBA Regulations 2013. Depending on the standard terms of a funding agreement, and in particular where the share to be paid to the funder never exceeds 50%, the amendments required are not extensive.

Third-party finance remains an important resource to enable insolvency practitioners to realise claims for value at no risk to the office holder or to the estate. The statutory powers to assign under the Insolvency Act 1986 are not impacted by the decision in PACCAR and assignments are not fettered by the judgment.

The insolvency practitioner or insolvency lawyer seeking insolvency litigation funding should consider the following.

• The financial strength of the funder –does it have a balance sheet that will meet all own and adverse costs and defeat any security for costs challenge?
• Will the funder provide a complete indemnity to the estate and the IP, or does it require the IP to take out ATE insurance?
• Will the funder agree that the IP’s choice of solicitors are instructed, whether the claim is funded or purchased?
• Will the funder pay lawyers for their work or require them to work on a conditional basis?
• The expertise and track record of the funder – does it have the necessary skill and experience to assess and price risk and to work with external lawyers to run litigation in a proportionate and effective manner?
• Does the funder have a nationwide network connecting with IPs and insolvency lawyers throughout the UK?
• Is the funder recognised in the insolvency industry, and does it have the reputation of always following through on claims?

An insolvency practitioner has a duty to realise company assets for value and a claim or cause of action is an asset just as stock or plant and machinery. It is well established that an insolvency practitioner has a wide discretion when making commercial decisions, and consideration of these factors will facilitate an informed decision and optimise returns to the insolvent estate.