News

Director Tom Davey explores the use of litigation funding in insolvency cases in Accountancy Daily

Director Tom Davey explores the use of litigation funding in insolvency and tax cases and discusses how this may be impacted by the upcoming CJC review of third-party funding.

Tom’s article was published in Accountancy Daily, 29 May 2024, and can be found here.

The Post Office Horizon scandal provoked public outrage across the UK. The wrongful prosecution and conviction of innocent sub-postmasters was a scandal that shook the British justice system. An ITV dramatization, Mr Bates v The Post Office, powerfully brought home the human impact of this shocking miscarriage of justice. Yet it also introduced more of the British public to the growing role third-party litigation funding is now playing in the legal system, including in funded insolvency litigation.

Despite litigation funding being increasingly embraced by the British legal system, it still faces questions of significant legal uncertainty, with the courts finding their way through the issues on a case-by-case basis. Only last year, the UK’s litigation funding sector suddenly was put in jeopardy by a landmark UK Supreme Court judgment PACCAR and others v Competition Appeal Tribunal and others. The court held that many litigation funding agreements (LFAs), which allow funders to recover a percentage of damages are, in fact, damages-based agreements (DBAs), which are enforceable only if they comply with the relevant regulatory regime.

The potential ramifications for the viability of group litigation actions were enormous and, in practice, implied that many future group actions would simply become impossible for litigation funders to even consider. Almost certainly influenced by public support for funded group litigation in the wake of the Post Office scandal, the UK government rapidly announced its intention to protect litigation funding and reverse the controversial PACCAR judgment with Justice Secretary Alex Chalk stating the government’s intention to legislate to counteract the “damaging effects” of the judgment.

This announcement of new legislation in turn prompted a major third-party review of third-party litigation funding in the UK by the Civil Justice Council (CJC). This will help to provide the necessary clarity and analysis to help reduce legal uncertainty and risk following the PACCAR judgment. A six-member working group, co-chaired by Mr Justice Simon Picken and Dr John Sorabji, is to provide an interim report by this summer, and a full report by summer 2025.

The working group looks set to analyse a series of recommendations for reform of litigation funding. Its report will set out the current position in relation to third-party funding, include the existing self-regulatory approach. It will also list recommendations, including whether and how third-party funding should be regulated. If the group decides that regulation is recommended, it will state to what extent a funders’ returns should be capped and will analyse the role of the courts, and the rules of court.

The UK government recently promised legislation to protect the sector, while a major expert review looks set to help shape the legal foundations of litigation funding for decades to come. However, the recent announcement of a UK general election on 4 July means that the ‘PACCAR’ legislation needs to be completed within the ‘wash up’ before cessation of Parliament or else will roll over to a perhaps an uncertain future in the autumn.

While litigation funding may bring to mind consumer driven group cases, such as the Post Office scandal, the use of third-party funding has a far wider reach than simply consumer collective actions.

Insolvency practitioners regularly use funding, whether directly or through the assignment of certain types of claims to specialist funders. The creditors of liquidated companies are often only too pleased not to have to fund legal action, where the liquidated estates don’t have the funds.

Of course, the largest creditor is often HMRC, seeking to recover unpaid taxes from an insolvent company and its officers. HMRC has its own litigation and settlement strategy and will often step in and take responsibility for the costs of pursuing action, rather than rely on funders. However, in the event litigation is necessary, this puts taxpayers money at risk, but increases the potential net recovery should the matter be successful.

There is a balance to be struck between off-loading cost risk onto funders and insurers in exchange for a share of the proceeds or alternatively absorbing the cash flow hit and potentially doubling down and funding your own claim, while also risking paying the opposition’s legal costs if the claim fails.

On one level, HMRC has deep tax funded pockets, and so it can afford to bankroll litigation. However, pressure remains on the Government to control expenditure, and by extension HMRC. Therefore, more consideration should be given to alternative solutions to fund litigation in the event matters need to proceed by way of the Courts where outcomes are uncertain and difficult to predict.

The Post Office scandal and subsequent ITV dramatization opened conversations about the role of litigation funding in the British legal system. The precise shape of any future regulatory regime will be shaped in the coming months and years. It is vital that accountancy sector, and litigation practitioners in particular, help to feed into the CJC review as it progresses towards its conclusion.