Blog Details

INTRODUCTION

Third-Party funding is also known as Litigation funding is a method by which costs of legal proceedings are funded for the recovery of claims by those under financial stress. The individual or company funding the proceedings gets a portion of the recovery obtained through the proceedings instead of covering the costs for the claimant. 

This form of funding is usually implemented on a non-recourse basis, which means that if the claim is unsuccessful, the claimant is not obligated to pay back the litigation funder's legal expenses. The litigation funding agreement therefore typically stipulates that the litigation funder bears the majority of the risk, including the danger of losing a claim and any damages assessed as a result of the litigation surrounding the claim.

In addition to alleviating the liquidity problems of small businesses competing with resource-rich corporate giants, litigation funding has acquired enormous appeal as a funding regime as a practical way to reduce the risk for stable businesses. It appears to be a good alternative for investments during economic downturns as it is resilient to market volatility. The two primary categories of third-party funding are "pure funding" and "commercial funding." In contrast to pure funding, which is only driven by financial incentives to support a party's claims, commercial funding has a more ruthless implication because the funder exerts significant control over the litigation process to maximize profit. No matter what kind, the yield is significant for a very small investment, even though the return on such investment may be unpredictable in terms of price and timeline. 

ADVANTAGES OF LITIGATION FUNDING

Litigation funding allows the litigation funder the chance to invest in a particular claim based on its merits, with the option of simultaneously investing in several claims. The expense of litigation funding is often covered totally by the funder on a non-recourse basis. If, however, the parties contesting the claim shall not be obligated to pay any amounts to the Funder in the event of non-recovery from the claim. The funder assumes a financial risk when pursuing a claim that could result in irrecoverable loss owing to the failure to recover a claim, in addition to the costs of damages, if claimed by the opposing party.^[1]

However, since the claimant is spared the financial risk of a claim's non-recovery, he may find this to be a reasonable option. 

As these types of investments have higher rewards but also higher risks, litigation finance is best suited for financiers with a healthy risk appetite. The funders would only invest in a claim after they were confident that they had a good chance of succeeding in court. Although the price and turnaround time for recovery may be unclear, it can be argued to produce larger returns for the funders with relatively small expenditures.

In addition to giving the claimants essential finances, litigation funding can have important strategic advantages.

In avoidance proceedings under the IBC, there is room for litigation funding because the insolvency professional (IP) is free to concentrate on maintaining the corporate debtor (CD) as a going concern and managing the corporate insolvency resolution process (CIRP) procedures, such as inviting claims, conducting meetings of the committee of creditors (CoC), inviting expressions of interest, etc. The funders are responsible for covering the charges, and experts processing the claims make sure that they are carried out logically.

LITIGATION FUNDING IN INDIA

It has been made clear by the recent case of Bar Council of India v. AK Balaji^[2] that non-lawyers are not prohibited from participating in legal finance agreements. However, a joint interpretation of Rules 18, 20, 21, and 22 of the Bar Council of India Rules implies that advocates are specifically prohibited from taking part in comparable agreements.

The Civil Procedure Code of 1908 has been modified^[3] by states including Madhya Pradesh, Maharashtra, Gujarat, and Uttar Pradesh to expressly account for cases funded by outside parties. In contrast, the Court rejected the argument in Maniankutty v. Venkiteswaran^[4] that the court lacks the authority to impose costs on those who are not parties to a lawsuit.

LITIGATION FUNDING UNDER IBC

In arbitration processes, where there is a high likelihood of a return on investment, litigation funding is typically utilised. In CIRP, avoidance transactions^[5]—including preferential transactions, undervalued transactions, extortionate credit, and fraudulent transactions—are the claims that have the possibility for litigation funding. 

The Code's avoidance transaction rules make sure that transactions that were carried out solely for the benefit of some creditors or to hinder the insolvency or liquidation process and had no other purpose are annulled. The rule helps to correct situations when a property or asset is transferred only to prevent it from being included in the pool of assets that are accessible to a resolution applicant in CIRP or from being divided among creditors in a CD under liquidation. To prevent the reversal of legal transactions that have already been completed in the regular course of business, the avoidance principles should, nevertheless, be implemented cautiously.

The IBC stipulates that before submitting an application to the adjudicating authority (AA) under section 26 of the Code, the IP must determine whether any avoidance of the transaction has occurred. Examining whether the IP can transfer the claim to the litigation funder is necessary because the duty to file the application is performed by the IP. Due to the uncertainty of the claim's assignment under the IBC's current provisions, this presents a hurdle for the financiers.

However, the IP may have a plan where, after evaluating the legality of the claim, the litigation funder will process and finance the court case related to it in place of giving up a portion of the transaction's earnings that can be paid in advance for the benefit of the creditors.

The Anuj Jain v. Axis Bank Limited^[6] case involved the corporate insolvency resolution procedure (CIRP) of Jaypee Infratech Limited. Two key issues were raised, one that due to related-party and other avoidable transactions that are listed in the Code, a corporate debtor may have tunneled out significant wealth. Second, avoidance proceedings may entail excessive delays and interfere with the CIRP's predetermined schedule. As a result of this verdict, the litigation funders are now free to pursue their avoidance transaction claims because an avoidance transaction to recover the CD's assets during the CIRP period was decided. 

Insolvency and Bankruptcy Code (IBC), which was recently passed into law, has thrust TPLF into the spotlight, especially in light of the monetization of arbitration awards in Hindustan Construction Company and Patel Engineering. Hindustan Construction Co. Ltd. (HCC), an investment management company, and a group of investors signed a third-party finance agreement in March 2019 under which HCC ceded its rights to arbitration claims and awards totaling INR 1750 crores. Similarly to this, Patel Engineering Ltd. informed Eight Capital Group of its interest in litigation claims totaling INR 2,168.5 crores.

According to the Insolvency Law Committee (ILC)^[7] report, there are problems with how to pay for litigation costs associated with avoidance transactions under the IBC in India. To analyse some funding options that are common worldwide, they looked at the debtor's estate, state funding, the appointment of contingency counsel, and funding by creditors and third parties. The committee looked at every angle and concluded in its report that India's current legislative framework does not forbid third-party litigation funding, hence the market may provide funding for such lawsuits. Therefore, it concluded that no law amendments were needed in this area.

LITIGATION FUNDING ACROSS GLOBE

Up until recently, common law countries like the United Kingdom (UK), the United States, and Australia were the only countries that typically provided litigation funding, but that has changed significantly in recent years.

Several nations, including Singapore, Hong Kong, and Germany, have taken action to remove legal barriers to third-party funding. The advantages of the idea, which include a more effective recovery mechanism and simpler access to justice, have been amply acknowledged by these jurisdictions^[8].

CONCLUSION

There is some hope for this type of funding owing to the Indian Association for Litigation Financing (IALF), which was incorporated on February 11, 2021, by practitioners, law firms, and third-party financiers. The association's goals include self-regulating litigation funding in India and educating the public on the subject so they may understand the litigation finance industry. This is the first step in establishing the legal funding regulatory framework in India.

In terms of realising the potential of litigation funding, India still has a long way to go. However, a lot of parties involved are taking this seriously to fund the costs of the litigation necessary to recover a claim. A strong business plan can pique the interest of potential investors in the venture. Since the formation of the IBC, legislation on several different topics has grown rapidly. There is little doubt that we are not far behind when it comes to improved ways to pay for the costs of litigation, particularly for IBC avoidance proceedings. This might result in improved avoidance proceedings, which might therefore maximise the value of the CD, achieving one of the IBC's goals.